Enzio's Clock

Background

1. "Panic" is setting in

You all know what is happening: greed is morphing into fear. This is the final stage of Prof. Kindleberger's marvelous framework which we have introduced you to.

What is happening is that punters (finally!) are getting it: The Economic Time™ in America has morphed into one characterized by an

• excess demand for money (this time it's a credit recession, nasty stuff, this), and
• an excess supply of goods

Our newest concern is not ratings downgrades or what is happening within banks' balance sheets, but what has not been put on to their balance sheets.....This game of peek a booh with the regulators is absolutely disgusting, would you not agree?

2. Currency implications

a) Yen: greed morphs into fear, so up she goes. Current rate: 101.98/USD (all rates from Bloomberg)

Expect carry trades to unwind. Here is what happens. Originally, punters borrowed yen, sold it, bought assets with the new currency, and held on. But with greed morphing into fear, watch this sequence go into reverse - "rapidemente": people will sell their assets, and then sell the currency in order to procure the yen with which to re-pay their original yen loans.

My gut guess is that the yen well could reach 90/USD, this reflecting greed morphing into fear and thus people unwinding their yen carry trades

b) Australian dollar: political survival ensures continued upside. Current rate: AUD 1.071/USD, or USD 0.934/AUD

We remain stuck in this one. There is "de-coupling" in one sense: the governments of China and India simply have to keep creating jobs - or they will have riots on their hands. So demand for commodities stays structurally strong. Stick with the Aussi. Soon Americans will have to pay USD1 per Aussie.

c) Euro: sticky downside to rates. Current rate: Euro 0.6485/USD, or USD 1.542/Euro

The Economic Time™ keeps worsening in Europe: her Economic Clock reads

• excess demand for money, and
• excess supply of goods
  

But, with Trichet being such an inflation hawk as well as being festooned with a large ego, it seems to me as if the likelihood of massive rate cuts a la Bernanke are out of the question. So the yield gap with America widens - because Bernanke probably will slash another 75 basis points on 18th March.

That, along with the observation that superpower currencies always turn into mush, gives me a gut-target of about USD 1.75/Euro by this June, at which time America's panic will become daily humdrum news.

How to Make Money Off This Idea

1. Always talk with your financial adviser first.
2. We are long of Euros and the Australian dollar.
3. Buy yen, the Aussie and the Euro. You might want to wait a couple of days because traders may go short-term contrarian, unwind dollar shorts. But in my head, "the trend is my friend".

Here are my "gut-targets" for this June: