The Eye of the Hurricane

The eye is the calmest part of a hurricane. Surrounding the eye is the eye wall, which is the most violent part of a hurricane. The eye wall is almost a complete ring of thunderstorms and contains the strongest winds in the hurricane. link

I've gotten quite a few calls today from some old trading friends still plying their trade in the Big Apple. A few called to laugh at my tenacious defense of the inflation trade but most called to express their confusion at the current state of affairs.

"If you would have told me that Gold would be down following the nationalization of Fannie and Freddie, I would have laughed in your face," was the general sentiment of the latter group. My response was, "I'm as surprised as you are so take this view with a grain of salt, but I think we're in the eye of the hurricane."

The Winds of Change

On Feb. 3, 1960, Harold Macmillan, then British Prime Minister gave a speech to the South African Parliament which came to be known as The Wind of Change speech. The wind to which he referred was the strengthening sense of dissatisfaction with central control, emerging as nationalism, that was tearing the British Empire apart.

The wind of change is blowing through this continent, and whether we like it or not, this growth of national consciousness is a political fact. We must all accept it as a fact, and our national policies must take account of it.

The United States Empire, it seems to me, is currently facing a similar wind of change but unlike the Brits, our leaders are doing their best to deny this as a fact.

Has it been less than a decade since Fukuyama's The End of History was the new Bible, when prophecies of The American Century were viewed as certain?

The times, as Bob Dylan still sings, they are a changin'.

The CFR's Brad Setser argues today that: foreign central banks now are in a position where they can influence, through their asset allocation, the allocation of credit inside the US economy. Remember that the Fed is trying to mitigate financial market distress by changing the composition of its balance sheet — and right now, the aggregated dollar balance sheet of the world’s other central banks is much larger than the Fed’s own dollar balance sheet.

Ten years ago Russia was, to use today's language, in the conservatorship of the IMF. Today Russian Fin Min Kudrin reassured concerned parties that Russia is "not trying to sell these papers (i.e. Agency Debt)," but added a grain of salt, "We want to see that these companies emerge from the crisis. To buy the debt of a company that is in the middle of a crisis is another matter."

He continued: Kudrin said holders of U.S. assets could be worried by the impact of tax cuts carried out by President George Bush's Administration or the military action in Iraq on the U.S. budget and current account deficits.

"In this sense, of course, if the United States is an acknowledged flexible, liberal economy, and we are using dollars as a reserve currency, then of course we expect very consistent and very balanced actions from the U.S"

"Ah, the zeal of the newly converted," I think to myself as I read former Communist Russia lecture the US about Capitalism.

The answer to the question, Who won the Cold War?, doesn't seem nearly as obvious now as it did a few years ago.

But, you might be wondering, what's this eye of the hurricane nonsense?

The hurricane comprised of the winds of change hit US$ and US economic supremacy head on, if you will. The leading eye wall hit during the first half of this year as commodity prices soared. The eye, or focal point of the storm, came into clear view as the Treasury nationalized Fannie and Freddie.

We will see during the second half of the year if the lagging eye wall is as powerful as the leading.

Or if I'm just all wet.