| GOODBYE JOE |
Me gotta go, me oh my oh
me gotta go pole the pirogue
down the bayou…
The heartbreaking scenes out of New Orleans these past two weeks brought to mind the lyrics of Jambalaya, one of thousands of great songs that sprung out of the bayou mud of Southern Louisiana over the past few hundred years.
I know - I guess, knew would be a better word today - New Orleans, the Cajun country stretching across South Louisiana and the Mississippi Gulf Coast extremely well, having been taken to New Orleans on my first fall break in college - a wide-eyed 21-year old graduate student (relatively) fresh off the boat from India. It was - to use a contemporary phrase - awesome. Not only did we drink all night and whatever part of the day we were up - I particularly remember sitting on the sidewalk swigging Boone's Farm Apple wine (99 cents a bottle, I kid you not) - but we danced on the streets, heard the finest music and I almost ended up married to a girl who was dancing naked on my table at a bar just off Bourbon Street one night.
And that was just the beginning. Over the next fifteen years, I went to New Orleans maybe twenty thirty times, each time getting in deeper and deeper. In a few years, I even had a table - the one on the left in the corner when you enter - permanently reserved for me at Napoleon House, a wonderful old bar in the French Quarter, on the corner of Chartres and St. Philip (I think).
We - and over the years, the composition of the "we" changed quite a bit - ate the finest Creole cuisine at Antoine's, breakfasted at Brennans, waited in line for late night omelettes at the Camelia Grill on the corner of Carrolton and St. Charles, and lingered over beigneits, doused in powdered sugar, and chicory coffee at Café du Mond at 2, 3, 4, even 6 in the morning. And, of course, we ate oyster po-boys. Available all over the city, but the best by far were at Cassamento's uptown on Magazine Street.
And we drank. And drank. And drank. From frozen daiquiris to mint juleps to bourbon to, of course, Dixie beer in longneck bottles. New Orleans is the only city in the U.S. where it is almost mandatory to drink while you're driving. I don't drive, so I was compelled to drink in every bar - and there's one on every corner and sometimes five or six to a block. From the classic tourist traps - like Pat O'Briens, where, after several too many Hurricanes, I once turned into a cockroach and had to keep scrambling to get out of the way of those shitkicking tourist cowboy boots - we drank at bars all over the Quarter, on the other side of the river in Algiers, uptown bars on Napoleon Avenue, and (almost) always ending up at Molly's at the Market (the best jukebox in New Orleans) in the Quarter.
And we dressed up. We haunted the thrift stores in the gay and voodoo section past the Streetcar named Desire across Esplanade - way back before all of the Quarter had become gay. Bought plum colored pantyhose at Woolworths and wore them decorated with hand-sewn on fried pork skins for the "Every Pig has its Day" Mardi Gras parade over in Gulfport. Wore a hat with a foot and a half long feather to a wedding in the cathedral on Jackson Square, almost upstaging the bride. [This paragraph is constrained of further details since this is a business report.]
And we danced all over the city. On the streets, of course, competing with the old drunks and little black kids tap dancing for quarters. At parties all around town. Jumping out of the car, when we were driving out to hear Zacharay Richard at the Zydeco festival, and doing a wild-ass Cajun shuffle right there on the highway. And, most memorably at a little wooden shack of a place a bit uptown off Tchopitoulas, which was the wildest blues bar I've ever been to.
And we became the music. Music was the air in New Orleans. Jazzfest. Mardi Gras. Preservation Hall, where the black guys playing were so old, you could hear the records scratch when they played. The Neville Brothers, Dr. John at Tippitina's, Professor Longhair at Commander Cody's. And one-eyed Billy Wolf, our guide to the nightlife.
Ah, New Orleans! The Big Easy! Laissez le bon temps roullez - let the good times roll!
And now, Goodbye Joe.
Breaks my heart. Will we ever meet again?
But, in any case, God is great and, perhaps, the other result of Hurricane Katrina may be the end of the "zero tolerance, winner takes all, let's buy everything at Walmart" way of life. The most interesting analysis I read of the horrible mess was in an article in the Financial Times, which pointed out that the tragedy of poor, black Americans suffering like people in Bangladesh or Africa was a direct result of the political belief - started by Ronald Reagan, and continued through all the the Republican-dominated Congresses since then till it is the accepted wisdom today - that Government is basically the problem; and the less government there is the better. Living here in India, we could be forgiven for feeling the same way, but, as the events of the past few weeks have graphically shown, this "tending-to-zero" government leads to trauma, tragedy and, yes, a failure of civilization.
