The Market Follies

With an undercapitalized banking system, most of this zero-interest-rate money is not working its way out into the economy.

The Market Game

The Market Game

Rather than a rebound in jobs and household income, the stock market seems to be pinning its hopes on limitless free money from the Federal Reserve. But with an undercapitalized banking system, most of this zero-interest-rate money is not working its way out into the economy.

Instead, this zero-interest rate policy is prompting rational investors — including foreign creditors who hold trillions in U.S. Treasuries and agency bonds — to accelerate their moves into inflation hedges like gold and commodities. The Fed may think it has ultimate control over its monetary policy. Those who already hold dollar-denominated assets play an important role, and for many of them, after putting up with lots of abuse, the promise of zero rates of interest on their savings are voting with their feet.

Thus, perversely, the “American Rebound” stock trade is more and more dependent on a steadily weakening dollar. As stocks soared yesterday, the dollar index found its own 2009 benchmark… a yearly low of 74.9. Looking at both together… hmmm… something is wrong with this picture.

There are indications that “the U.S. dollar is now serving as the funding currency for carry trades,‚Äù reads an IMF report from the weekend, confirming a suspicion from back in September. The IMF report was meant as a warning to its clients and colleagues‚Ķ the group noted that distorted dollar values here have contributed to upward pressure on the euro and some emerging-economy currencies.

As Nouriel Roubini has recently stated, “We suspect cheap dollars are contributing to a rise in nearly everything.”

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2 Comments

  1. Hal_Burns

    The “cheap dollar” is truly the crazy gorrilla in the closet. It will lead to a financial meltdown that will pale all others before. Hyperinflation is just around the corner also. I can't see how there is any true meat on this bone of recovery, other then the PR job that is being done to try to re-establish consumer confidence. Remember though the one thing that will rebuild consumer confidence is JOBS. Why is this so difficult for Washington to understand?

  2. Gustav Altman

    I don't think Washington doesn't understand the importance of jobs. I just think they are testing the elasticity of voting power. There is nothing really, short of an impeachment, that could change the direction of the Nation at this point for at least another 12 months. And those 12 months are going to be hell for the economy. Latest poll even confirms that the president has the confidence of the vast majority of Americans. PR used to be called PROPAGANDA. The German Third Reich was created that way. They were masters in leading their citizens down a dangerous path with the end result still clinging in my ears: “Wir haben es nicht gewuesst”.

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