The 70% chance of a 50 basis points Fed Funds cut predicted by futures markets later on today looks, from a Taylor Rule perspective, aggressive. Such a cut (excluded from the above chart) would suggest the Fed is reasonably confident inflation will tail off from the December's 4.1% reading in line with consensus forecasts (of 3.5% next time tailing off to 2.3% by year end); or that this is no ordinary recession threat; or both.

Those numbers mean free money in real terms; and as one who, in the face of very mixed economic data, does not get the logic of a 75 bps cut followed a week later by the mooted 50 bps, it means, hopefully, that once whatever metrics the Fed is using improve rates can also go the other way as swiftly. Otherwise the longer term danger is of a cure worse than the illness.

The guiding principle of 'data-driven' appears a victim in all this. Economic data management is, above all, a means to an end not the end itself. When in due course judgement is passed on this Fed the board should hope it says vision was combined with humanity; that without chasing after popular but unwise measures in the short term it recognised the case for the greater good and, equally, regulatory reform. Those ends are what matter most and are partially within its remit.

Some additional data of relevance, released yesterday:




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If there is one story that stands out this morning amongst all the others it is of what Société Général (SG) described as fraudulent trading by one of their plain vanilla futures specialists. The losses total US$7.2 billion (as in with a ‘b’) utterly overshadowing the bank’s other write-downs of US$3bn (US mortgages and monoline exposure).

A US$7.2bn gouging appears to be the mother of the mother of the greatest single unauthorised trading related loss. Ever.

In what is now the classic style of misdirection the public has come to expect from such situations, SG’s announcement claimed the massive loss was only possible because of the trader in question’s knowledge of the bank’s financial controls and systems. Such as they were.

Now, it is obvious that where a determination to cheat and steal exists no control system is infallible. However, one that leaks to the tune of US$7.2bn suggests, on the face of it, that it simply does not deserve to be called a control system. Yet SG say only one man did it over 2 years. Scarcely credible (and let's leave it at that).

So as much as this is an alleged fraud it is more, it would seem, a gross failure - a monumental negligence conceivably - of internal control and audit. Dodging responsibility for a fraud this size on the grounds that the perpetrator failed to play by the rules is farce of which Fernandel would be proud.

But expect les gars of SG to deny it to the end: Chair and CEO Daniel Bouton had his resignation refused by the Board. Which raises the question that quite possibly the only way to be made to resign in French corporia is to physically expire on the job. And then only maybe.

Separately, the cost of insuring against default on some of SG’s 5 year debt instruments increased by 10 to 20 basis points this morning. Anything less would belie the colossal scale of this episode.

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Today, in his small corner of the DAX index hedging world, the scribe noticed for the first time in a while that market makers hesitated to take prices in persistently choppy and violent action. Understandable when the DAX ended off 7%; and on a day when mental stops proved their worth in the face of some impressive volatility.

Since forecasting at year-start here a 2% to 8% fall in European and US equities for the first half they have instead fallen 12% to 15% in 21 calendar days. Which shows that even the persistently pessimistic can, disappointingly, be too optimistic.

Still, amidst the shock and awe, there was for those with the craving (guilty) a malicious pleasure to be had in observing the plight of French banks - notably Société Général (down 15% in two trading days), Crédit Agricole and BNP Paribas. The theory, smugly held in some quarters, that the French (cross-holding) Way and énarquism would mitigate financial contagion’s impact appears to have been snuffed out. And breaching that bastion is in itself ominous – most particularly, perhaps, for the stalled French housing market.

Yet might it all not also add up in global terms to capitulation with happy days around the corner? This observer has doubts – volume does not seem to have been large enough indicating, maybe, that today only the hot-money ran with little retail, investment or pension fund participation.

Nonetheless, that does not make it a day without significance; and those looking for the positive catalyst of an early 'surprise' Fed cut before its scheduled meeting at January-end ought to ask if that would be enough to hold back the underlying force (and even the short-term sentiment) of this tide.

