Spending Surprise - 19th March

*Markets are all positive on the back of the aggressive moves by the US Fed yesterday (more below). Asia sees good performance in the morning session across all markets, but as the reality of stronger Yen kicks in (USD/Yen: 95.53) Japan sells-off to end lower (-0.33%), Hong Kong did its best to react well but is failing at the end (-0.50%). France braces for widespread strikes today, 24hrs after AIG’s CEO urged his employees to return their “contractual” bonuses (we saw it coming) as he was grilled by US policymakers following Obama’s crowd-pleasing tirade. Social strife has been kept at bay till now, but if the global economy doesn’t improve fast, governments are going to have a lot more to do than simply placating a few fuming tax-payers with words. Even in Japan (where crime is virtually unheard of) foreign governments have been forced to issue their citizens with warnings to avoid bustling Roppongi – apparently “deceptively attractive women”(?) have been drugging drinks and stealing wallets from unsuspecting foreign drinkers – is nowhere safe? As if to make matters worse, Oil has made another strong dash for $50/brl and Gold has attracted some investors again (as more uncertainty grows surround US$’s future) - up almost 5% today at $932/oz. My favourite leading indicator, the BDIY has been falling for several days and has done so again this morning, giving up 18% in the last 5days. Wow, a mixed bag out there to say the least and an apparent return to future inflationary pressures, let’s try to discus why…

SPENDING SURPRISE?
*Finally! – the FED and Bernanke in particular are able to carry-out a plan that had been prepared long before the start of this crisis – pumping almost $300bn into purchasing US government debt. This led to a plunge in long-dated bond yields (largest fall in a decades) and a quick selling off of US$. The now super-aggressive FED also announced a doubling of its purchase of securities issued by Fannie Mae and Freddie Mac to $1.45bn, and clearly signalled interest rates would remain at near-zero-levels for an “extended period” of time.

*The only reason this announcement and these measures had not been implemented earlier is because of the political wrangling amidst the US corridors of power, preventing a quicker deployment of the tools and changes required. Bernanke himself had several times laid out the very details of every step the FED has taken (and will be taking): the first in a paper he wrote for Greenspan back in 2002, and reiterated in a speech a few months ago, not to mention insisting the “correct monetary path” for the US was the equivalent of quantitative easing the UK had announced two weeks back.

*That is why I am surprised that everyone else seems surprised with the latest moves by the FED? It had been mentioned here in these commentaries many times that the only solution would be the pumping of money by the US government into the system and in particular the purchase of long-term debt given that rates are effectively already at zero, and that this would at some point bring great pressure on US$ (we saw some significant swings in the major cross-rates yesterday, especially for Japan which does not like a stronger Yen as it hurts its exporters).

*As far as Bernanke is concerned, there is no doubt in his mind that these are the right steps. The next few steps, if you read his paper, will be the continued stimulation of the economy through borrowed money – meaning a consistent decline in the US$ as investors will surely begin to understand that inflationary pressures will not be far away - but that is what Bernanke wants right now. He wants to re-create an inflationary environment where prices are no longer spiralling downwards and everyone sits at home waiting for the next best (lower) price rather than spending now – he is creating a shift in the way people consume to start looking more like the old US consumer we all once- knew-and-loved. He wants inflationary spending. He wants a return to lending. He wants the economy to do what it does best – borrow cheap and lend high to allow others to spend.

*The long-awaited thawing of the credit-markets is of course a secondary desire and wanted impact of the announcement yesterday – banks need to be cajoled into lending with extremely low-yield curves at the long-end – comfortable in the knowledge that they will be making attractive spreads on the rates at which they borrow and lend.

*How to trade what we’ve just seen and heard from the US? Get into Gold (if you weren’t already), start buying up some of those cheap “for auction” properties on US’s east coast, and take out the mortgage your UK bank has been offering you for that extremely attractively priced property in central London – when inflation returns you’ll be laughing – even if you will be a government employee and not receiving a bonus at the end of the year anymore.