Vilnius Again

Stepping outside onto the balcony, low and behold there was a marching band!

The marching band was quite good and was followed by very enthusiastic students of all ages. And that says a lot about Lithuania: if nothing else, they are enthusiastic. From their unabashed expression of style to their propensity for busking and singing in the street, there is an optimism and expressiveness here that I don't notice in the Czech Republic. In the evenings people openly flaunt their happiness as well as their grief.

This is my third trip here, and I'm liking it more and more each time I visit.

Havel Responds

If you don't know about Vaclav Havel that is a pity. The last President of Czechoslovakia and the first president of the Czech Republic, Havel earned his reputation as a political writer and playwright under communism. He spent many years in prison because of his dissidence and for that, he certainly has my respect.

We don't always agree (he supported the Iraqi invasion) but he is consistent in his approach: he vehemently opposes oppression. So when he argues that acting to curb global warming does not jeopardize our civil liberties, I listen.

This recent article in the Herald-Tribune was clearly written in response to Klaus' assertion that the global warming hysteria is a danger to freedom (see post below). In the article he nails a point that I think is being missed in the argument....

Because so much uncertainty still reigns, a great deal of humility and circumspection is called for.

We can't go on endlessly fooling ourselves that nothing is wrong and that we can go on cheerfully pursuing our consumer lifestyles, ignoring the climate threats and postponing a solution. Maybe there is no danger of any major catastrophe in the coming years or decades. Who knows? But that doesn't relieve us of responsibility toward future generations.

I couldn't agree more.

But seriously, read the whole thing. It is short, sweet, and to the point.

And Vaclav Havel is worth your time. He's earned it.

Klaus Denies Global Warming

I for one had been anticipating Klaus' speech at the UN. Today, he presented his arguments but he certainly hedged his bets. (you can read the entire speech here).

Klaus has become perhaps the most prominent world figure to officially challenge the existence of anthropomorphic global warming. But far from denying it outright, yesterday's speech simply challenged the notion that anthropomorphic global warming is a foregone conclusion. In fact, he seems to hold the same disregard for those who are certain that global warming is not caused by man, or doesn't exist at all (like you Roger). Here is a quote to explain what I mean:

An impartial observer must accept the fact that both sides of the dispute – the believers in man’s dominant role in recent climate changes, as well as the supporters of the hypothesis about their mostly natural origin – offer arguments strong enough to be listened to carefully by the non-scientific community. To prematurely proclaim the victory of one group over another would be a tragic mistake and I am afraid we are making it.

I have to admit, I can't stand foregone conclusions, including those about the superiority of our current economic system over all others.

Suspicion and doubt are healthy. One should always be wary of those who are so sure of themselves that they have lost the ability to even consider the other side of the argument.

Now What?

You would have to be living under a rock not to have heard that the Fed cut both the overnight lending rate and the discount rate by a full 50bp (.5%) on Tuesday. Once again I was wrong in my prediction. I really didn't think that they would cut by more than 25bp. This also means that I was wrong when I predicted that the overnight rate would remain at 5.25% until the end of the year. Furthermore, it looks like now I will be proven wrong about my prediction that the Dow would stay between 12K and 14K until the end of the year (14K will likely be broken next week).

Right on cue, the dollar is taking a pounding dropping to an all time low against the Euro ($1.41). This is not only due to the rate cut, but also because Saudi Arabia is talking about dropping its peg to the dollar. More strikingly, the Canadian dollar is now equal to the American dollar for the first time in over 30 years. Meanwhile, gold is at a 30 year high, and oil has set new record levels above $80 per barrel. $100 oil and $800 gold now look to be on the horizon.

It is unclear what all this means for the greater economy, but one thing is for sure: one should really try to avoid making predictions, especially about the future.

King dollar has lost his crown, and the implications of this move I think are clearly that inflation will again lift its ugly head.

What really bothers me is that the Fed is making moves to rescue the financial sector from a crisis that it created all by itself. There is no external factors involved, no emerging market crisis or major default. If an external crisis were to emerge now, there is little the Fed could do to prevent major fallout without jeopardizing the dollar and price stability drastically.

In fact, with this move the Fed has okayed the risk taking by the financial institutions and has sparked a new round of irrational exuberance. The correction will still have to come, and now we can be sure that when it does it will be even more painful than it has to be.

Postscript: Two "small" things I forgot to mention are as follows. Firstly, in all the confusion no one seemed to notice that the U.S. public debt surpassed $9 trillion. I don't remember Congress changing the law to allow for that, but oh well. Secondly, net purchases of U.S. bonds came in at under $20 billion in July down from just under $100 billion in June. With a current account deficit running at nearly $60 billion per month, this is not good.

And of course if you want the full story on the dollar, you really can't beat this post from Econobroser. Be sure to scan the comments as well. Very enlightening.

Drumroll please.....

In the most heavily anticipated FOMC policy decision announcement in the last, well, year at least, most expect the Fed to lower interests rates by 25 basis points from 5.25% to 5.00%. Some believe the rate should (and will) by cut by a full half of a percent. Those folks, I'm afraid, are going to be sadly disappointed.

But what about the others? Will Bernanke cave in to pressure from Wall Street and drop rates to prevent a recession? Are we even that close to a recession? The S&P 500 is up 4.7% on the year. After a hiccup in the Q1, Q2 GDP growth is fairly robust. Inflation has been rather tame in recent months, but will that trend continue especially in light of a rate cut?

And finally, the big question: what about the dollar? The last time I mentioned exchange rates some months ago, the Euro cost $1.31. Now, it is nearly $1.39. Here in the Czech Republic, just over 6 years ago you could literally buy more than twice the local currency than you can buy today for one dollar.

What will actually happen to the dollar if the Fed cuts rates and the ECB raises rates in October (which they are widely expected to do)? $1.45? $1.50? Certainly new record lows for the dollar are in the cards should the Fed lower interest rates. Furthermore, there is some inflation data coming out just before the meeting (PPI and core PPI). What if those numbers surprise to the upside and the Fed cuts rates? What if the CPI numbers which come out on Wednesday surprise to the upside as well? The Fed will look awfully silly cutting rates as inflation fires up. But their job is in fact getting harder every day.

I predicted not long ago that the Fed would hold rates at 5.25% until at least the end of the year. Although I still believe this is the best policy prescription in light of the economic situation, it looks like I'm going to be wrong (again). But don't be too surprised if I'm not. I think the most that the interest rate doves are going to get is a one-time move down to 5.0% with a clear warning that investors should not expect more.

I imagine that even a hawkish tone will keep equities in check for now. There is still a lot of sorting out and unwinding to do. Let's just hope it doesn't happen all at once.

P.S. sorry for the 2 week break. Hopefully, regular program will now continue as scheduled.

Lazyboy Lyrics

Want to laugh about things that are kind of serious? If you appreciate Daily Show humor, you might like this.

Here is a taste:

Why is marijuana not legal? Why is marijuana not legal?
It's a natural plant that grows in the dirt.
Do you know what's not natural?
80 year old dudes with hard-ons. That's not natural.
But we got pills for that.
We're dedicating all our medical resources to keeping the old guys erect,
but we're putting people in jail for something that grows in the dirt?

Enjoy.