Comments on: Dollar Devaluation Is a Dangerous Game

By: Larry Doyle

Larry Doyle — Fri, 09 Oct 2009 11:55:47 +0000

Aaron,

Certainly the dollar is ‘the story’ and getting a LOT of attention around the world. Thanks for sharing this color.

By: Aaron Kramer

Aaron Kramer — Fri, 09 Oct 2009 11:20:50 +0000

LD
I agree the chances are very low but the rumor started in NY at a certain bank’s repo desk, where a certain central bank does business. I don’t put a high probability on the event but rather see it is a example of how the FED is aware and closely monitoring the situation. The fact that they are aggressively watching the $ value show a level of consternation not previously seen. I WOULD NOT TRADE OR INVEST ON THIS INFORMATION.

By: Larry Doyle

Larry Doyle — Fri, 09 Oct 2009 09:44:16 +0000

Aaron,

Thanks for this color. I think the chances of an inter-meeting hike in rates at this juncture are quite low, BUT I think the Fed very easily could engage in aggressive amounts of reverse repos with Freddie, Fannie, or any other ward of the state in an attempt to temporarily drain some liquidity from the system.

By: Aaron Kramer

Aaron Kramer — Fri, 09 Oct 2009 03:05:08 +0000

Asian governments not (Asian Currencies)

By: Aaron Kramer

Aaron Kramer — Fri, 09 Oct 2009 03:03:39 +0000

I have been hearing noise about a inter-meeting Fed hike that may be in the works. I can’t confirm the validity but I was not surprised to see Bernanke bring it up after the close. The Fed will lose all power if they kill the dollar, do they really want this outcome? Does 25 bps matter? 50 bps? This type of move won’t affect business loan availability. They have already destroyed most of the competition for the large banks, which hold massive capital at the FED earning interest. The Curve might actually flatten for a few months if the market views the FED as moving towards a neutral stance. An inter-meeting rate hike would change the game for at least a quarter or two and the Fed and Administration are just buying time. Everyone knows adding more liquidity won’t help, does Bernanke want to be at the helm when hyper inflation breaks out? Deflation destroys those who are levered, hyper-inflation destroys economies and countries. He seems rather aware of his legacy considering his comments on 60 minutes and the Depression. The Fed has been active around expirations so keep an eye out over the next 5 trading days. They don’t have much time to change the tone and Asian currencies are already intervening to support their currencies. Remember this is speculation by some trading Eurodollars and Bonds so watch the short end and good luck.

By: D Lawrence

D Lawrence — Fri, 09 Oct 2009 01:18:46 +0000

“That said, at some point the patient has to face reality”.

Not necessarily! The patient could overdose and die. To carry that analogy over to a national economy, the social fabric can rupture and the government can collapse. We may not be there yet, but the example of the Weimar Republic is a pretty scary example.

By: Larry Doyle

Larry Doyle — Thu, 08 Oct 2009 16:07:20 +0000

Not a big proponent of drug use to begin with but having seen people go through withdrawal, it is never a pretty sight.

That said, at some point the patient has to face reality.

By: Mark G.

Mark G. — Thu, 08 Oct 2009 16:00:15 +0000

Increases in producer prices cause those producers to pass those increases on to consumers thus weakening demand further. This causes these producers to cut costs elsewhere, plant closings, lay offs, wage freezes which further dampens demand causing more plant closings, lay offs, etc. The drug of Fed liquidity, hot money inflows as an attempt to re-flate gives a great but brief high. Like all drugs, you come down harder from the high than the drug induced high provided you in the first place.

By: Matt

Matt — Thu, 08 Oct 2009 14:16:11 +0000

Excellent points Larry. The other downsides are that gas and food become more and more expensive (like we saw last year), and the combination of high (and rising) unemployment, along with high (and rising) food and gas prices, along with very tight consumer credit (note the consumer credit report yesterday) does NOT bode well for the economy at all.