German Chancellor Strenuously Objects to Central Bank Monetization

This is important in its own right, but even moreso because it suggests that some rumours that have been going around the trading desks over the past two weeks might be true.

We will keep you informed as things progress.


Financial Times
Merkel mauls central banks
By Bertrand Benoit in Berlin and Ralph Atkins in Frankfurt
June 2 2009 17:25

Unconventional monetary policies being pursued by the world’s main central banks could aggravate rather than ease the economic crisis, Angela Merkel, Germany’s chancellor, suggested on Tuesday.

Her surprisingly strong attack on the US Federal Reserve, the Bank of England and the European Central Bank was remarkable coming from a leader who had so far scrupulously adhered to her country’s tradition of never commenting on monetary policy.

“What other central banks have been doing must be reversed. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,” she told a conference in Berlin.

“Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds.”

She added: “We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.”

Ms Merkel’s decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting on monetary policy out of respect for central bank independence – suggested Berlin is far more concerned about the ECB’s approach than has so far been apparent.

Meanwhile, Berlin is anxious that central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and fears the long-term inflationary potential of hyper-loose monetary policies.

The ECB’s efforts have been focused on pumping unlimited liquidity into the eurozone banking system for increasingly long periods. But last month, it followed the US Federal Reserve and Bank of England in announcing an an asset purchase programme to help a return to more normal market conditions.

The ECB announced it had agreed in principle to buy €60bn in “covered bonds”, which are issued by banks and backed by public-sector loans or mortgages. The purchases were only agreed after extensive discussions within the 22-strong ECB governing council. According to one version of May’s meeting, the council had discussed a €125bn asset purchase programme that would also have included other private sector assets, but only the purchase of covered bonds was agreed....

Palotta's Raptor Hedge Fund Halts Redemptions - To Close

No doubt overwhelmed by the heady perfume of green shoots wafting from the Fed's printing presses.

WSJ
Pallotta, Noble to Close Funds
By JENNY STRASBURG and PETER LATTMAN

Two prominent Boston money managers are winding down their biggest funds, another sign of the relentless shakeout in the hedge fund industry.

James Pallotta, who runs the $800 million Raptor fund, has decided to return money to outside clients, people familiar with the matter said.

George Noble, a former mutual-fund manager who controls some $550 million across two funds named Gyrfalcon, intends to refund clients this month. He describes his 2009 performance in a letter to investors Tuesday as "the most professionally disappointing and personally frustrating of my entire career."

Their simultaneous exits show how veteran investors still regard these markets with caution, despite stocks' recent ascent. The decisions could portend similar moves by other fund managers who, burned by losses and facing pressure from clients, opt to shutter, even as the hedge fund industry's returns have improved.

Mr. Pallotta less than a year ago split off from hedge-fund pioneer Paul Tudor Jones, his investment partner for 15 years. Mr. Pallotta ran Tudor Investment Corp.'s Raptor fund, a stock-picking vehicle that at its peak had $9 billion in assets and some of the best returns in the industry but that hit a money-losing skid starting in mid-2007.

Mr. Pallotta, 51 years old, grew up in Boston's working-class North End neighborhood and became one of the city's richest men and a minority owner of its beloved Celtics professional basketball team. This year, he opened a New York office in addition to his Boston location. Yet amid the market tumult, he kept most of his assets in cash and for now has put fundraising and major organizational decisions on hold, people familiar with the matter said.

Saving Private Greed

As best we can figure, this rally is providing cover for the big Wall Street banks who are issuing equity as fast as their little hooves can move, to qualify for the TARP payback mechanism.

By 'proving' that the market wishes their debt and equity, Timmy says they will be permitted to pay back their TARP funds, and be released from scrutiny on their bonuses.

While the volumes stay thin and the Fed's wallet remains fat, this rally make continue. Or at least an optimistic trading range.

As a side note, I made the first borscht of the summer season yesterday with very nice beets from a local source. Slowly roasted the beef and beef bones, onions, and celery to carmelize in a foil pan on a grill outside, and then cooked it up with the already cleaned and boiled beets, beef stock, seasoning, a little sugar and vinegar in a big pot for a couple hours. We then allowed it to chill overnight. It was a thin clear broth but a deep purple, and loaded with diced pieces of beef and beets, with a few very small round redskin potatoes.

