It doesn't make sense to me. We have a war in Afghanistan, one in Iraq, still no hope for peace in the Middle East, and Iran is boiling its nuclear reactors. Now we have the Nobel Peace Prize? I know it's not really my place to comment since we all have our own opinions, but if C.C. Sabathia doesn't get the Cy Young award — and I know that guy in Kansas City had a better ERA, but the Yankees are in the playoffs — then I might think about changing parties.
I do like what Ben Bernanke did last week. In a speech last week he said, "Accommodative policies will likely be warranted for an extended period. . . At some point. . .we will need to tighten." At the same time the Financial Times of London reported the Fed engaged in some practice reverse repos. A reverse repo is where the Fed sells assets (thereby draining cash from the system) with the agreement to buy them back at a later date. I like all this. The Fed has been doing reverse repos since the time of the pyramids; they don't need to practice anything. But Gentle Ben sent a signal to the market that the US has the ability to reverse course and drain money from the system when it wants to. Soleil's Chief Economic Advisor and former Fed Governor Lyle Gramley thinks it will be at least another year before the Fed will tighten. In my opinion, it is good to know that Ben is on the case and knows exactly what to do. I like that he told the market that being short the dollar is going to someday be a very bad trade.
Monetary policy is shifting around the world, however. The times are beginning to change, and Australia's recent interest rate hike is just the very beginning of what we'll be seeing out of Asia in the coming year. Despite protestations to the contrary, Washington wants a weaker dollar to make our exports cheaper, and I bet that's the game plan right up to the mid-term elections. While exports might benefit, capital will flow away from the United States and to Asia's better economies. Their currencies might be pushed higher, but investment in those areas will be rewarded.
We did see the beginning of the improvement of exports in last week's trade deficit figures. The deficit fell to $30.7 billion. The fall in imports was led by a volume decline in oil even thought the price of oil was up. Export growth was modest but it was faster than import growth. The contest near-term will be the value of U.S. exports being priced in a weak dollar vs. the weakened U.S. consumer's inability to import more. Chances are with emerging markets recovering faster; exports to that area will grow, and what I see is the political motivation of a weak dollar will be rewarded in the short term. But, as I wrote last week, no nation ever grew to prosperity by debasing its currency.
We do get lots of earnings this week, especially in the financial sector, with JP Morgan, Citibank, Goldman, Bank of America and Morgan Stanley all reporting. It strikes me that we're going into this earning season with a higher level of expectations than will be realized. But that will play out in the next few weeks. We also get retail sales and business inventories this Wednesday and the CPI on Thursday. Both the New York State Empire manufacturing index and the Philadelphia Fed index will also be reported on Thursday. Friday we'll see industrial production for the month of September and capacity utilization.
Now, about those Yankees. . .