Group of Eight (G-8) Meeting Key

RichardSchwartz — Wed, 11 Jun 2008 14:00:00 GMT

UPDATE ON THE STOCK MARKET. Written Wednesday, June 11th, 2008: 6:30 a.m. Today’s stock market has no real leadership. The Dow’s up, the Dow’s down, all day long. Yesterday it was more of the same. No real trend except for in ENERGY and GOLD, both selling off big time, sort of reversing their up trends from last week. Other market indices were indecisive but mostly lower. Still under the surface, it looks like institutional investors are now preparing for some big news out of the Group of Eight (G-8) in Japan this weekend. I figure they figure that the US dollar is going to get some support. Maybe coordinated central bank intervention to prop up the dollar. For the first time since 1995 I believe. Whatever, it now looks like some big money is being reallocated now toward a stronger US dollar. I see commodities selling off, gold starting up then falling back, the yen breaking down, US Treasury yields moving up. These are all movements which would dovetail with a stronger , and higher, not lower, US interest rates. Fed heads are suddenly talking hawkish about rising inflation as well, maybe setting the stage for a Fed rate hike. Hm, we’ll soon know.

Schwartz View: Yep, the tone has changed. Now Ben & Hank, that’s Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Henry Paulson, are talking publicly about supporting the US dollar. Obviously, the rise in oil prices to above $130 has gotten to a critical point and gotten their attention. Thus, let me reiterate, it looks like many investors are preparing for renewed strength in the US dollar, maybe propped up by coordinated central bank intervention, maybe by rate hikes, maybe by some G-8 statement. Yes, a possible Fed change of heart and a rate hike although some think that’s not likely as they see the US economy too weak to handle increased rates. Still the Fed seems that its now shifted its focus from fighting Bogey man #1, the credit crisis, to fighting Bogeyman #2, fighting inflation. I guess Bogeyman #3, fending off an US recession, is the last item on the pecking list as Ben set forth his priorities by saying “the economy improved last month.” Say what? Yep, Ben said the risk of a substantial downturn in US economic growth has diminished. Hey, he must not be having much contact with the general public, my assessment is just the opposite; maybe Ben’s just looking at the stats and not much else. Ben needs to have some good economic reason for a change of focus, wouldn’t you say? Since the 2^nd of the Fed’s now dual mandates is to fight inflation, keep prices stable, the sooner he gets back at it the better. Of course, raising interest rates to fight inflation is likely to hurt the economy as well so it’s important that the economy’s on the improve, at least for the record. It’s a high wire act Ben’s walking and jawboning is part of his tool kit.

Schwartz 2^ndView: Usually central banks intervene when they think some trend is changing anyway and that they maybe can accelerate or help this new trend. That’s only common sense, to strike when the iron is hot. The problem I have is with the bull’s latest argument. That is that if the dollar rises, all will be well. A stronger and higher dollar would depress commodity prices and lessen our inflation problem, so say the bulls. The flaw is that a stronger dollar would hurt exports, the only factor keeping the US economy going.

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Group of Eight (G-8) Meeting Key