Bravo, Thomas Hoenig

It's nice to see that at least one FOMC voter isn't afraid to tell Jim Cramer where to stick his Ferrari.

The relatively hawkish statement (i.e., aggregate risks now balanced = no more mechanistic rate cuts) should be bearish equities and, by extension, other risky assets. After all, the only thing that should prompt a further dose of liquidity is a deterioration in the growth outlook and, by extension, earnings/credit conditions.

If equities come back to finish strongly on the day....well, that tells you that we're already swimming in an endless see of investable cash....so borrow in turds ($, Yen, Swissie) to the hilt and buy the riskiest rubbish you can find....
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jdc
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October 31, 2007 at 6:54 PM ×

Lift-off...

Oh well, time to convert cash into stuff, I guess.

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Macro Man
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October 31, 2007 at 7:24 PM ×

Yes indeed. At this point Mars bars are looking like a better store of value than the buck....

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Macro Man
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October 31, 2007 at 7:40 PM ×

tThis one always brings a smile to my face as well.

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Jeremiah
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October 31, 2007 at 7:50 PM ×

great job there... 10yr swap rates up, swap spreads wider.

maybe i'll take out a mortgage in germany and buy a miami condo..

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Macro Man
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October 31, 2007 at 7:57 PM ×

Do you really want to have a euro-denominated liability and a dollar-enominated asset?

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cmacculloch
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October 31, 2007 at 7:58 PM ×

Macro, could we now see the infamous Economist cover tommorow?

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Macro Man
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October 31, 2007 at 7:59 PM ×

I hope not...but fear yes...

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CV
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October 31, 2007 at 8:52 PM ×

Hi Macro Man,

Well, intersting times indeed.

I pretty much agree with you in the sense that a 0.25 lowering was a foregone conclusion but should they have done this; nope! Moreover, this is of course really putting the Eurozone under pressure and of course putting the notion of de-coupling to the test.

Clearly the ECB can focus on that 2.6% reading but you really think they would actually consider 'raising' at this point? I certainly hope not because I am still short EUR/USD (at 1.4433) with a lot of my funny money :)(i.e. in an online investment game). But more seriously, we could be looking at a serious contraction in Italy not to speak about all those poor peggers in Eastern Europe.

Of course, the current environment has risk appetite written all over it. One thing about the Swissie though; I think the CPI readings will come out a bit over consensus in a couple of days (you know, I flipped a coin :)) so don't place those short Swiss bets just yet, at least not against the Euro.

Ultimately, I think the current environment is very fragile with the EUR/USD this high but it is also difficult to see what comes next. And of course, we should never forget, as you have argued time and time again, the global headwinds of liquidity should always be considered.

Claus

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Jeremiah
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October 31, 2007 at 9:06 PM ×

the Economist cover depicting the $'s funeral ?
thats why i would buy $ now .. i dont think it can fall further.

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Macro Man
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October 31, 2007 at 9:11 PM ×

Good luck with the game, Claus, but don't say I didn't warn ya on the buck!

On the Swissie, I tend to think that the inflation figs are irrelevat. The SNB has set out its stall with its super-low 1 week repos, and their inflation concers are even less credible than the Fed's.

As for the ECB, I think if the EUR were 4% lower they would definitely be hiking. That it is where it is is an irritation, but as I attempted to demonstrate earlier today it may also be something of a blessing for the execution of their mandate. In any event, a back up in market interest rates would help tighten conditions for them and thus allow the ECB to remain flat while still talking a tough game to discourage excesses in forthcoming wage rounds.

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CV
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October 31, 2007 at 9:50 PM ×

Thanks Macro Man and warning indeed noted. This is the virtue of course of it being a 'game'.

Interesting point on the ECB and I think you are basically right in the sense that this smells of 'on hold'; a bit like at the BOJ really where they are also flagging a wait and see position although of course the issues in Japan are even more structural I feel than in Europe.

The tradeoff however seems to be a bit more severe at the ECB in the sense that it seems that a lot of faith seems to be vested in the Eurozone's ability to remain strong in the face a slowing US (i.e. de-coupling/re-balancing.). So, a lot of the liquidity seems to favoring the Euro at the moment but I have to say that I am structurally bearish on the ability of the Eurozone to muster it.

As for the Swissie ...

You called my bluff :) in the sense that I was trying to say something about something which I know very little about. Interesting point about the inflation credibility credentials though. I am still feeling my way in the FX markets (learning something everyday) and this would seem to be something of a lesson then; i.e. inflation readings mean different things for different central bank decisions. Clearly, the ECB might end up feeling the flipside of the coin since it has tended to be very tough on inflation with its vigilance and all. And what to do now; hope that the high Euro will eat up some of the inflation? Such credentials can also be hard to roll back if the Eurozone growth tanks amid strong head line inflation.

Claus

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