Trader’s Narrative

The US dollar index is back down to the lowest levels for the year. But as I mentioned in the Politics of the US Dollar, it has yet to fall below the 2008 lows. Right now it is about 5% above that floor.

A bright side of the weak US dollar is the earnings boost it gives to US corporations with major international sales:

Source: Bloomberg

Today Geithner told Japanese reporters, “I believe deeply that it’s very important for the U.S. and the economic health of the U.S. that we maintain a strong dollar.” This is the same “strong dollar” pablum that all Secretaries of the Treasury have to peddle as part of their job.

But the unvarnished truth is that the US dollar is being sacrificed so that the US economy can continue with the least amount of structural changes. Instead of having to actually face the bloated deficits and debt racked by the US consumer and the US government, it is much easier to simply reflate your way out. The only sticking point is that this trick is an easy one and much too transparent. Almost every single developed country is racing each other to the bottom.

It is entertaining to watch from our perch as traders. But don’t forget that the stock market can defy the dollar and climb, as it has for the majority of this year. In fact, the dollar carry trade is pretty much single-handedly responsible for the rescue of the world economy from total collapse. As long as it is a controlled decline, it is welcomed.

You can either argue whether this is any way to manage an economy or realize what is going on and make decisions to profit from it.

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see more, go to news.tradersnarrative.com:

• AIG CEO Gives Uncle Sam (and Us) the Finger
• Prechter Turns Bearish
• Optimism is Back
• Stiglitz Calls for New Global Reserve System
• Get a FREE Subscription to Futures Magazine
• Random Reinforcement: Why Most Traders Fail
• Former Market Maker Turned At-Home Trader (video)
• Asia: An astonishing rebound
• Is Nouriel Roubini a False Prophet?
• Hoenig Stirs Debate on Bank Failures
• No Bull! Rally Hits the Wall
• Get the “Best of Trader’s Classroom” eBook for FREE (limited time)
• Andy Xie: New Bubble Threatens a V-Shaped Rebound

For the complete list, follow the graphic link below:

And remember to check back regularly since there are interesting links added throughout the week.

Geithner’s Non-Sequitur

Since I got my hands on my copy of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, I’ve been devouring it almost non-stop.

Written by Barry Ritholtz, Director of Equity Research at Fusion IQ, and blogger at The Big Picture, it promised to be a definitive guide to the financial mess - and it didn’t disappoint.

In his inimitable colloquial tone Ritholtz sets out to meticulously explain how the stage was set for the historic unraveling of the global economy in 2008. Although we will no doubt have a plethora of similar books, Ritholtz’s book, for its detailed historical approach and its comprehensiveness will probably end up being the encyclopaedia that future historians and traders come back to.

Filled with charts, diagrams, cartoons and highlighted sections, Bailout Nation grabs hold of your attention and never lets you come up for air until the very end. I found very few errors or bumps along the way. Some sections were a bit repetitive. For example, referring to the case of LTCM, he says:

The collapse of that hedge fund in 1998 and its subsequent Fed-orchestrated rescue plan provided one of the greatest — and most terrible — examples of moral hazard ever known.

Then a few paragraphs later:

Contrary to what Greenspan claimed, the Federal Reserve’s involvement did not create “slight” moral hazard. Rather, the 1998 Fed-orchestrated rescue was moral hazard writ humongous.

Yes, we get it Barry! But because the book is so well written and researched, I’m nitpicking here really.

I truly appreciate that Ritholtz comes across as politically agnostic. He excoriates both the Democrats and the Republicans for reckless policies and decisions that have no logic but foster a culture of entitlement, reduce or entirely eliminate regulation and get private enterprises addicted to public funds.

Most Americans are labouring under the patriotic delusion that they live in a free market society. But for all their pro-capitalistic bravado, America’s history is replete with corporate welfare. Both Democratic and Republican governments have lavished public funds on businesses that would have gone extinct in a real free market. To start at the beginning, Ritholtz highlights the precedent setting bailout of Lockheed Martin in 1971. This was the first time the US government had acted to help out a single corporation. He then proceeds to describe the other bailouts, which by now had become the norm.

Ritholtz spies a 10 step pattern of bailouts:

1. Risk Event
2. Pre-awareness
3. First Reactions
4. Bigger Reactions
5. “Interested Party” Agitation
6. Official Concern
7. Broader Worry, Deepening Panic
8. Major Intervention/Bailout
9. Rationalization & Apologies
10. Expected Results and Unintended Consequences

It isn’t too hard to spot us at stage 9 - with Greenspan’s sheepish “flaw” apology and Geithner’s haphazard attempts to sell everyone on his ill thought out PPIP proposal.

When it comes to casting blame, Ritholtz doesn’t pull any punches. As you can imagine, with a foreword written by Bill Fleckenstein (author of Greenspan’s Bubbles), Ritholtz doesn’t shy away from criticizing the Maestro. In fact, he puts him front and center, as the primary enabler of this convoluted tragedy. But he also defends what he considers to be “misplaced fault” such as naked shorting, mortgage interest deduction, etc. I don’t totally agree with him on naked short selling. The deregulation that he cites elsewhere was also why naked shorting was allowed to take place - at times on a massive scale, with devastating consequences.

Ritholtz also cites a very clever reason for why Wall St. got greedy in the first place and went into overdrive, taking on fatal amounts of risk. I won’t ruin the aha! moment for you but it is signature Ritholtz to be able to pull together very disparate variables and see a pattern emerge.

I’m often asked by friends and family members to explain why Wall Street just imploded. Bailout Nation is an accessible and fun to read book that explains every question they have - and a few they never even thought of asking.

To catch up on what you missed and to prepare for next week, here are just a few picks from the past week’s reading list at news.tradersnarrative.com.

• “Dumb Money” by Daniel Gross (look forward to Ritholtz upcoming book)
• US Tax Burden Near Historic Low (what? didn’t hear you, too busy teabaggin’)
• Get a 120 page report FREE from Global Market Perspective (limited time offer)
• David Tice: S&P 500 set to plunge 62% - that’s a real bear!
• Cramer attacks Jon Stewart for ambushing him
• Get a Free Subscription to Futures Magazine
• Yale economists discuss the financial crisis & Geithner’s response (must see video)
• Why we should have not only saved Lehman Bros. but invaded it.
• Warren Buffett’s investment in a Chinese electric car company
• Where in the World is Paul Volcker? and why is he so quiet?

Follow the link below to get much, much more:

And remember to check regularly since there are new links added everyday.

Week Ahead: US Results, Data Dominate

A short trading week due to the Easter holidays but a key moment nonetheless as the market teeters on a +27% rally powered by very low volume. To catch up on what you missed and to prepare for next week, here are just a few picks from the past week’s reading list at news.tradersnarrative.com.

• Why D-Day Could Come as Soon as Monday
• The Real Unemployment Rate (try 15.6%)
• Robert Shiller’s new book on “animal spirits”
• How Banks Will Game the PPIP (Geithner’s plan)
• Do Your Genes Determine Your Investing Destiny?
• Free Subscription to Futures Magazine
• Trading Fibonacci Levels
• Roubini Eviscerates Cramer (almost makes you feel bad for the Booya… almost)
• Abnormal Markets: High Yields Outperforming Investment Grade Bonds

Follow the link below to get much, much more:

And remember to check regularly since there are new links added everyday.

WSJ Economy Survey: Things Not Getting Worse