Tuesday, June 23, 2009

Dollar Collapses Ahead of the FOMC


Interesting. Lets take a look at the US dollar the last two days:

My Take:

You know I had to laugh to myself the last couple days as I clicked through my daily reads. Yesterday, Everyone was screaming DEFLATION! DEFLATION! DEFLATION! as the dollar soared and commodities tanked.

Today after the the dollar virtually collapsed and gold rallied a tad, all I heard was INFLATION! INFLATION! INFLATION!

All I can say is what a wacky financial world we all live in! In my view, investor's are panicked no matter what side of the trade you are on. Everyone is freaking out: Bears, bulls, Inflationist's, deflationist's. No one is too confident in their thesis despite what they may tell you.

The way I read today's dollar move, the market still sees major slack in the economy as more bad economic data continues to pour out. As a result, they are guessing the Fed will continue to be more fearful of deflation. The market's trading thesis then concludes that if the Fed fears deflation, we should expect another Ponzi spending/QE announcement from the Fed tomorrow afternoon.

IMO, my guess is the "easy" Fed will spend a few trillion more $$ tomorrow since inflation is no longer a risk. (Yeah right).

I tell you what, I sure am going to be SERIOUSLY pissed if a loaf of bread is $20 five years from now after hearing the Fed tell me for two years that there is ZERO inflation risk.

Folks, as long as the currency is at risk to a total loss of confidence, inflation will always be a risk. If the Fed pulls liquidity on time then deflation will be the much larger risk. However, the Fed has always been late in pulling liquidity. I expect them to be even later on the liquidity pull this go around because the risk of deflation has never been so high.

IMO, we will likely see several head fakes from the Fed in terms of pulling liquidity as they try and juggle all of these monetary balls. What you need remember is, until the Fed actually pulls the trigger on pulling liquidity, both deflation AND inflation must stay on the table.

Markets are built on confidence. If a currency is destroyed by bad monetary policy there will always be a risk that people simply walk away from it. The scoreboard given the current circumstances should read "Massive Deflation" if we had a responsible Fed in Washington. The problem is we have anything but this. We have a Fed thats obsessed with deflation and it appears that they will do anything they can to stop it.

Lets hope the bond market puts an end to the inflationary risk by taking rates higher. I would much rather see deflation than inflation. Deflation causes bankruptcies. Inflation causes social chaos.

Bottom Line:

Today was the calm before the storm. The Fed ends its two day meeting tomorrow afternoon. I expect another Ponzifest spending announcement based on the way the dollar moved today.

From a trading perspective I would stick on the sidelines here. The Fed has a habit of providing maximum pain to anyone who attempts to front run their announcements. Not much else to report today. The markets were pretty quiet.

The "irrational exuberance" of green shoots has definitely appeared to have worn off. I think this bounce is over and if the Fed pounds the dollar tomorrow with another irresponsible QE announcement, we could see some unintended consequences from the bond market in terms of higher interest rates.

If the Fed stays neutral the market may take this as a positive. Either way, a significant move higher is unlikely as the market realizes the economy still sucks.

Stay tuned tomorrow. There should be much more to talk about.



Jeff said...


Bernanke news was a shocker.

Lots of people got killed going long bonds today ahead of the FOMC thinking the Fed would announce more purchases.

Update up around 6!

Anonymous said...

There's no reason to primp the wool when it's successfully been pulled over everyone's eyes. Ben is hiding in a corner. We'll see how long the markets allow him to remain in hiding. Not long, I suspect.

Is it possible to stop, or even control, deflation? In other words, to maintain imbalance indefinitely; to violate the natural order of things? Excess is the sickness, deflation, unfortunately, is the only cure.

Jeff said...


I agree.

If the treasury stays on the sidelines like they did today deflation is almost a lock. Thats a big if though.

What's interesting is gold was up along with the dollar. thats a rare occurence and tells me there is a ton of fear out there.