FOMC, meeting next week may bring surprises… It’s time to read the markets and not old books…

Th Federal Open Market Committee will hold its periodic meeting next week, on the 26th and 27th of april and might bring some surprises to the market. In my view, after the S&P has changed the rating outlook of the country to negative, it has put some pressure on the FOMC members to take preemptive mesaures… Of hiking interest rates. Even though as per the old orthodox school, hiking rates might be a recessionary measure, and the economy is not growing, the percpetion of higher risk may be a good reason to bring interest rates up to meet the increased risk America represents at this moment. In any case, keeping interest rates extremely low for too long does not bring the necessary results and affects psicologically the people, believing permanently that things are pretty bad. Things are pretty bad… but there’s no interest in the economy, to invest or to produce if your returns are this low. If they hike interest rates, the value of the dollar will start picking up and the humour of the population will start to improve by having a stronger currency. In times of difficulty, specially this one now, unprecedent for America, we have to be agressive and creative to put things back at the right track. The US debt is huge, it will be difficult for the treasury to pay more interest on its debt, but the economy is not picking up with the rates this low. It is a time to be agressive and read the market and not old books. If the rates are a little higher, the dollar and the ambience will improve, will send a signal to the market (we are not dead…). At the same pace it will be more expensive for the treasury to service the debt, the economy will feel a renewed interest and create more activity and that brings more taxes back to the government to service the debt. The way it’s now, with rates this low, nobody has any interest to hold the dollar, to hold treasury bonds or bills, or even to do anything in America. Currently, the situation is so bad, that the dollar is running the risk of losing its reserve currency status. The only way to starting reverting that is starting raising rates, reducing the expansion of the monetary base (reduce currency printing and debt issuance), reducing taxes, reducing all expenses, reduce importing, starting the process of replacing imported goods by domestic produced goods (more difficult…). America has to get back at its feet and the only way of doing this is doing the mea culpa, recognising the errors of abusive spending the country and the people did. Getting back to the simplicity of things. Consuming only what you can pay for. We are heading for difficult times ahead, but the problems have to be tackled now, before it is too late. So, the FOMC might bring some interesting news on wednesday. If they choose to play it by the book… Well, the dollar will sink to USD 1,60 per Euro, the troy-ounce of gold will touch USD 1,600 and investors will start having second thoughts about buying or even holding treasury debt.

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6 Responses to FOMC, meeting next week may bring surprises… It’s time to read the markets and not old books…

  1. Tulio says:

    Funny thing… The US spent the entire last century telling third-world economies what to do, specially when in times of crysis. Seems to me they are the ones in desperate need of some guidance.

    Anyway, although I agree with your suspitions regarding S&P’s negative outlook, it could have somewhat of a positive outcome as it may be forcing the review of the american interest rates. Maybe, if the FOMC starts raising rates slowlly, people will tend to foresee a “brighter” future and regain confidence to invest and produce.

    Also, I believe that there is reason to believe that Brazil will benefit from this tendency in the long term. However, our own FOMC and FED could use a lesson or two, right?

    • tradingcafe says:

      Hi Tulio, I think we have learned a lot in the past two decades, that’s the reason why we are in a sounder financial situation than they are. It is the same old story of “do as I tell you don’t do as I do…” The americans have always held themselves in a high regard, thinking they are special or better than everybody else. That is the reason why they are taking too long to realise their economy is in trouble and adopt real measures to curb the problem. They are spending too much, printing money, issuing debt, importing too much and paying a very low interest rate that does not represent thei real risk. Cheers

  2. Tulio says:

    Ricardo,

    I was reading New York Times’ Economix and I thought this might be of your interest. http://www.cbo.gov/ftpdocs/120xx/doc12039/BudgetTables.pdf

    Taken from http://economix.blogs.nytimes.com/2011/04/21/behind-the-s-p-warning-on-the-deficit/

    • tradingcafe says:

      Thank you Tulio, very usefull indeed. The CBO is only one of their problems though and it looks pretty bad. Bearing in mind those are projections and they seem to me to be extremely optimistic. If we add on to that the size of the debt and how they finance it, well then, the S&P is absolutely spot on in releasing the alert. The thing to note though, is the unprecedent courage or the smoke curtain that this announcement was. The agencies have been under fire for the continuous attack on the European countries and nothing was ever said about the American financial situation. Thanks a lot!

  3. tuliobr says:

    Ricardo, that odd optimism is precisely what caught my attention in the first place. One can only wonder how realistic are those revenue projections and what will effectively raise their numbers in the future. Will it be their industry? How are they planning to do that?

    I remember you telling us in class that the US has been outsourcing its manufacturing sector for a long time now. It is always interesting to watch these “trends” develop into numbers:

    “O jornalista Carlos Mota, colunista de negócios do jornal Milênio Diário, lembra que mais de 80% de tudo o que o México exporta vão para os Estados Unidos. Por isso a economia foi tão afetada pela crise americana, chegando a cair 6,1% em 2009.”

    http://oglobo.globo.com/economia/miriam/posts/2011/04/23/a-volta-do-mexico-376081.asp

    • tradingcafe says:

      Hi Tulio, as they say “paper accepts everything…” They have this habit of telling the story they want people to believe, but, as time goes and we are able to cross-check the facts against their stories we are able to see that reality for them is not a Hollywood feature. The fact is they are losing face again and again and their credibility is not only S&P who’s doubting. The rest of the world is tired of believing in stories and not backed by reality. The problem is exactly that, how will they revert the situation if the economy is in bad shape and looking worse for the future? They need to replace imported goods. They need to create jobs. They need to start moving the economy to generate revenue from taxes. They cannot raise taxes, they cannot create industries overnight. Their cost of running the governmental machine is huge and they need to maintain their status as “the world sheriff” and the dollar as ther reserve currency of the world. How will they manage that? I think we are at a crossroads in history. I do not believe they will manage. Also, Carlos Mota got the worng numbers for Mexico, the number more likely is close to 95% of Mexico exports to US. In the past 2 years, they have been trying to export to other countries and that is changing a little the composition of their exports; In any case, things look bad and those numbers are totally unrealistic in my view. Cheers

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