Obama's Ascendancy and Fall

Along the way I have had a rather interesting dialogue with a colleague of mine that I have the utmost respect for.
Not only is he one of the very best traders I have ever worked with and one of the funniest persons; but he is someone that has a love for the culinary arts like myself, fully interactive in any environment, and with every sort of company. One of his contentions and a consistent one to boot, was that Obama would be a one term President, a viewpoint I have not been able to embrace until recently

He has always ascertained for any number of reasons that Obama would be one term. Recent events that have had very little main media profile has me seriously doubting my opposition to my colleagues contention.

The first aspect deals with the Presidents assertion that Pakistan/Afghanistan would be the focus of the war on terror. His approach is philosophically and fundamentally no different to that of Dubya, just different geographically.

In his attempt to unearth Osama Bin Laden and his Taliban supporters, he has created a source of future enmity and hatred for the USA. The result of his actions is that there are anything between 2.5 and 3 million displaced persons now living in refugee camps in the Afghan/Pakistan borders. This is a direct result of the action of the new Commander-in-Chief. People are dying and displaced, the camps lack water and appropriate facilities, and the only thing that they know is that their current situation and circumstance is a direct result of US policy as ordered by Barack Obama.

Additionally while his recent speech in Cairo was a landmark one in many respects and reached out to the Muslim world, some may see it as cynical picking Hosni Mubarak as host, when one considers the record of the Egyptian leader.

What's even worse is that as part of the financial services industry I watch in astonishment as a bit of a double play occurs, on the one hand harsh rhetoric and the appointment of a czar to oversee executive pay even as the majority of the banks are allowed to borrow from Peter to pay Paul. In this instance I refer to the fact that many of the banks (and read Goldman Sachs, Morgan Stanley as banks now) happily feeding at the FDIC guarantee trough to borrow cheaply and pay back TARP Funds. Nice arbitrage especially when these institutions are only paying back a portion of what they actually owe; but it allows them a way out from under the heel of the administration re executive compensation and the like.

While I continue to believe in Obama to a greater extent than not, I am increasingly of the opinion that what has always been a plan that sits on a knife edge, will end up falling apart, especially with a likely second leg down in the economy as unemployment picks up and the federal deficit continues to grow at an astounding pace.

The End of US$ Hegemony - June 16th 2009

This morning I delve into the domain of my esteemed colleague on FX Jack Spitz. We have had numerous conversations on this topic and I suspect many more ahead.

Of late all eyes have been on the FX markets and with good reason; but it has not been the more traditional economic data and drivers that we have generally looked upon; but instead what increasingly looks like a complete paradigm shift.

With the G-8 Ministers meeting this weekend providing rah-rahs and pom-poms for the Greenback and the Finance Ministers of Japan and Russia suggesting faith in the worlds reserve currency for very different reasons, one might question my focus on the end of the hegemony of the Greenback and why this may be the beginning of a paradigm shift that will change the worlds reserve currency.

How can this be?

Currently and for the last number of decades the US way of life and its military spending in particular has been financially sponsored and supported primarily by the Chinese, Japanese and South Koreans, with the Russians in the last few years and the ascent of oil prices, jumping into second place for buying US debt and funding that lifestyle.

We have continually however, and with increased volume of late, heard and read about the concern that's been expressed by these nations, with the exception of Japan and Korea, about the continued depreciation of the USD.

It's a simple matter of observation, seeing the Chinese continually trying (not always successfully) to purchase real and in particular commodity assets with their USD rather than maintain overly large reserves in what is a continually depreciating currency. Recent examples are Chinalco's bid to acquire a stake in Rio Tinto (and despite huge concessions on the part of Chinalco, still a resound failure) and only yesterday Sinopec's bid to acquire Addax Petroleum with a Stg 4.8bn bid.

Over the last number of months the stories/rumours have been numerous on these same creditor countries looking to diversify away from USD and in the last number of weeks we have had stories from not only these creditor countries but also the IMF suggesting use of SDR's (a currency basket of Special Drawing Rights of which the USD is still the largest percentage, though with the Euro and other currencies also making up said basket); add to that Paul Krugman the recent Nobel Laureate in economics suggesting that the GCC should de-peg from the Greenback and the growing cacophony of voices spouting the same notion, demands that attention be paid.

Hence the shellacking that the USD has been faced with of late, as concern grows about the extent of US deficits ($2 trillion and growing) and despite all the talk of a strong dollar policy the evidence that continues to suggest otherwise.

But this week is especially important as the SCO (The Shanghai Cooperation Organization) meet in Yekaterinburg, Russia, (formerly Sverdlovsk) Monday and Tuesday with Chinese President Hu Jintao, Russian President Dmitry Medvedev and other top officials of the six-nation group. The SCO continues to gain in significance and in the context of the refusal that the US received in its request to attend this meeting, becomes even more significant.

It's quite evident that the primary subject will be what to do about the US dollar as the world reserve currency. China is already establishing the Yuan as the preferred currency in bi-lateral trade agreements and Russian continues to express a similar desire to use the rouble.

I can't help but believe that we might be seeing a landmark moment in history unfurling before our eyes as it speaks to the hegemony of the Greenback as the worlds reserve currency.