The US Dollar has tanked very badly as the liquidity driven rally into equities has dried up demand for the safety of the greenback. Crude Oil not withstanding recent selling is still above $71 and still looks strong technically. Further depreciation of USD will have higher crude prices. Its the perfect storm of selling safety to buy risk assets.
Weaker USD = Weaker Treasuries = Stronger Equities = Stronger Commodities. This particular theme is playing out wonderfully on Wall Street but horribly every where else.
We have to watch for the 77 level on the Dollar Index, I fear any break below that level, will trigger technical selling of greenbacks and buying of most commodities including a run up for Crude above $80.
Longer term support is there at around 72 for USD.
Back to Crude. $75-$80 Crude is no good for no one. It cant be the forefront of any type of sustainable long term economic recovery. Americans are still in a state of shock when they look at their 401k statements, do we really need $4 gas once again? The crash in crude was nice, it was an added tax cut for all Americans, the kind that we needed.
But, the fact remains, the Treasury, Fed, and its conduits namely PIMCO, have spoken negatively on the USD for months now. They needed to unwind the safety trade so that funds can flow back into equities. Guess what? It worked! But now both the Treasury and the Fed are at a major crossroads. While reflating equities was secondary to stabilizing the credit system, what we have now is higher equity prices and higher commodity prices, which is an added tax on consumers who are already taking it on the chin with respect to jobs, loss of credit, and housing. The stock market is up over 50% this year, but has the average mutual fund rallied back even 1/4 of the losses from last year? Absolutely not! Case in point you take a mutual fund that was 100 last summer, that fund got smashed down 50% to 50 because of forced selling and shareholder liquidation. That fund is not even close to being up 50% like the market is this year. That fund if its lucky is up 30%, 30% gain on $50 is $65, which is still 40% off of where it was last year. This is the quandary that most people are in. The markets need to rally some 200% from here just so that people are made whole. Its just not happening. Whats worse, when the markets go spiraling back down, that fund will be at $25.
It all goes back to what the Treasury and Fed want. They wanted to unwind the safety trade, the only way to do it was to kill the dollar. They instituted all of this Quantitative Easing plans to ease the transition to liquefy the credit system, but the unintended consequences of just reflating the old bubble is what also happened.
The Fed needs to suppress rates to not only reflate the credit system, increase lending, but most importantly to help keep rolling the enormous debt that needs to be financed every day.
If you remember, when the dollar was so weak, and crude flying, there was actual talk of raising short rates to combat the drop in USD. In fact, the ECB did exactly that, which really started the meltdown in global commodities. At the moment, this is not economically or politically feasible. The only way to do so is to organically talk up the USD and Treasuries. This is an extreme tight rope at elevated heights. It has to be done right because any upward move in Treasuries and USD will have dire results for commodities and equities. I will say it here, the day the Fed/Treasury starts defending the USD, we have a crash in equities and all commodities. It will be Sept/Oct 2008 all over again. But the Treasury needs a somewhat stronger USD and lower rates to keep the delicate balance,so they can keep printing money.
In the end here the Treasury/Fed needs an equity crash to stabilize the USD and Treasury markets so they can still have a market for debt issuance. It really like a dog running around chasing its tail, but with trillions of dollars at stake.
Where does the market go? No clue. I will say this. This market is a work in progress, and what is working will work until it doesn't work anymore. At the moment the tape is very strong, it can get very negative very quickly after Labor Day, but at this moment there is tons of positive feedback in the system, and liquidity is very good even though volume is slow. \
There is so much excess liquidity out there. Its all chasing Beta at the moment. Crappy stocks are far outperforming good stocks. But the liquidity is not reaching the real economy, as consumer lending is non existent.
Putting it all together, we all know that long rates are considerably higher, the markets are in a bullish pattern with no volume pushing them up accept for HFT Programs. The Dollar back to 2008 lows as well as equities and commodities moving lock step. All of this tells spells out for me a major correction that is going to happen starting after Labor Day extending through October, where we might just as well see new lows for equity indices.
I see USD rallying, not a huge rally, but comfortably above 82-83, Treasury Rates will tank, equities will drop, financials will get hammered, energy sector will weaken as crude and commodities have another round of technical liquidation. I see USD higher, but I see the Yen taking off, while the Euro, Aussie, GBP, and Canada currencies get blitzed. Just draw a correlation chart of Aussie USD and the SP 500, its almost 94% correlated.
The big big wild card here is how does Gold perform? It all can go in the toilet, if we have a simultaneous drop of all that is holy. USD - LIBOR - Treasury - Equity - Crude all in the tank while Gold Soars? I am not ready to comment on that because that is truly frightening.
tradersutra.blogspot.com/2009/06/black-swans-and-unthinkable-stuff.html"
It can happen, I hope it doesn't. There is too much smart money as well as dumb money floating around that makes anything a possibility. massive deleveraging will bring more money out of risk and into safe investments like treasuries and USD, but that's all to conventional wisdom, and these times are far from conventional. What happens is smart and dumb money exit one bubble to start another. This is how Black Swans happen. Who is to say that USD/Treasuries don't become the de facto toxic security types that sub prime was?
The problem here is the dilemma of monetizing bad bank debt and excess reserves. This leads to inflation in theory which wrecks all things fixed income.
We are in a very dangerous period. I can honestly say that I am more concerned today with the averages up some 50% then I was the day Lehman filed for bankruptcy. There is so much more to lose today then last September.
We are in a deflationary environment that means that global deleveraging is the dominant force. Unemployment is too high, Rates are too high, housing still is a conundrum, too much growth is being predicted by equity prices. Most importantly real global economic growth is non existent, much of what we have seen is central bank printing money excessively to reflate credit systems.
The Treasury and Fed have some serious planning to do. How they do it? Can they do it? Do they kill the equity rally to get USD/Treasuries back in line? Do they kill the Commodity Rally? It all really depends on China, India, Japan, and the rest of South East Asia's demand for our treasuries. Do they keep buying?
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