And that, too, in the richest country in the world, which is also these days globally famous for delivering lectures on "a civilized society".
Huge numbers of Americans, already fed up with their current government's misadventures are horribly upset with what they have seen on TV. And while peoples' memories are notoriously short - how many of us in Mumbai actively remember the trauma we suffered with the floods just a month or so ago, perhaps, even turning it back towards a more interventionist government for decades to come.
So, what does this imply for financial markets, and, more specifically, the dollar? Well, a more interventionist U.S. government means a higher budget deficit, greater protectionism and a weaker dollar. Global growth may not suffer immediately, since the balancing force of Asian mercantilism may continue to keep interest rates low. But, at some point, U.S. growth will have to slow down, and, then, unless Japan, China, and the rest of us have continued to really accelerate, look out…
In the meanwhile, of course, the Sensex blew through 8,000 like a hurricane. Like the song goes
Jambalaya, crawfish pie and file gumbo
'cause tonight I'm gonna see my machez amio
Pick guitar, fill fruit jar and be gay-oh
Son of a gun, we'll have big fun on the bayou.
currency markets view: rupee and majors
USD/INR
Fortnightly movement: O: 43.71 H: 44.17 L: 43.72 C: 43.85
Sentiment: Back to strength, balanced by RBI
Expected range for 1 Month: 43.50 - 44.00
Expected range for 3 Months: 43.35 - 44.25
The rupee lost around 15 paise in the fortnight, closing weaker at 43.84/85, but did well to recover from its intra-period low of 44.17/18, hit early in the fortnight. The sharp upward move in crude oil price triggered by the impact of Hurricane Katrina - the benchmark NYMEX 1-month crude oil futures jumped by 7.5% to over USD 70 per barrel on fears of extensive damage to major U.S. oil processing and refining facilities - sent the rupee sharply lower, particularly as this event paralleled a [temporary] slowing of FII investment during the second half of August. The rupee, which in any case had been inching lower during the previous month on technical factors caused by a cash dollar shortage, suddenly broke through the 44.00 level on Aug 30. Of course, this triggered RBI intervention and, in a few days, the rupee climbed back into its 43.70-43.90 range.
While market is, of course, a bit nervous on having seen this spike, the prognosis for the rupee remains bullish on the back of continuation of foreign money inflows in the growing economy. The Sensex, having crossed yet another major round number, remains strong, with nary a bearish analysis around - while this, in itself, could be a contrarian indicator, the fact remains that nobody can afford to miss this bus. Perhaps, we are simply in the early stages of a bubble.
On a technical basis, the continuing capital account surplus along with the increasingly excellent prospects for the IT sector - underlined by the entry of Indian IT majors into the billion plus contracts club - will likely be more than sufficient to absorb the rise in trade deficit in the coming few quarters, irrespective of high crude prices. Again, the near certainty of further appreciation in Chinese currency at some point also underpins the rupee, reflected in increased activity in the rupee NDF market, which today reportedly trades close to $ 1 billion a week (up hugely from the $ 50 to $ 100 million a week just a year or so ago). In fact, there are some players who believe it was NDF arbitrage that created the sharp downward spike in the rupee last week.
Be that as it may, overall sentiment remains for a strong rupee going forward, although the market does remain vulnerable to spikes up to (and possibly above) the 44.00 level, although these will be short-lived as RBI would be unlikely to risk the inflationary impact of a weaker rupee, particularly given the recent rise of administered prices of petroleum products. On the subject of RBI, it must be admitted that their policy of containing the rupee in a narrow range (43.50 - 44.00) for the past several months has paralleled excellent performance of the economy - the question, however, is whether there has been a causal link.
EUR/USD
Fortnightly movement: O: 1.2337 H: 1.2589 L: 1.2171 C: 1.2411
Sentiment - neutral to positive, corrective rally may end soon
Expected range for 1 Month: 1.2350-1.2750
Expected range for 3 Months: 1.1950-1.2750
The euro slipped initially to sub-1.22 levels before a smart rally to just under 1.26 following a sharp decline in the US Chicago PMI below 50 into the contraction zone, an unexpected decline in the ISM manufacturing index and waning expectations of continued Fed rate hikes due to Hurricane Katrina and its possible effect on the US economy. However, the euro thereafter slid gradually as far as 1.2375 on better than expected US ISM service sector index and sanguine to hawkish comments from Fed officials.
