Key News
• The value of financial assets held by Japanese households at the end of December hit a record (WSJ).
• Key Reports Due (WSJ):
8:30a.m. Feb Chicago Fed Natl Activity Index. Previous: -0.74,
10:00a.m. Feb New Home Sales. Previous: -16.6%.
10:30a.m. Mar Dallas Fed Mfg Production Index. Previous: 18.1.

Quotable

“I am convinced that the future of America is rosier than people claim — I've been hearing about its imminent decline ever since I started reading. Take the following puzzle. Whenever you hear or read a snotty European presenting his stereotypes about Americans, he will often describe them as ‘uncultured’, ‘unintellectual’ and ‘poor in math’ because, unlike his peers, they are not into equation drills and the constructions middlebrows people call ‘high culture’. Yet the person making these statements will be likely to be addicted to his Ipod, wearing t-shirts and blue jeans, and using Microsoft Word to jot down his "cultural" statements on his (Intel) PC, with some Google searches on the Internet here and there interrupting his composition. Well, it so happened that the U.S. is currently far, far more tinkering an environment than that of these nations of museum goers and equation solvers — in spite of the perceived weakness of the educational system, which  allows the bottom-up uncertainty-driven trial-and-error system to govern it, whether in technology or in business.

“It fosters entrepreneurs and creators, not exam takers, bureaucrats or, worse, deluded economists. So the perceived weakness of the American pupil in conventional and theoretical studies is where it very strength lies — it produces ‘doers’, Black Swan hunting, dream-chasing entrepreneurs, or others with a tolerance for risk-taking which attracts aggressive tinkering foreigners. And globalization allowed the U.S. to specialize in the creative aspect of things, the risk-taking production of concepts and ideas, that is, the scalable and fat-tailed part of the products, and, increasingly, by exporting jobs, separate the less scalable and more linear components and assign them to someone in more mathematical and ‘cultural’ states happy to be paid by the hour and work on other people's ideas. (I hold, against the current Adam Smith-style discourse in economics, that the American undirected free-enterprise works because it aggressively allows to capture the randomness of the environment — ‘cheap options’—  not much because of competition and certainly less because of material incentives. Neither the followers of Adam Smith, nor to some extent, those of Karl Marx, seem to be conscious about the role of wild randomness. They are too bathed in enlightenment-style causation and cannot separate skills and payoffs.)”

  Nassim Taleb, The Birth of Stochastic Science (Source: Edge)

FX Trading – A dollar surprise?  No so far fetched…

If financial contagion from the subprime market is contained (though the jury is still out), then kudos once again to the resiliency of the US financial system…just maybe another surprise materializes…which wouldn’t be such a surprise to Brian Westbury and Robert Stein, economists at First Trust:

“First, US GDP growth rates are not directly reduced by a shift from homeownership to renting.  Renting or owning are both counted as consumption of housing services.  Foreclosures do not cause homes to disappear, nor do they remove the spending power earned by workers.  The asset price of homes may change but the real value of housing services rendered by the housing stock (rentals and owner-occupied homes combined) will barely budge, if at all.  And while construction or mortgage-related job losses may rise, the adjustment will take place over time, limiting the damage.

”Second, the days of limited financial choice are long gone.  Years ago, when local banks found themselves holding bad loans (often based on local economic conditions), they had to limit all lending, including to creditworthy borrowers - and those worthy borrowers had nowhere else to turn.  Now, interstate competition and even international competition have made it almost irrelevant if a particular lender goes belly-up.  There are always other healthy financial firms ready to seize market share from troubled ones, or buy assets at fire sale prices.  Moreover, the world is awash in liquidity, interest rates are low, and the Fed is still accommodative - not tight like it was in 1999-2000 prior to the stock market crash.”

If Messrs. Westbury and Stein are correct, it might likely change the view of many that a new low in the dollar is inevitable, as the Fed on-again-off-again-on-again-not sure where-again would be on-again; and prove Mr. Consumer was prematurely pronounced DOA once again:

“Another fear is that real estate price declines might impinge on consumer net worth.  To assess these risks we use a model of residential real-estate prices based on rents, after-tax incomes, interest rates, and the stock market.  The model suggests that on a nationwide basis, owner-occupied homes were probably about 5% overvalued at the end of 2006, versus 10% overvalued at the end of 2005.  This likely means that some markets are significantly overvalued, but most are at or near fair value.  In other words, this is not the dot.com bust all over again.”

March 20, 2006 Commitment of Traders Report for euro:

Long Open Interest:  106,108
Short Open Interest:   18,232

Maybe this isn’t quite an extreme one-way bet in euro, but a lot of players seem positioned to ride it to all-time highs against the dollar.  And we know what happens sometimes when everyone is expecting the same thing; there is no left in the market to make it happen—everyone is already committed.   

Jack Crooks