(email from Tom @ Laffer Investments)

> Looking at this chart of the 91-day T-bill…don’t think
> the Fed’s not going to cut rates on December 11th. We
> expect .50 bps and more cuts early next year…unless
> something changes.

The low t-bill rate is due to money funds switching asset choices away from any perception of risk, and moving the indifference levels between bills and fed funds, libor, etc. It’s part of what is being called ‘repricing of risk’ and has nothing to do with where the fed funds rate ‘ought to be’.

> Arthur and I were discussing Abu Dhabi’s investment in
> Citigroup. As you know, Arthur has been saying that
> the dollar can only fall so far until investors step
> in to buy U.S. denominated assets. When that starts
> in earnest, he says, the dollar will find a bottom.
> (See Laffer Associate’s ‘Whither the Dollar’). Abu
> Dhabi’s massive investment may signify that point. We
> would not be surprised to see a floor forming in the
> U.S. dollar as a result of factors such as the
> Citigroup investment.

Agreed! PPP is a powerful force, but often takes quite a while to assert itself.

Additionally, ‘fundamentals’ in favor to the $US also include the fact that the US budget deficit as a % of GDP is at a very low level, which tightens the ‘new’ supply of $US denominated net financial assets available.

Forces working against the $US recently recently are portfolio shifts due to concern over fed policy that has the appearance of ‘inflate your way our of debt’ and ‘beggar thy neighbor’ demand stealing ‘competitive devaluations/exports’.

Once the flood of portfolio shifts subsides, I agree the $US looks ok.

> Which leads us to oil prices. As you know, we look
> for the substitution effect in the supply of and
> demand for oil to create a ceiling on oil prices.
> That substitution effect is clearly underway. The
> wild-card has been the U.S. dollar. A weakening
> dollar has postponed the fall in oil prices, as you
> know.

The Saudis are acting as swing producer – posting price and letting quantity pumped adjust, thereby setting price at whatever level they want. So, the thing to watch is Saudi production. If it rises, that’s bullish for oil as it indicates more demand at the current prices. If Saudi production falls, it means net supply is increasing and the Saudis are able to sell less at current prices. They will hold price until the amount they are selling falls below 7 million BPS is my best guess.

Also, to compound matters, the Russians are doing the same thing; so, we have two swing producers, and the price goes to the higher of where the two post prices, as at the margin we need all of their current production of the day.

> We would not be surprised to see other investors step
> in to buy U.S. assets on the cheap much as Japan did
> in the early 90’s. You may remember the effect
> Japan’s buying had on the U.S. dollar then.

Yes, the $US shortage caused by tight US fiscal policy will turn the boat when the international portfolios run out of amo.

> A strengthening dollar and a slowing global economy
> could knock much of the froth out of oil prices.

Only if the Saudis/Russians decide to accept lower prices. Don’t underestimate them!!!

> Regarding OPEC: don’t think they aren’t aware of the
> fact that the U.S. economy is slowing.
> Maybe because so far it isn’t. Gasoline demand is still going up, though at a slower rate.
> Don’t think the heightened level of fear regarding a
> U.S. recession isn’t effecting their discourse heading
> into their December 5th meeting. We expect them to
> pump more oil. It doesn’t behoove them to be an
> accomplice in the murder of the U.S. economy.

They already pump all that’s demanded at their posted prices. You’re missing that dynamic in your analysis, and Art agrees with me.


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