Home > Uncategorized > 2011/10/03: Taxulationism Update: Fisher Confirms Fed View & Protectionism Back With a Vengeance

2011/10/03: Taxulationism Update: Fisher Confirms Fed View & Protectionism Back With a Vengeance

There is a new and pernicious development on one area of Taxulationism that did just not seem that important in the face of more pressing concerns on taxation and regulation: protectionism (which is the ‘ism’ at the end of Taxulationism.) For the most part up to this point it has included nothing more than the US scoring points against itself by failing to pass free-trade agreements which would significantly enhance export potential.

That is substantially due to the degree to which the Liberal faction in Congress wants to impose labor law requirements on our trading partners. The sense of things there seems to be that it would be better for the low-end laborers in these countries to have no jobs rather than jobs where the wages and environmental standards don’t suit the sensibility of the US Congress. Of course, this is nonsense that has allowed our other trading partners to take advantage of the US. And we will be revisiting an even more benighted effort from Washington DC below.

In the meantime, for any of you who didn’t see it, Dallas Fed President Richard Fisher appeared as a guest host on CNBC’s Squawk Box this morning. He has been one of the most vocal opponents of the Fed’s quantitative easing efforts, and has also been very clear on the degree to which the weak economy is a creature of Congress, and something they (and NOT the Fed) must address.

And while not railing against regulation very specifically this morning, he once again focused on the degree to which Washington DC is creating confusion on the fiscal front as well. He noted that unless and until business felt a greater sense of ‘clarity’, not much was going to happen on the business investment and especially the jobs front. He even went outside of his region to point out the dilemma of an institution generally perceived as being very rich: Harvard University.

The problem even for academia that is considered immune to the vagaries of the economic cycle is that the unsettled economic picture affects them. Assumptions about gifts from donors, their tax picture in light of states and cities that are needing to raise more revenue due to federal cutbacks, and how much work their research facilities are going to get from corporate research and development efforts are all in flux. What are they supposed to tell an applicant that has a worthy grant proposal about whether to proceed with their research?

And that illustrates the dilemma faced to even a greater degree by the for-profit small businesses and financial institutions. The Fed’s Fisher even noted the degree to which they are very concerned about the degree to which Dodd-Frank may weigh on community and regional banks more so than the big institutions. The latter are meant to be shrunk in any event, but the degree to which their smaller competitors are struggling with extensive new regulations is more troubling. That is because they are still the primary lenders to many small businesses; who are also the key generators of new jobs.

And as noted above, the protectionism aspect of Taxulationism is indeed back with a vengeance. For those of you who might not already be aware of it, it is a given in the markets that even the best portfolio managers, traders and analysts in the world have a hard time assigning any sort of meaningful ‘valuation’ to the exchange rate of a currency. There are just too many broad and narrow factors which can affect both its near-term pricing and long-term value.

The US dollar is a good recent case in point. As long as the economies and stock markets appeared to be in good shape there was reason to not put money into a currency that didn’t yield any interest income (which we can all agree is the case for the greenback.) However, as other areas became much more suspect of late there has been a massive influx of funds into the US dollar as a safe ‘haven’.

For all the concerns about the US fiscal picture and long-term debt, when commodities and the related currencies (like the Australian dollar and Canadian dollar), and the euro on the back of further concerns about its debt picture all sink, the money all still runs to (as Mr. Fisher put it this morning) “…the best looking horse in the glue factory.” In other words, the classic ‘risk-off’ trade. However, what we might see in future on the long-term value of the US dollar is another matter completely, and very hard to discern through the fog of the highly volatile short-term shifts.

Why is all this relevant to the international trading regime and protectionism concerns? Because the latest move by the geniuses in Washington DC would not only put tariffs on China, but do so based upon perceptions that they have kept their currency (the renminbi) artificially low by intervening in the currency markets. And to some degree that may no doubt be true, due to the huge incentive they have to support their exporters in a manner that in turn supports their employment market.

As the US Congress is now determined this undervaluation of their currency is a primary offense, they have decided to attack that directly… even if effectively doing so is a problematic cum impossible effort. The US Senate’s Democratic leadership has caved in to its most extreme faction, and actually scheduled to vote on legislation that would apply duties to Chinese exports proportionally by the degree to which their currency is ‘undervalued’.

Wow… That this can be effectively determined is quite an assumption. Relating back to our appreciation that even the finest analytical minds in the world have a very hard time assigning an actual ‘fair value’ to foreign exchange relationships, who, pray tell will the US Congress’ bill mandate to determine such a challenging assessment of value?

Well, the bureaucrats at the World Trade Organization (WTO) of course. Who in their right mind actually believes that the bureaucrats, or even the analysts at a supranational Non-Governmental Organization are going to be able to determine that!??

WTO? …that’s more like WT_ well, you know.

General Market Observations

So it was no surprise that the temporary outbreak of bonhomie in Europe on the need to solve the most pernicious immediate aspects of the sovereign debt crisis has brought a strong temporary rally to the equities early last week. Equally predictable was the degree to which the US dollar and the government bond markets had reacted back downward to some degree. Especially the euro-govvies are burdened by the degree to which additional funding for the rescue efforts.

