As the credit crunch is hitting hard the banking sector, the U.S. institutions are putting on the table various solutions to avoid a dominos effect. The U.S. dollar, in the mean time, could decline further, albeit some levels of support are emerging.

Rates eventually lower in the U.S., but not for now

What a week! In an effort to avoid a dominos effect and trying to give some confidence to the shaky markets, the Federal Reserve and the Treasury department are putting on the financial table the highest cards in their hands. From guarantying a loan of USD 85 billion to AIG, the largest seller of credit fault swaps, to creating a counterpart that would absorb trouble assets from banks balance sheets, the U.S. institutions are making an enormous effort to get things going again. It will not be an easy process tough. So, the Fed announced that it would establish or increase new swap lines with major central banks by U.S. dollars 180 billion and some of the funding will come from various auctions conducted by the Treasury department. In effect, we are living a crucial moment in the long history of the world¡¯s economy. The cyclical turn of interest rates, from the bear market that began in 1980 to the current new bull market, has caught the most important institutions off guard.

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U.S. : Great Challenges Ahead?

Equilibrium is the name of the game. Bulls and bears are battling for the destiny of the U.S. economy without much conviction thus far. The line of least resistance has not been broken and for every action there is a reaction. Good news are emerging, but they are too sporadic to be called turning points. The U.S. dollar is meeting some resistance at current levels, although the short/medium term trends stay bullish.

Great challenges ahead

In August, the Institute for Supply Management’s (ISM) manufacturing survey remained near 50 for the second straight month. New orders moved up to 48.3 from 45, while employment slid to 49.7 from 51.9. The pattern is confirmed by the ISM services index which rose slightly to 50.6 from 49.50. In effect, inventories are rising, while domestic and foreign demand is weakening.

We are living in a period of great change and the clock of history will shortly stop at a key appointment. On November 4th, a new President will be elected in the United States. Hope is mounting, but great challenges lay in front of him. The golden days, characterized by low costs/strong investments, a peaceful world, are over. Commodities are receding from the highs and the trend could continue for few more weeks/months. However, the long term picture is pointing to the upside. Why? During the bull markets of the last century, agricultural and soft commodities have shown the tendency to top every 30/33 years from highs to highs. The last cycle ended in 1980. So, the next appointment for the bulls might be for 2010/2013, if history repeats its course.