I rarely listen to central banks, I note what they do....

Hence this morning I have been busy unloading my long EUR/USD position into the market before this p.m ECB meeting. I will most likely look like a total a.. by 2 p.m, but I just remind myself I listen to the ECB in 2000 when the EUR/USD was dropping 1 figure a day! Which earned me a nice return, however, before I start getting your "but..." remarks;

1. Yes, US real rates are negative


2. No, the US administration does not give a toss about the US dollar


3. Yes, the US administration should realise that a stable US dollar could solve a lot of their issues, as the US is cheap, but no one trust Paulson/Bernanke as they have shown only one thing: A massive lack of understanding


4. No, the market is not really short US dollars, our bias still indicates more people fade this move


5. Yes, the economic data is better for Europe than the US for now.....

Now.... board the plane and go to 10.000 feet - what do you see?

1. 40% of the world have inflation issues (Middle East + Asia)


2. 60% have stagflation light outlook (Europe + US)


3. 10% of the worlds population consumes 80% of the savings (The US spends rest of world saves it)


4. US FX swaps are trading bid again indicating "turn money" over quarter getting expensive - AND indicating European banks are having serious issues of funding their day-to-day operations ending up going into final resort; The FX swaps market


5. Munipalities, ARS, is closed down - Munipalities pays 650 bps for 7day funding vs norm of libor!


6. Major Private Equity funds pays penalties of not meeting funding...


7. Bernanke and Fed have cut 2 y notes to 1.50% - Yes, 150 bps, what will he/they do when they reach ZERO!


8. Central bankers in Europe, Canada, New Zealand and Middle East wants, and will soon demand stronger US dollar.....


9. Inflation is here - Gold in 1.000 US dollar, Crude in 105, Feds 5y5y above 300 bps


10. 1970s most likely analogy; Then and now we had; Big government, Central banks denying inflation is risk, energy and food crisis.


11. Japanese Fiscal Yearned coming - seems the Japanese banks and savers more than happy to keep the money at home at Bank of Japan, rather than lending them to the US and others- DO NOT forget Japan is the commercial banker of the world, recycling the massive saving surplus to the rest of world.

Now, then, I have given you a fund managers daily nightmare - and now I need to ask you, what could solve this multi matrix, multi level equation?

Take your time, feel free, to revert later.....but let me give you suggestion from point of reverse engineering;

• Has it worked to cut rates? No, stocks down 20% in Europe, 10% in the US


• Has it worked to "engineer" private deals on Monolines, Mortgage House? No....


• Has it worked to spend the 150 bln. US of tax rebate? No, not after cost of energy and food calculated.


• Has it worked NOT to include recession in your investment scenario? No, au contraire

So, in my opinion, and remember I am merely a poor farmer boy from Denmark, who has been let into the world of finance by mistake, the solution is;

Stabilise the US dollar or even force the hand of the market to make it stronger...

Why would it work?

1. It would create "bottom level" for overseas investors into the US. Making the cheap US stock and debt look like good investment over the next 5 years


2. It would stabilise the long term yield, and hence helping cut funding costs of 10y mortgages, through increased recycling of fixed income buying into US dollar...The Clinton/Rubin experience


3. It would reduce the imported/exported inflation of Asia and Middle East.


4. It would ease currency pressure of Middle East, India, Vietnam and China


5. It would send market serious signal that Fed want to avoid the 1970 mistakes of thinking inflation is anti-cyclical.

Well, I am, as said naive, and it seesm only Paul Volker and I agree on this......(Not the worst person to agree with mind you...)

Strategy:

Foreign Exchange

Reduced my long EUR/USD to zero. Bought EUR p JPY c options, long EURSEK, long AUDUSD and USDCAD(hmmm..not working).... Looking to seel EURGBP as funding issues becomes real deal closer to month end. Think PLN soon to blow up...

Fixed Income

Buying lottery tickets in bunds & t-bonds... upside..

Equity

Short US stocks.. think this is 5th wave....down..

Commodities

Short crude in August around 100.60 level.

As always be careful out there!

Steen