Random Thoughts on The City, Wall St & Capitalism

I have read a tremendous amount of rubbish about the direction of currency movements especially Dollar/Sterling. Most of it is the worst kind of conjecture by 'professional' forecasters at the big banks. They should Know better. The common consensus for 2003-2005, seemed to be that the dollar would weaken - maybe even reach 2$/1£ by the end of this year. The US current account deficit isunsustainable Snow/Bush and the other idiots were constantly trying to talk the dollar down as if somehow this would solve US indebtedness by itself. So what happens the Dollar rallies to a high this year - hitting 1.71 recently. When Bernanke was nominated to succeed Greenspan this seemed be a catalyst for dollar strengthening. All this proves is that currency movements, like all other markets react to sentiment not fundamentals. So what's really happening , lets consider the following:

• US Consumers love consuming- they will never stop spending that's their constitutional right seemingly. Long live imports from China/India etc.
• There is an unprecedentedd house price inflation boom in the US, as in the UK. Remember Tony is just Bush lite.
• Most currencies in the developed world have abandoned the gold standard - so all the dollars in the world are not really worth the paper they are written on, so to speak. Our own super smart chancellor sold UK gold reserves a few years back- now gold has hit multi year highs per troy ounce. Such a move in any other job would get you fired - but instead he will probably become PM .But I digress. So really all currencies are merely confidence tricks and bad ones at that.
• China has liberalised yuan/dollar to a semi-floating rate.
• Japan isn't going to keep buying US debt forever , and will probably dump some dollar reserves.
• Bernanke has said his policy will be to target inflation, unlike the the Bank of England at least he has a clear policy.
• Commodity prices will only go up due to demand in developing economies. Oil is back down from 70$ a barrel, but copper, platinum and gold are still going up. Why?Becausee these metals have some kind of intrinsic value not linked to the vagaries of market demand/supply. In other words they are not confidence tricks.
• The interest rate cycle in the US is probably at the top, consumers need cheap credit to keep spending . Cheap money and high institutional liquidity mean a rising stock market in the US .

So here's what will happen:

• The dollar will weaken - the US will just keep printing more dollars till they run out of paper.
• The US deficit will actually go up not down - this is a red herring - the US will never go out of business. When the economy slows down they will just start wars. Remember wars are always good for economies in the long term.
• Sterling will weaken vs dollar , because UK interest rates are suspiciously high for an economy in decline ( the government growth figures are basically fabrications as certain bodies have now pointed out)

What to do..a couple of ideas

Simple buy US assets( shares, property- whatever- avoid auto companies, obviously)

Go long dollar/sterling calls

RB