The dollar made its highs against most major foreign currencies on June 7th. Since that time it has declined against the Euro by almost 12%. At the same time the stock market as measured by the DJIA has rallied almost 8% and more importantly 30 year bonds have rallied almost 4% to help drop 30 year mortgages to 50 year lows. ( Remember when Clinton and Bush were debating what we were going to do with all of the extra money now that 30 years were no longer relevant !)
What is up Here? When I studied my Econ 101 text by Paul Samuelson, he said this shouldn’t happen. If citizens from foreign countries are selling all of the dollars that they can get their hands on, it should be to shy away from US Interest rates, so ok that part makes sense. On the other hand where is the money coming from to fuel the credit markets and raise equity levels. I think I may have an idea.
I think it is the sneaky guys at the FED. They are pouring more money into bonds than all of the citizens of the world can take out of the dollar. The second part of the mystery can be solved by looking at the mass liquidation of money market funds. That old .004% yield is fetching (it can turn $1,000 into $2,000 in less than 150 years provided you don’t need the cash flow of almost $4 a year!) People are willing to give equities a shot. A quick look at Gold sort of confirms the mystery. It is down almost 5% during this period.
Is this a scenario for a perfect storm or a beautiful fall?
Stay tuned, it could get interesting after the FED meeting next week.
As always keep those stops tight!
Todd “Bubba” Horwitz