The Federal Reserve Chairman is testifying to the Senate Banking committee and is promising dire consequences if the credit market problems are not solved. The implied threat is that if the proposed solution, which includes a $700 billion acquisition of low quality bank assets, is not accepted the US economy is due for a major correction including negative economic growth.

I am trying to assimilate the current political/economic issues as it applies to traders and I am convinced that the Fed/Treasury plan can be summarized as essentially an attempt to hold back risk. One immutable law of investing is that if you are willing to take risk and participate in the market you will demand a return. The riskier the market - the more return you should demand. The Fed/Treasury plan is to have low returns and high liquidity in a high risk market and in order to achieve that objective they will flood the market with cash to lower the cost of capital. In the video I will walk through a generic example of why the Fed wants the buy out of those assets and what they are trying to accomplish through this plan.

This is a high stakes game that is historically unprecedented. How often do you try a new investing strategy that works the first time? Now imagine how much more difficult it is to successfully launch what is essentially a new Fed trading plan in which you have a disproportionately large (and growing) percentage of your portfolio involved.  That is the situation the Fed/Treasury team faces. If I had the ability to trade against new traders attempting brand new contrarian strategies I would do it (maybe I should become a dealer?)

Therefore, if the plan fails or merely stalls a market return to higher yields to compensate for greater risk I should be able to profit from it. The shift to higher yields is likely to increase the value of the USD and could hurt low yielding currencies like the JPY. If the breakout occurs, which I think it inevitably will, the move is likely to be as fast and dramatic as the shift over the last few weeks. This may be bad for Capitol Hill but could be great for currency traders.

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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."