``Economic history is a never-ending series of episodes based on falsehood and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited" -George Soros
For an abbreviated trading week, the US Federal Reserve bought $11 billion worth agency debt, mortgage backed debt securities and US treasury. Tyler Durden of Zero Hedge notes that the balance sheet of the Federal Reserve has “hit a new all time record of $2.2 Trillion in assets”.
Following their failed prediction for a market collapse late October, the “desperately seeking normal camp” are back with their old antics of forecasting a deflationary doomsday or the “end of the bear market rally”, following the latest market volatility prompted for by the events at Dubai.
Dubai through its state owned Dubai World asked “creditors for a “standstill” agreement as it negotiates to extend debt maturities” (Bloomberg) last November 25th, which apparently rattled Europe first, whose shockwaves reached Asia, and belatedly to the US-since the latter was on a Thanksgiving holiday when the Dubai debt crisis surfaced.
We then read headlines of “Era Of Green Shoots Over” or “Hyperinflation in Reverse” or “Mark End of Risk Trade” or emotive comments like ``The stock markets and the bond markets are in violent disagreement, and at some point, it is going to be resolved by a sell-off in the equity markets” (New York Times) to even a simpleton “expert” swagger at a Bloomberg interview claiming that “when a crisis emerges everyone runs to the US dollar”.
As one would observe in Figure 1, upon the revelation of the Dubai debt crisis on the 25th, the US dollar fell steeply to a 17 month low rather than functioned as safehaven, as fictitiously alleged by the expert.
It was the next day, Friday, when the violent US Dollar rally occurred, which inversely took down commodities as gold. Babbling from the perspective of Friday’s action as a generalized trend is blatantly misleading.
However, the rally appeared like a knee jerk response. The USD gave back most of its gains but still ended the session 1% higher. This huge reversal was equally reflected on the commodity markets.
Yet despite the sharp intraday fall of gold, the former commodity money bounced mightily until the end of the session. Over the week gold registered a 2.3% gain, just a few percentage points (about 1.5%) off its fresh record high $1195, established Thursday, incidentally when the lid of the Dubai crisis was uncovered.
It takes a lot of chutzpah to make logically false claims on air.
I would like to further point out that the rally in bond markets have been an ongoing event since late October as shown by the record move of the 2 year Treasury bill (see window $USTU). This means the rally has fundamentally little to do with the Dubai crisis, and could likely reflect on position squaring for sprucing up year end balance sheet goals of financial institutions and or importantly, a manifestation of the distortions from government interventions.
To interpret for a “violent disagreement” that would be resolved by a selloff in the stock markets accounts for as nothing more than a preconceived bias which fallaciously underestimates the political imperatives by the US government (or even global governments) to support asset markets with the ultimate aim to uphold the survivability of the US banking and financial sector.
Proof? A Bloomberg report as quoted by the Credit Bubble Bulletin: ``French Prime Minister Francois Fillon said Dubai’s request to reschedule debt repayments shows the global financial crisis “is not over” and that stimulus efforts must be maintained to avoid “breaking the weak recovery.’” (emphasis mine)
If there is any asset market that would likely experience a bust as a result of the reversal of bubble conditions, it would primarily be the US treasury market.
According to the New York Times, ``With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.”
$1.9 trillion of debt required for refinancing + $1.5 trillion in additional deficits + $ .2 trillion in interest payments=$3.6 trillion of financing required for 2010! Since US and global savers (particularly Asia) are unlikely to finance this humungous amount, [other parts of the world will require debt financing too (!!)], the available alternative options appear to be narrowing-the Federal Reserve would have to act as the financer of last resort through the Bernanke’s printing press or declare a default. Of course, Bernanke could always pray for a “Dues ex machina” miracle.
So embracing a bond bubble “out of deflationary fears” would be like a Turkey accustomed to a plethora of feeds but is unknowingly headed for the Thanksgivng day kitchen.
We might like to add that Europe’s stocks as represented by $STOX 50 appears to have been diverging with US stocks, even prior to the Dubai episode. While US stocks are off the new highs, European stocks have been flaccid since mid November. The Dubai debt crisis has only exacerbated the sentiment rather than ‘caused’ it.
And another important perspective missed by the mainstream is that China’s Shanghai bellwether, which lost 6.4% this week (as seen in the $SSEC window), has likewise been languishing even prior to the Dubai episode.
Bottom line: Volatile market action during the week has been aggravated by the Dubai debt crisis instead of a Dubai prompted meltdown. Hence, to interpret this week’s volatility as a start of cross cascading market selloffs would likely account for as another gaffe in a disgraceful menagerie of errors.
Eventually since markets operate on cycles driven by government policies, there will be another crash due to mounting unsustainable imbalances. But as a cliché goes, even a broken clock is right twice a day, which means wrong conclusions from false premises will be peddled until markets will confirm their outlook for “timing” reasons.