Our greatest glory is not in never falling, but in rising every time we fall.
Intermarket trends across the board are acting far more normal following 2013's outlier environment as cause-and-effect makes a comeback. We appear now to be in a classic risk-off period, defined by a deflation pulse that is causing worldwide risk assets to fall, increased volatility, and higher internal correlations. During such periods, certain areas tend to benefit, most notably the VIX
(INDEXCBOE:VIX), gold, the yen relative to the dollar, the dollar relative to everything else, and Treasuries.
The yen part of the opportunity set is clearly strengthening as the carry trade unwinds. However, the dollar relative to everything else really isn't rising that much. Shouldn't the greenback be considered a safe-haven play given how sharply stocks have fallen in the past three weeks? Take a look below at the PowerShares DB US Dollar Index Bullish Fund
(NYSEARCA:UUP) and note that the ETF has barely appreciated since the risk-off period began.
So what gives? First, consider that deflationary pressures remain high in the US, but higher in Europe. Because the euro makes up 57.6% of this fund, its movement will largely be defined by how the euro itself is acting. Deflation bets tend to benefit currencies on the upside, which means the euro has underlying upward pressure relative to the dollar.
Aside from the euro though, there is a fundamental reason why the dollar may fall more broadly. The US stock markets has been seen as a bastion of strength among world equities, especially as foreign direct investment increased and money from overseas invested in our shares. If we are in the midst of a resync, and if stocks are responding to the reality of failed reflation, then that same money could rush back out on a risk-off juncture, causing the dollar to undergo selling pressure as a result.
It should be an interesting period ahead, but if the dollar is now removed from the opportunity set of risk-off plays, it may only accentuate movement in everything else. My firm's ATAC (Accelerated Time And Capital) models used for managing our mutual fund and separate accounts continue to favor long-duration bonds here until internals improve.
No positions in stocks mentioned.
This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.