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Monday, November 24, 2008

US Economy

The US government was forced to ride to the rescue of the Citigroup over the weekend, as it became clear of the course of last week that the bank would fail without prompt action from the authorities. The details of the rescue package are unique compared to recent measures, but then again, the US Treasury, Fed and other financial authorities have been forced into a lot of creativity and changes in tactics since the entire credit implosion debacle began. Citigroup was a horribly mismanaged company during the later phases of the credit bubble and put on enormous risk in its later phases, when risky assets were already ridiculously overpriced. Citi was clearly too big to fail.

Many have talked up the risks to the US economy due to the two-month transition period between presidents and lack of action until Obama takes the reigns, and it appears that Bush and Obama are trying to address this - Obama with a stimulus package on the order of $500 billion designed for signing on the day he goes into office and signals that plans to raise taxes on the wealthy will be delayed, and Bush's man Paulson now indicating that he will swing into action with the second half of the TARP rescue fund after signaling as recently as last week that he was going to leave these funds for the next administration to deal with. Paulson's plan will supposedly try ease household borrowing and further stem foreclosures, though there were no specifics. The negative momentum in the data doesn't seem to showing many signs of slowing and we wonder what the employment situation will look like in the retail sector in the US after the Christmas shopping season is behind us, as it is likely that many are retailers are on life support and could look to shut down or slash costs after what is shaping up to be an ugly and cold (literally, with record cold recently in many parts of the US) end of the year for sales.

US equity markets supposedly took heart that the NY Fed governor Geithner was named as Obama's Treasury Secretary, but we wonder whether this was just an excuse for the late Friday rally. Mr. Geithner is considered a key figure in many of the responses brought by the Fed so far in this crisis. It makes eminent sense that Obama chooses someone from the Fed rather than from the financial services industry, as no bank has remained untainted in this crisis.

Anything to like about GBP?

UK Chancellor Darling is expected to announce an emergency budget today at the so-called pre-budget report today, with new measures including a temporary reduction of the VAT from 17.5% to 15.0%. Other measures are also on the table, but the FT is also reporting that Darling is also out talking up tax increases on the wealthy, so the signals are a bit mixed. One potential bullish development for GBP was a story out Friday about a potential tax change on corporate taxes in the UK that could see massive repatriations of overseas profits. This is a story worth watching, especially as GBP has been the punching bag of the G7 and any new positive spin on the pound could really shock market positioning.

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