I'll be blunt:
AT SOME POINT GREENSPAN IS GOING TO HAVE TO "DEFEND" THE DOLLAR.
The question is how will this "feel" to the markets and what will it
look like.
Clearly, the dollar is in trouble.
And, it doesn't look like the expected decrease in the trade deficit
will materialize.
In fact, it's very possible that it's TOO LATE for that! And, a
lower dollar will simply mean that Americans are paying more for the
same amount of imported goods.
SO, IF THE "TRADE DEFICIT MAGIC" DOESN'T MATERIALIZE?
GREENSPAN MAY BE FORCED TO "GET REAL," AND RAISE RATES IN A (VAIN?)
ATTEMPT TO "DEFEND THE DOLLAR."
But, what will "doubling" rates do? Going from 1% to 2% should not
really effect "worthy" deals.
But it could smash the BOND CARRY TRADE. AND, OF COURSE, ALL OF THIS
IS HAPPENING "AT THE MARGINS."
SO...THE "NEWS" MIGHT BE WORSE THAN THE "CURE."
WILL A PANIC ENSUE? LETS HOPE NOT.
BUT, THE MARKETS HAVE BEEN ENCOURAGED TO HAVE SUCH A "JUVENILE"
MENTALITY; THAT ANYTHING IS POSSIBLE.
I can envision a 1000 point drop upon the first rate hike. The
operative yada-yada will be "Its the first of many!" You know.
BUT, ANY LARGE DECLINE IN US ASSET PRICES MAY CAUSE THE DOLLAR TO
FALL EVEN MORE! AS FOREIGNERS, LATE TO THE PARTY, DECIDE TO LEAVE.
Remember, the actual twin deficits are seperate from Greenspan's
sphere of influence; which is merely to control short term rates!
WHAT TO DO?
THIS HIGHLIGHTS THE "TANGLED WEB" WE WEAVE WHEN THE CENTRAL BANK TRYS
TO MANIPLUATE THE ASSET MARKETS!
AN EVIL WARNED AGAINST BY THE ECB IN TODAY'S WSJ!
http://www.bloomberg.com/news/markets/currencies.html
