Weekend Thoughts by Global View

I think we are in the end game on the liquidity squeeze, even if it is a drawn out game. The Treasury and Fed are throwing the kitchen sink at the market. The Fed can now pay interest on bank reserves so no need for banks to hoard cash, and will allow the Fed to act as an intermediary between banks if I read this right. The Treasury will soon be taking some of the illiquid assets off bank books. A bidding war for Wachovia and Wells willing to take it on without pre-conditions may be an anomaly or a sign that the severe financial market panic is finally easing.

I think we are in the end game on the liquidity squeeze, even if it is a drawn out game. The Treasury and Fed are throwing the kitchen sink at the market. The Fed can now pay interest on bank reserves so no need for banks to hoard cash, and will allow the Fed to act as an intermediary between banks if I read this right. The Treasury will soon be taking some of the illiquid assets off bank books. A bidding war for Wachovia and Wells willing to take it on without pre-conditions may be an anomaly or a sign that the severe financial market panic is finally easing.

This is like digging out after Katrina.. It is a slow process to get basic services working again and the result is a different world than before that devastating storm.

What does this suggest? It is very complicated to answer. Europe is a mess and hasn’t even started to deal with its issues. Assuming a U.S. financial market Armageddon risk eases, then focus shifts to the real economy. In this regard, expectations are rising for a Fed rate cut.

The ideal response would be coordinated rate cuts. The sticking point is whether the ECB would go along or act on its own timetable. History suggests the latter. ECB is so far behind the curve, still focusing on inflation when deflation has become the greater risk.

As for the dollar, logic suggests it needs a breather after such sharp moves. Logic also suggests that if liquidity pressures ease, demand for dollars should also ease. On the other side, there is no safe place to hide as focus shifts to a slowing global economy.

As for eur/usd, current range is around 1.37-1.39 but 200 pips is too tight a range to last long. Refer to SF’s week ahead post for a scenario to watch.

Have a good weekend.