ForexNews: How is the Fed doing? TheLFB Forex Newsletter

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03/12/08 Newsletter Issue
529
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Welcome to this week's Forex newsletter, How is the Fed doing? We hope you enjoy
reading it.
We welcome feedback on the content provided for your reveiw, and look forward to
hearing from you with ideas on how we can better serve your information needs.
The New Trade Plan design has had rave reviews, and is now providing LFB Members
with six Trade Alerts eeach day, one for each Pair, with Long and Short Entries,
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How is the Fed doing?

The Fed Chart [http://rs6.net/tn.jsp?e=001NokZXmtU4Z8ldHKnLYGVXtYdrNdBKeCHO4XuYgmu_tsf981Ztrd9dPDvFi-5TpFBxdXJzKfd_wTJlq3smmXN-TJfqndijD6gddbxEBYRVksIeRZY_h-E-ayd-YiIk5sY]There's
a growing concern in the market that the Fed is becoming less effective, although
Tuesday's action from the Federal Reserve initially drew praise for its targeted
approach. Instead of a sharp interest-rate cut, the Fed is adding liquidity to
the fixed-income markets (and attempting to effect long term interest rates) through
auctions to its primary dealers and not just the banks.
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The Market has seen this movie before, but will it work?

Credit markets had remained squeezed because banks who borrowed at the TAF were
hoarding money to shore up their own balance sheets. The underlying problem remains
housing-specifically the fact that inventories are rising as prices are falling.
If that trend continues, we're likely to see this move get steamrolled by the markets.
Goldman Sachs advised selling Tuesday's rally, saying the Federal Reserve's action
"does nothing to attack the root cause of credit and funding risks: asset price
depreciation." The company believes housing prices will fall an additional 10% to
12%, and commercial real estate prices will fall an additional 15% to 20%.

For a dose of reality visit TheLFB News Desk. [http://rs6.net/tn.jsp?e=001NokZXmtU4Z8ldHKnLYGVXtYdrNdBKeCHO4XuYgmu_tsf981Ztrd9dPDvFi-5TpFBxdXJzKfd_wTJlq3smmXN-TJfqndijD6gddbxEBYRVksIeRZY_h-E-ayd-YiIk5sY]
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Dollar crisis to get worse?

U.S. Dollar [http://rs6.net/tn.jsp?e=001NokZXmtU4Z98NUPDZMGe2Dcnk-x9brqhaJGR3TJMlIBwHRHkzWmEPcrpkYzwgz_eZVOOaqJORzYI1j5S9rS2MYvjyjIBzFkTVUqgTlc-bhEGvyuSmaUVGg3NZaXpP_sp]Meanwhile,
the WSJ is saying the dollar is weakening today in part because of more chatter
out of the Gulf States who are contemplating the end of their dollar pegs. While
these states have benefited from a massive influx of money through oil sales, the
dollar pegs have contributed to high inflation in those countries, and increased
trade with euro-zone countries only exacerbates this problem.
Sheikh Hamdan bin Rashid Al Maktoum, finance minister of the United Arab Emirates,
told Zawya Dow Jones that the country is studying whether to maintain its policy
of pegging the dirham to the dollar.
Inflation rates in the major Gulf countries are exceedingly high, notes Stephen
Jen, economist at Morgan Stanley. Inflation is above 14% in Qatar, above 10% in
the UAE, and above 7% in Saudi Arabia.
The pegs exacerbate inflation as the dollar weakens, and the UAE has responded of
late by instituting price controls, which of course hurt businesses selling goods,
and burdens the government in turn.
Bank of Tokyo Chief Economist Paul Chertkow believes that if GGC area countries
do cut their pegs, a further massive deterioration in the dollar would occur as
a rush to buy Euros would likely ensue.
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A message from long ago.