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Bill Shakespeare had a nice few lines on technical anaysis:

We at the height are ready to decline.
There is a tide in the affairs of men
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures. (Julius Caesar, IV.ii.269–276)


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Despite Mr Obama being substantively unoriginal when compared to the other candidates on the Democratic left in policy terms; and in spite of a lack of administrative experience (or possibly because of it) he has distinguished himself by appealing to the nobility of the American soul with his polished oratory. He looks and sounds a leader - and not the prosaic technocrat personified by Mrs Clinton. New Hampshire tomorrow appears set to deliver him the momentum required to take the nomination.

And yet the Democrats have never taken the White House in modern times without a southern white Anglo Saxon protestant as candidate, bar John Kennedy - and that was a bitter campaign and result bearing comparison, arguably, even to the Gore/Bush 2000 contest.

Now the party is on the cusp of presenting a candidate widely described in the world’s media as 'half-white' (and Mr Obama's marketing men seem to have decided that is vote winning commentary). Mr Obama is, more precisely, an American Kenyan (via Indonesia) raised mainly by mid-western (Kansas) grandparents in Hawaii. But why confuse matters.

Perhaps mindful of his unusual background, as well as US electoral history, a nascent strategy appears to be an eventual Obama / Edwards ticket. This conclusion of the scribe's sits on the basis of the last Democratic debate in which John Edwards, a Carolinian, sided with Mr Obama and began a move intended to ultimately nudge Mrs Clinton into campaign oblivion.

Still, the scribe uses a model that suggests John McCain would beat that ticket. For sure, this model has never had to weigh such unprecedented Democratic factors before. And there remains the assumption that Mr McCain becomes the Republican nominee. But on that count, at least, it is a stretch to imagine a campaign-broke quasi-preacher, or a liberal New Yorker viewed with antipathy in the south, or another Governor of Massachusetts not liked by his own side there instead.

Nevertheless, the fact remains that a President Obama would be a resounding rejection of what the US has historically decided upon for the White House; and it would indicate a change in racial attitudes and relations, particularly in but not limited to the south, that would be startling in its pace. Audacity of hope, indeed. And give the man his due if he coined that himself.

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Laying fear of public humiliation aside in honour of the New Year here are some of the assumptions this scribe is investing under for the first 2 quarters of the year. Subject, of course, to revision as new data appears:

  1. US house price falls coupled with credit evaporation will knock on through to consumption, 70% of the US economy;

  2. weak dollar driven exports will not fully offset reduced consumer demand. And the buck will near certainly strengthen against sterling;

  3. the crumbling bits of bank balance sheets, visible in large inter-bank spreads, will (continue to) be bolstered by managers faster than expected due to the realisation that central banks cannot bail them out quickly enough; and with the opportunistic help of what McKinsey in October labelled the four new financial power brokers;

  4. US inflation will surprise on the upside toward end Q1 causing the Fed to think twice about easing rates just as it would like to be more accommodating. They ease anyway;

  5. but do not prevent a US recession (which, pending data, may have already begun in December);

  6. or the decline of US and UK equity markets by between (2)% and (8)% of their worth in the first half.

And, if one must hold stocks in this environment, here - with the proviso that stock selection is second to portfolio management* - are a few potential extra sticks to beat the scribe with in 6 months time:

  • BHP Billiton plc, 1542p (commodity exposure with upside if Rio bid goes south; but China related risks)

  • Astrazeneca plc, 2144p (defensive with dollar exposure but not much to get excited about)

  • Hikma plc , 483p (pharma qualities plus more than useful growth prospects in petro-dollar land)

  • Empresaria plc, 110p (staffers, 80% temps, and a play mainly on recent changes to German labour legislation)

  • ICO, Incorporated, $13.10 (boring but steady US exporter of resins)

  • Team, Incorporated, $34.94 (the incontestable champ of its fragmented N American oil & chemical services market)

  • Ascribe plc, 33.5p (small cap hospital software specialist with niche markets, a decent reputation and gear that actually works)

  • Invu plc, 30.5p (seriously chosen but fun-money scale micro cap; Sage plc deal a potential catalyst)

*Repeat a few times before considering these as ideas; and see usual disclaimer in the right margin.

NB: Scribe owns Billiton, Hikma, Empresaria, Ascribe and Invu equity

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