08 December 2009

Short Term Dollar Strength on Recognition of Worldwide Crappiness

We've reached a short-term inflection point in our general asset reflation scheme. General worldwide crappiness and uncertainty will lead to a short-term dollar strength. Safe-haven searching, a general one sided bets against the dollar, and a slightly brightening U.S. Economic Outlook will assist this move.

An overview of volatility-driving upcoming events:
The next due date for part of Dubai World's debt is on Dec. 12th. There is an upcoming important court decision on the restructuring of the first bankrupt Islamic "Sukut" bond.

The steep downgrade of Greece's debt today, is going to force the European Central Bank to spell out its long-term support of excessive Greek borrowing. The ECB is lending to the Greek banks, which in turn are holding large amounts of Greek Government Bonds. This is complicated by the fact the Greek banks are barely solvent. And the Greek Government is broke. This uncertainty about the European Monetary Union will negatively affect the euro until the issues concerning the weaker states are resolved.

The Japanese have been hurting due to their currency's strength against the Euro and Dollar. Intervention is possible, probably by the enlargement of the Central Banks relatively un-extended balance sheet.

The amount of correlation between general asset prices over the past year has been quite incredible. Gold, oil, and stocks around the world has fallen for the past several days. The dollar has been rising.

We are about to witness short-term correction in the dollar's long-term decline.

I believe the stimulus dollars are beginning to enter the general money supply. There's a hum in the air on main street that whispers of a significant increase in the velocity of money. Money is a momentum- a product of its quantity and the speed at which it moves. Money is coming out of the mattress and being spent. In labor news, the employed are working longer hours. People are taking home more weekly pay, despite hourly wages continuing to fall. This suggests overtime.

Finally in other news, an extremely destabilizing bill just passed the House Financial Services Committee, which if enacted into law will severely restrict credit by shutting down some portions of the interbank lending market, and introducing new destabilizing panic pathways into the overnight market. Also worth mentioning is the accounting rule change going into effect in January, bringing all of bank's off-balance sheet entities back onto the balance sheets.

In short, short-term dollar strength probably clustered around $1.40 against the Euro lasting around than three months. Higher US stocks relative to Gold but lower in general. Lower Europe Stocks. Brazil lower but not as far. Other emerging markets with deficits, harder hit.

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