With a dollop of sour cream and chopped sweet onion, DELICIOUS! and refreshing.

By far the best, and a delightful distraction from this wretched market.

A Stronger Dollar: After Many a Summer Dies the Swan

This is the kind of situation that tends to wobble forward from momentum until it hits a crack in the pavement, some trigger event, then topples into a ditch and a full blown crisis, often when we least expect it.

I have not been reading many other financial blogs lately, giving more time to family and preparing for what is to come. I wonder if the more strident true believers in a stronger dollar through deflation have relaxed belief in the improbable yet, or if they are still flogging the data to support a mistaken theory.

Its one thing to be wrong. Everyone is, at one time or another, including yours truly. But its especially costly, sometimes fatally so, to be stubborn after your time has come and gone.

If equities take another leg down, as we suspect they will, then the dollar will strengthen once again, perhaps impressively. But it is just a shifting in allocations in a dollar universe that is changing, often slowly, into something that will likely be quite different, as in a black swan event.

As you know the position we took on this question was to make the case that in a fiat currency regime a range of outcomes are technically possible (and still are). But the probability of inflation was overwhelming when the facts were considered dispassionately.

As a general rule, the louder the rhetoric, the weaker the case to be made for a viewpoint.

Look at the data and be guided by it in all other things of this world.


Bloomberg
Dollar Declines as Slump Prompts Nations to Mull Alternative
By Oliver Biggadike and Matthew Brown

June 2 (Bloomberg) -- The dollar dropped to its lowest level against the euro this year on speculation record U.S. borrowing will undermine the greenback, prompting nations to consider alternatives to the world’s main reserve currency.

The 16-nation euro gained for a fourth day versus the dollar as the Russian government said emerging-market leaders may discuss the idea of a supranational currency. The pound strengthened to $1.65 for the first time since October.

“There’s been a lot of talk out of Russia about a new global currency, and that’s contributing toward this latest bout of dollar weakness,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “These latest comments are just adding to the general dollar weakness we’ve seen recently...”

Russian Proposal

Russian President Dmitry Medvedev may discuss his proposal to create a new world currency when he meets counterparts from Brazil, India and China this month, Natalya Timakova, a spokeswoman for the president, told reporters by phone today. Medvedev first proposed seeking alternatives to the U.S. dollar as a reserve currency in March.

The dollar also declined on speculation “smaller” central banks started today’s selling of the greenback, said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.

“If people believe that there is official pressure behind it, then obviously it puts pressure on euro-dollar on the upside,” Galy said. Galy predicted the 16-nation currency may reach $1.4360 today, a peak last reached in December.

There will be demand for the record amount of debt the U.S. is selling, Treasury Secretary Timothy Geithner said in an interview earlier today with state media outlets in China.

China’s ‘Understanding’

China has a “very sophisticated understanding” of why the U.S. is running up budget deficits, Geithner said in Beijing, pledging to rein in borrowing later.

“Despite the more comforting words we’ve had from the Chinese to the U.S. overnight, it does seem that the world’s reserve managers are still concerned about exposure to the dollar,” said Ian Stannard, a foreign-exchange strategist in London at BNP Paribas SA...

‘Last Stage’

The euro’s rally against the dollar may be entering its “last stage,” and investors would likely benefit from selling the 16-nation currency against the greenback, UBS AG said.

Europe’s currency is poised to weaken toward $1.30, analysts led by Mansoor Mohi-uddin, Zurich-based chief currency strategist at the world’s second-biggest foreign-exchange trader, wrote in a note to clients yesterday. The analysts reiterated forecasts for the euro to trade at $1.40 in one month’s time and weaken to $1.30 in three months.

“We remain positive on the U.S. dollar and think that the greenback is likely in its final stage of weakness,” the analysts wrote. “Equity and bond flows have the potential to surprise and could lend support to the dollar.”

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net