However, that was all over by later in the week. Even the German legislature’s approval for the expanded funding and powers for the European Financial Stability Facility (EFSF) on Thursday morning brought little more than a higher opening to equities, yet which saw the December S&P 500 future stalling at no better than 1,182-92 resistance; which maintained the current bearish rounding pattern (Scallop) intact. Similarly, December T-note future sagging back below 130-20 still held no worse than the mid-to-low 129-00 area prior to returning to that higher resistance this morning.

While both commodities and commodity currencies recovered in the wake of the near-term equities recovery, as we noted last Tuesday that still seemed to be a partial rebound. That also seemed to bring the equities recovery into question. At least that is the implication we must draw from the euro’s very modest recovery from below the low end of important EUR/USD 1.3900-1.3837 support that held back in July, especially now that it has violated the next important incremental support in the 1.3460-00 area; that points toward 1.3000-1.2860. The US Dollar Index also only reacted partially back toward the high end of its .76-00-80 resistance prior to pushing up through interim resistance in the mid-upper .7800 area.


EQUITIES: Downside leader DAX still has been holding him better than the US equities with its orderly slippage back below the 5,600 and 5,500 areas. That is important due to the degree to which it takes the DAX is now trying to form a bottom after the push above 5500 last week took it out of its very weak ‘declining channel’ pattern (opposite of a firmer upward consolidation.)

Long Dated Government Bonds: In light of the recovery in the equities, the weakness of the developed world government bond markets was no surprise. While the Euro-govvies had somewhat more of a correction than we have seen in some time, it is very typical that weak rallies in equities are not very influential on ultimately strong government bonds.

While stronger than the T-note of late, December Gilt future when through a bit more of a correction by dropping down to its mid-128.00 support, yet held very well. Similarly for the December Bund future, the previous strong sister has now dropped rather more sharply. Yet, after its recent push to a new high there is even some short-term support in the mid-low 135.00 area that held without even reaching the much more prominent intermediate-term support back down into 134.00-133.30.

Foreign Exchange: It seems in the wake of the far more downbeat ECB forecasts for the European economy and failure of Operation Twist to impress the equity markets that classical relationships are reinstated. And as the weaker economic expectations have permeated the markets, it has not been much of a surprise that commodity currencies have capitulated, as well as the euro not responding well to economic expectations that will not assist in the fiscal rebalancing attempts.

At least that is the implication we must draw from the euro’s very modest recovery from below the low end of important EUR/USD 1.3900-1.3837 support that held back in July. The US Dollar Index has also been out above the high end of its .76-00-80 complementary resistance, and at least so far is not dropped anywhere back near it on the current equities bounce.

Australian dollar support in the AUD/USD 1.0300-1.0200 area was a critical bellwether for whether its overall top and intermediate-term channel were going to Break DOWN. Since the AUD/USD failure below there it has fallen below parity with the US dollar, and slipping below the mid-.9750 area to near next interim .9600 area support prior to stabilizing on its last break was not a good sign. Much below there another test of the top of the more prominent trading range at .9400 area would be very likely, and critical

All of which reinforces the US Dollar Index push above its key .7600-80 area. While it had stalled temporarily at next incremental significant resistance in the mid-upper .7800 area, extended coordinated weakness elsewhere reinforces the degree to which it might well be headed for its significant downward channel (equivalent of EUR/USD getting back toward the 1.3000-1.2850 range) in the .8050 area. Of note, that is on the approach to the important late 2010-early 2011 rally failure highs in the mid-.8100 area, which also just happens to be the Fibonacci 0.50 retracement of the entire swing from the .8872 2010 high to the May 2011 lows.

Energy and Gold: Both are now direct reflections of the trend in equities, with the significant shift of late being the yellow metal’s failure along with equities. Especially on the November Crude Oil stalling on its multiple tests of the 89.50-90.00 resistance over the past several weeks, there was some sense that any return to significant weakness in equities was not going to be good. In the event, previous holding action around the important 83.85 February low has given way to a test of the prominent interim support in the 80.00-79.50 area. Dropping below that today Negates last week short-term basing action which leaves the 76.00-75.71 support around the early August trading low the next likely target.

As noted repeatedly in recent analyses, it was most interesting that the lead contract Gold future had been only temporarily above its 1,886 major Runaway Gap Objective on two occasions into early September, and had immediately fallen back on each occasion.

It has turned into a full rout back below the bottom of the 1,692-82 Runaway-Gap; that turns it into an Exhaustion Gap Top (E-Gap) that will now act as resistance on any rallies. It seems a very depressed level, but that is the way these work. That said, the first test of the 1,550-40 important major channel and weekly MA-41 support seems to have held (in overnight electronic trading last Monday.) Even though Gold is now getting a more classical ‘crisis’ bid back in the face of weak equities today, we still must presume the upper-1,600 area is going to act as strong resistance even if equities continue to weaken.

Thanks for your interest.

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