Thursday, March 19, 2009

Then again, I could be wrong...

The dollar keeps falling sharply making me wonder whether my "Not bearish for the dollar" call that I made yesterday was very insightful. There's a widespread belief that the Fed is "monetizing the debt," which it is not. The concept itself is totally not applicable in floating FX systems where governments spend by crediting bank accounts. Under this paradigm there is no need for a "buyer of last resort."

Moreover, the only thing the really Fed did yeterday was say it was going to bring down long term interest rates and it does this by manipulating reserve balances. In this case it will be buying long-term bonds to bring down long-term rates.

Forex trends have not been about interest rates in the past year and I still don't think that the rate argument applies, however, if enough people believe it or believe in debt monetization and they are itching to sell the dollar, they'll sell. It becomes a self-fulfilling prophecy to a point.


Matt Franko said...

I see a bit of a relationship between oil and the Euro.
As oil has lately been holding at upper 40's/50, the Euro has been stronger, perhaps much of Euro debt is dependent on higher oil prices to be able to make the payments, if oil (which here in US is at recent high inventory levels 350M+ bbl) is manipulated back up like last summer it will damage our US economy again, help the Euro and our clueless leaders will go back to blaming India and China like you have said.

mike norman said...

Yes. Without curbs on speculation the markets will continue to be driven by a herd that adheres to a belief system mired in fallacy. But that doesn't matter because for while perception becomes reality. That's why you get these bubbles. You can also get killed if you think rationally, which is exactly what just happened to me in the past 12 hours.

Unknown said...


Thanks for posting this followup! I've been thinking about it ever since I read your first comment about this, and I wondered how much it could become a self-fulfilling prophecy.

The key to betting against people believing the wrong model I suppose is timing when reality will prove them wrong. In this case, its going to take more than a day!

My first comment here but I really enjoy your blog, keep it up!

mike norman said...


Well stated!

Matt Franko said...

Another thing that may be helping the Euro today is that the ECB just today formally announced their collateralized USD auction schedules will continue thru June 09 today, at of course "full allotment" via courtesy of the Fed. swap lines.

Virtually unlimited access to USD at now 1.2%.

bubbleRefuge said...

Mike yes it is hard to predict what a herd of people out of paradigm are going to do. I think Warren himself was roasted last year by the -so-called Mike Master's liquidation- when the bottom fell out. He did not see it coming.

I was calculating this morning that a small investor could make about 27% cash flow by buying a high yield corporate bond ETF that is paying around 10.5% and leverage at around 30% ( a tad better than 3 to 1) at short term interest rate of 1.8%.

Anonymous said...

In its announcement this week the Fed said will BUY (sorry for the caps to emphasize, not yelling i just don't know html) up to 300 bil in long term Treasury bonds over next 6 months so wouldn't this pressure the yield lower and therefore narrowing the spread in comparison with the Fed funds rate. If I'm understanding this correctly, Foreign central banks will not benefit from this as it will not increase the quantity of U.S. currency they hold.
However, in regards to mbs the wording is BUY-BACK which would benefit cbs in other countries in that they can sell back in return for the dollar.

Could this explain the recent strength in the Euro?

mike norman said...


The Fed's buying of securities adds to reserves by definition and among the entities that could get a credit to their reserve accounts are foreign CBs or other foreign institutions if they tender securities for sale. But your observation is correct: The Fed has not actually started doing this yet so there has been no increase in dollar reserves tied to this policy, at least insofar as this week is concerned. The move down in the dollar was purely a reflex reaction and technical in nature in my opinion, and a bounce back should be expected. Moreover, as to Matt Franko's point, USD reserve balances will be absorbed (perhaps quickly) by ongoing Treasury sales, meaning that the whole "debasing of the currency" argument holds little merit I'm inclined to believe. But, again, that does not stop the herd from creating its own reality.

googleheim said...

all of the above.

the recent rally in the stock market awakened a rally in the commodities which inversely rallies the dollar.

it is only a reverberation of wall street, and the mechanics shows that it still has the gears to move the world.

but as the stock market rally of bulls fades back into caves of bears, the commodities will quieten down and Mike will be right in that the dollar will strengthen back up.

all the gold bugs and mattress stuffers would have to leave their nests to make things continue to a next peg.

Anonymous said...

Thank for the explanations :)
Mike called the stock market rally back in December siting that attention and action in regards to FASB would be the trigger with the financials leading the way. Bullseye!