Unless the US data in the next 10 days are very upbeat, the euro may rise again towards 1.2750 particularly if prospects of CDU/CSU alliance improve ahead of the September 18 German elections. A CDU/CSU victory could extend the euro rally towards 1.29 whereas a hung Parliament and prospects of a CDU/CSU/SPD grand coalition could be negative for the euro.
Technically, the decline from 1.2589 looks like a bull flag and another sharp rally seems very likely. Only a direct and decisive break below 1.2350 may abort the view of 1.2750.
GBP/USD
Fortnightly movement: O: 1.8078 H: 1.8498 L: 1.7820 C: 1.8391
Sentiment: positive, corrective rally may end soon
Expected range for 1 Month: 1.8200-1.8700
Expected range for 3 Months: 1.7600-1.8700
Sterling slid as far as 1.7820 after the disappointing CBI survey of retail sales but recovered strongly after the US Chicago PMI. An unexpected rise in the UK PMI manufacturing index back above 50 into the expansion territory, a decline in the US ISM manufacturing index and waning hopes of continued Fed rate hikes in the aftermath of 'Katrina' saw sterling rise to almost 1.85 before retreating modestly.
With good technical support in the 1.83-1.82, sterling may rally to the 1.86-1.87 area before turning down again.
JPY/USD
Fortnightly movement: O-109.86 H- 111.78 L-108.76 C-109.71
Sentiment: positive, will likely outperform other majors
Expected range for 1 Month: 106.50-111.75
Expected range for 3 Months: 105.00-112.50
The yen underperformed euro and sterling thanks to oil prices rising above $70 per barrel, although briefly, and some disappointing Japanese data viz. household spending and retail sales but recovered lost ground on the sharp decline in US Chicago PMI and an unexpected dip in the ISM manufacturing index.
PM Koizumi's landslide victory in Sunday's elections could change the entire tenor of the market, which, in any case, has been getting slowly more excited about the Japanese economy. The Nikkei is raging as foreign inflows have been very strong; more importantly, the election victory confirms that Koizumi will go ahead with his postal reform plan, which is a major step in deregulating Japan's still sushi and sake dominated market, which bodes well for heightened Japanese competitiveness and yen strength.
With the dollar looking firm, it appears as if EUR/JPY will see more action than usual, although if the yen really takes off - always a possibility, from a historic perspective - it could drive a turnaround in the dollar's fortunes as well.
Look for increased volatility as the dollar's fate will be governed by US data on retail sales, inflation, trade deficit and capital flows and then of course, the FOMC meeting on September 20.
From a technical perspective, the dollar may trade in a 108.50 to 111.75 range before a downside break towards 106.50 and probably 105.
interest rate markets
The latest government release showed that the weekly inflation rate based on wholesale price index has eased to 3.01% for the week ended August 27th. Headline inflation number has been falling for the past few months mainly on account of higher base affect of last fiscal and due to non-alignment of domestic fuel prices with the international prices. Now with partial upward revision in domestic fuel prices and simultaneous fall in inflation base value, the WPI inflation is expected to increase gradually towards 5% mark in coming months. Higher expectations on inflation front along with higher economic growth will keep the yield on domestic government paper firm, and we could see the 10-year rise steadily from the current 7.03% towards 7.25% by December-end.
This rise could lead to a steepening of the yield curve, since we do not expect there to be a hike in the repo rate at the next credit policy (October), despite the fact that liquidity remains abundant, as evidenced by MIBOR, which continues to hover under 5%. Going long MIBOR swaps could provide a good return.
Overseas, the market is divided over the impact of Katrina on Fed policy. It stands to reason that it may hold rates steady at the next meeting (September 20) in a wait and watch mode, to assess how the economy responds to the trauma. This is all the more likely since there has been some evidence that U.S. manufacturing may be slowing down, even though the all-important ISM indicator is still above 50. Overall, however, the U.S. economy remains strong enough to sustain further rises in the Fed funds rate and the betting is that even if the Fed does hold steady this meeting, it will continue its rate hikes for the next two meetings this year, taking the Funds rate to 4% by December. The long end of the curve remains subdued, continuing Greenspan's conundrum, and the flat yield curve may offer some good opportunities for buying 12x18 and 18x24 FRAs.
