The Economy Guy

The stock market continued its sideways move today by moving down 45 points.  10 Year Treasuries increased in interest rate by 0.05% as a correction to the recent downward rate moves.

The Dollar held steady today.

Gold, Oil and Gasoline all moved down in price as profit taking took place from the massive recent increases in price.  Our friends in OPEC said they weren’t about to consider increasing the oil supply to reduce the price.

In the news today…..

Fed Chief Bernanke stated today that he wants the banks to work more with homeowners by decreasing their principle loan amounts.  Naturally, this will be resisted by banks as no bank wants to reduce the mortgage amount – just because the market value has fallen.

“The strength of all the Gulf investors may not save Citibank.”  That is what was stated by the head of the Dubai Investment Fund. Citibank is expected to write down more losses, and that might take the bank down.  Several Gulf state investment funds have committed to help Citibank – Dubai, Kuwait, Saudi Arabia.  Apparently, the losses are mounting, and these investors are able to see the “true” loss position, as compared to the poor “on the street” investors in the USA.

If you remember my “Wealth Health Warning” when Citibank’s misfortunes first hit the limelight; stay away from this company. Stay away as an investor, and stay away by not using their services.  You are only asking for a headache.

Tonight’s Dinner Conversation - “What makes a “Strong Dollar?”

The Europeans are crying for the US to live up to its rhetoric and to have a “strong dollar.”  With today’s exchange rates a strong dollar might be just what we have.

What does a strong dollar mean?  It is a fairly meaningless statement in my mind.  Since no one can define what a strong dollar means, it can mean anything.  When the European, and now Japanese, want the US to strengthen the dollar, they mean they want the US to change the exchange rates such that the dollar strengthens against their own currency – in other words, they want their own currency to fall against the dollar.

So what can the US do to strengthen the dollar?  Exchange rates are set by “the market” - meaning bid and ask prices on a currency exchange.  No government sets exchange rates.  What the US could do is to purchase dollars and sell the Euro and Yen.  But, where would the US get those currencies?  The US doesn’t hold Euros or Yens as reserves, so that course of action doesn’t make sense.

The US could also raise interest rates while those other nations could lower interest rates.  This would be a cooperative move among the nations.  (It’s happened in the past.)  That would have an indirect affect on currency exchange rates as money would flow to the higher interest rate.  But what interest rate could the US increase?  The FED is eagerly LOWERING the Fed Funds Rate.  That leaves only longer term interest rates, and the way to make longer term interest rates rise is to increase INFLATION.  I guess we’ve been seeing that happen recently, but I don’t think this is a conscious move by the US Government or FED.  If the FED really wanted INFLATION, it would print money until the presses glowed.  However, that would have the opposite effect – it would weaken the dollar.  This is a true CATCH-22.

The statements by the European finance ministers is truly meaningless.  They are political statements to get themselves re-elected.  They are pandering to their local population.  My purpose today is to show you that what you read can be truly meaningless – so question everything.

Here are today’s Numbers:
Dow Jones 30 Industrial - 12,259 (Down 45 points)
10 Year Treasury Bond - 3.58% (Up $0.05)
Euro - $1.5218
Gold - $966 (Down $18)
Oil - $99.52 (Down $2.52)
Gasoline - $2.52 (Down $0.15)