Strange Days

By Mr Practical  NOV 06, 2009 3:25 PM

The dollar is the new yen, from which investors are still cutting their losses.


Not much has changed since we last spoke. I'm just sitting tight vacationing in the US with my assets in dollars. Everyone is negative on the dollar, for good reason, but that fact alone could, and I think will, propel the dollar higher at some point in nasty fashion.

Just look what happened to the yen. Everyone was negative on it for the same reasons and everyone was borrowing in yen to buy risky assets. Of course they took huge currency risk in doing so and thus paid the price. They're still counting their losses.

So now, in my opinion, it’s the dollar's turn.

Speculators are borrowing dollars (short) to buy risky assets and loving it right now. Everyone thinks the Federal Reserve is going to keep printing and printing until the dollar goes to zero. The problem with that is the Fed right now can't print enough, that is to say, it can't create enough credit. It's trying as hard as it can, believe me, for that is what it does, but without a fractional banking system willing to lend, it's impotent.

One way the Fed can print money/extend credit could be in a very devious way.

Many are marveled at the boom in stocks, given really rotten fundamentals. Of course, so far it's been a function of a lower dollar and there's a way to "reflate" with those printed dollars that normal conduits won't allow.

What if the government/Fed realized the most efficient way right now to "print" dollars and "reflate" the economy was to get stock prices up? What better way to do that than print dollars to buy stocks?

There's ancillary evidence that stocks are acting "artificial". Stocks aren't only climbing a wall of worry, they're scaling the Mt. Everest of bad fundamentals. Tick data is extreme, especially when the stock market is down. We constantly see 1000+ tick prints when stocks are down; this is very strange indeed. Volumes are down at least 20% from normal levels (and much more if you discount for high-frequency trading), making it easier to get stocks up.

Under TARP, the fine print allows dealers to REPO stocks to the Fed as collateral (holy cow is right).

What if there were an arrangement where large dealers buy stocks and stock futures through the day and REPO them to the Fed at the high closing prices? The dealer would book the profits derived from the difference at no risk.

If you look at the trading patterns of the largest dealers, one in particular lost money trading in only one day last quarter. Statistically that's like finding a needle at the bottom of the ocean.

Of course no one knows for sure because no one is allowed to see what's on the Fed's balance sheet. But more and more of us are suspecting it's not just the normal junk people talk about.

There was a good editorial in the Wall Street Journal describing the government’s and the Fed’s involvement in the financial ponzi scheme that has accumulated over the years. I believe it disingenuous for the government to persist in covering up its complicity by doing more of the same. They seem intent on bankrupting the country instead of steering clear of gobbledygook economics.

This won't work in the long run and only serves to increase risk.

Risk is very high.
No positions in stocks mentioned.

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