Book [http://rs6.net/tn.jsp?e=001NokZXmtU4Z88RSyMpFkWxrzfK2LYGVwkTaYPqFWprnyoLeJblJhLtkPs52HYnzLJWubp-NXKT0__DtAKgaFc3yC4NGBS6YllomSUT8k_tRjIcOH9L8hSkv1GQjH4p2sxpeRxImPUjmc=]The
big question these days seems to be; "when will the financial turmoil be over?"
To answer it we'll have a look at another question; "was this financial crisis able
to be foreseen?"
We'll have a quick look at what history has to say about it.
Back when the sub-prime debt was only on the drawing-board, the former Fed Chairman
Mr. Greenspan was supporting the financial liberalization in front of Congress.
That was a move that allowed Sub-Prime to see the day of light, and, with a little
help from the former Fed Chairman in the form of public lobbyists, borrowers had
a real rush towards sub-prime packed deals, known as ARMs. Low qualification, low
deposits, higher rates = a win/win situation. Average Joe gets a house of his dreams,
Banks rake a fortune off the top, Hedge Funds buy the AAA rated debt. Happy Days.
Now history comes into play; In the '70s the world had seen only 3 banking crisis.
During the '80s the number of banking crises had reached 22. The banking system
was dragged down by macroeconomic problems, but the number of Balance of Payment
problems almost doubled from 22 to 46. Banking however was the major problem; in
the banking sector the crisis numbers grew 7 times.
The main reason for the constant crisis situations, as economic literature shows
it, was the bank de-liberalization during the '80s, compared to the highly regulated
financial markets of the '70s. During the '70s and '80s in 18 out of the 25 banking
crises the financial market was liberalized 5 years previously or quicker. In fact,
soon after deregulations in the financial markets credit Booms, and asset Bubbles,
became the norm rather than the exception.
Does all this sound familiar? Deregulation, credit Boom and asset Bubbles? We had
them all, and in the summer of 2007 we can now add in a missing Credit Rating Agency
overview that allowed credit ratings to go unchecked.
Now we can start to see the whole picture.
So, the answer to our question "was this crisis able to be foreseen" is yes. We
could have somehow foreseen it, but looking back to when the Bubble was getting
bigger and bigger it was hard to contain the greed.
Well now another Bubble has burst, and all we can do is to look for ways that will
not allow it to happen again. One of them may be to force the Fed to publish the
Money Supply numbers that were taken away under Mr Greenspan's control. In that
move the Fed took away the only way that they could be accountable for a lack of
Reserves, and therefore created an inability for anybody to know what each Dollar
is actually worth in our pockets. Another way is to start to save, to put something
by for a rainy day, because the US economy will be strong again, and at that time
it will be comforting to have the ability to weather the next storm without maxing
out the Credit Card, or the Line of Credit.
At the previous Congress Meeting Mr Bernanke asked for the public the start to trust
the Fed. Hmmmm, trust is earned Mr B, and respect comes from leading by example.
Neither of these is happening right now, and something may have to change if trust
is going to come the Fed's way. We live in a world of instant access to information,
Average Joe is getting knowledgable, it will be harder to earn his respect than
it was 5 years ago.
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Trader Jai's Retail Army

The other day, while I was sitting in one of the common areas on my campus hunched
over my CrackBerry watching quotes whiz by, a friend of mine walked up and asked
me what I kept looking at. I showed him my screen. Of course once I showed him,
the floodgates opened with all the questionsArmy hat [http://rs6.net/tn.jsp?e=001NokZXmtU4Z9JWZiM4CoVgza1BTH-jKWOOa8MLHfIhltMgTLIq0OJJcwYSwfZCXTGDDDK0vzDQOJRO-uD2WInqo5Rw2_rY3XWzWRve17KTyM=]
everyone asks when they first see all those numbers flickering; "what is it, and
how much to open an account".
I started to say that he could open an account for as little as $500 but then it
made me think, how much would it really cost, if it were done correctly (money
management wise)? Assuming for a mini account, at $1 (roughly) per pip and risking
2.5% on each trade, that would give you a 12 pip stop, and this isn't even including
the collateral you have to put up. Now I've been trading a while and even I can't
get my stops down to that low of an amount, so how in the world could he? Even with
opening a $1000 account the stops would only be 25 pips. At TheLFB, most of the
time the stops start around 40 pips so the average account balance to use proper
money management should be at least $1800. This of course discouraged my friend
because being a college student while working for minimum wage; it could take forever
for him to get that kind of scratch together.
So he is starting out with a $2000 demo account, tons of trading e-books, proper
money management/trading psychology techniques (if he listens to me), and of course
a subscription to TheLFB. Once he is doing well with all that, I may mention that
he could open a micro account to get his feet wet ;-)
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