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What Will Obama's New Deal Do to the Dollar?

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What Will Obama's New Deal Do to the Dollar?

Post by Sean on Wed Dec 10, 2008 10:04 am

Smart Spending, Stupid Timing
How Obama's New Deal Will Affect the
U.S. Economy and the World's Currencies

Good day... And a Terrific Trading to you!

Well, it looks like the new President wants to spend more money.

Yes, President-elect Obama presented his economic plan to the world yesterday. Before doing so, he warned that the economy is going to get a lot worse before it gets better.

The new President's plan calls for the government to spend the most on infrastructure since the 1950's interstate project.

Now, let me say this, the Big Boss here at EverBank, Frank Trotter, and I talk about this all the time. And we both agree. We're not fans of spending money on Financial Institutions and other things you don't use more than once (like bullets and bombs).

On the other hand, building something that you can use over and over again like bridges actually makes sense. That being said, this spending is coming at the absolute worst time. The government's deficits are exploding in front of our eyes, and no one seems to care.

Yes, so Obama believes the economy will get worse before it gets better. This supposedly justifies his pledge to spend more money.

Forex Traders Were Listening As Obama Promised More Cash

But on the other hand: Obama's pledge to spend more gave foreign currencies a boost yesterday.

You see, the risk takers are starting to creep back into the markets. When that happens in earnest (probably sometime mid-next year), we should see the end of this strong dollar trading theme, and the "flight to safety" that's pushed the dollar higher these last few months.

Back to the markets' reaction to the announcement: Of course, you have to remember that we still have over a month before Obama takes office. Unless Obama plans to pound this message in everyone's heads every day until then, the market could soon forget that he's willing to pour money back into the economy.

The jury is still out on this one. But once we get a better look at his policies, you'll be able to tell whether we'll have to live with the strong dollar for some time to come.
Will the Lowest Rates Since 1958 Actually Hurt the Loonie?

The Bank of Canada (BOC) met overnight to discuss rates. Naturally, yes they slashed interest rates again - this time to 1.5% (the lowest since 1958).

After all, why wouldn't they follow the rest of the world's Central Banks in a race to 0%? They had the perfect justification. Canadian Housing Starts fell 22% last month. Also, they could just point to the rest of the world and said, "See, we're just keeping up with the Joneses."

As for the loonie: I doubt this rate cut will either hurt or help the Canadian dollar, because all the traders in the markets have decided they don't care anymore about rates.

You can hear them singing: "I don't care anymore... I don't care anymore... I don't care, what you do."

Wall Street Is Apparently Gone...Depending on Who You Ask

Did you see the "Money and Politics Show" on TV last night? They interviewed the former CEO of Bear Stearns, Alan Greenberg.

But here's the interesting part. Mr. Greenberg actually said "There's no more Wall Street. That model doesn't work because it's at the mercy of rumors. The entire make-up of Wall Street has changed forever."

Interesting take, don't you think? Of course, it could just be sour grapes, because his company was forced to sell at bargain basement prices to JP Morgan.

And are you following the hearing on the fall of Fannie and Freddie? Well, the Washington Post says that the House Committee on Oversight and Government Reform will hear that.

"Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry."

There will also be a memo that circulated Freddie: "Former Freddie chief enterprise risk officer David Andrukonis wrote that the company was buying mortgages that appear "to target borrowers who would have trouble qualifying for a mortgage if their financial position were adequately disclosed."

Doesn't that just get your blood boiling! I know I could go into a tailspin right here, and point fingers, but I'll stop right there. No need to rehash this stuff!
The Numbers Confirm - We're Turning into Japan

Okay, this is important: I was looking at Bloomie yesterday, and I noticed something that's really interesting. The Fed Funds rate is 1/16th right now.

But wait! Didn't the Fed cut the Fed Funds rate to 1% at the last meeting?

Yes, they did, but the people in the trenches are trading Fed Funds to each other at 1/16th. Does that tell you something? It tells me that the Fed really will cut rates to 0% - as I've been saying. These daily transactions wouldn't be trading this low, unless rates were going there! Bernanke-san is transforming our economy into Japan.

Let me explain. I believe that the U.S. is following Japan and Japan's leaders in how they dealt with the decade of economic mess.

If you go back to the mid-90's you'll find the Japanese economy circling the bowl. The Japanese government and central bank issued stimulus package after stimulus package, and built huge amounts of government debt. They also cut interest rates to zero.

Now, ask yourself: What central bank does that remind you of in 2008? I'll give you one guess, but I'll doubt you'll need it. (Hint: It's run by Ben Bernanke.)

And we haven't even seen the effects of President Obama's full economic policy yet.

Sean

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