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HomeG-20 Preview: Prisoner’s Dilemma Revisited
Posted by Larry Doyle on September 21st, 2009 9:12 AM |
Should we expect any surprises emanating from the G-20 conference at the end of this week in Pittsburgh? Don’t count on it. The fact of the matter is the bulk of the work at these conferences is done beforehand, and the conference itself is more pomp and photo ops than anything else.
Getting the G-7 to agree on a wide array of economic issues is tough enough. To think the G-20 will not only fully agree on the importance of the underlying issues facing our global economy BUT then also implement the necessary changes is not likely. If this group of nations had the necessary degree of conviction and cooperation, perhaps we would not find ourselves in the current economic morass.
What are the main topics and initiatives the G-20 is already working on pre-conference? The Wall Street Journal provides a preview in writing, Nations Ready Big Changes to Global Economic Policy. Allow me to highlight and comment on the major initiatives.
1. Need for increased savings rate in United States.
This is occurring, but can and will it be sustained past the point of paying down our short term debt? Can the ‘wizards in Washington’ ever address our long term federal deficit? I am not optimistic. The inability to address our long term fiscal deficit is a pox on both sides of the aisle. In an attempt to make progress on it . . . hello higher taxes!!
2. Need for increased consumption in China.
We have not yet seen a real inclination by the Chinese to consume more. As many low income wage earners in China fight for a better life, I think this hope is a long range target rather than a near term reality.
3. Need for Europeans to invest more in their business infrastructure.
I am less optimistic on this than I am on the Chinese inititiative. Why These investment dollars would likely come at the expense of supporting social programs which are the very fabric of the European culture.
4. Europeans are pushing for substantive reforms on banker compensation.
The Wall Street lobby is already hard at work to maintain control of this issue. I have very mixed feelings on this topic. Ultimately, I believe the misalignment of risk and reward on Wall Street is nothing more than a failure of corporate governance. Until the boards of our largest banks embrace the need to change that fabric, I think compensation reform will be shallow.
5. The U.S. regulators are pushing for major banks to hold more capital to protect against systemic risk.
This is all well and good, but if the increased capital is not also correlated with the use of the capital then the systemic risk will not be alleviated. Our friends in Washington should invite Paul Volcker into this discussion and embrace his ideas to have Wall Street exit its hedge fund-like activities inside our major banks.
6. China continues to pursue an increased influence by developing nations within the IMF.
You can feel the impact of this shift already with the greenback declining in value.
MAJOR CHALLENGE: Make no mistake, our international brethren strongly believe the core of our current economic crisis resides here in the United States. That core encompasses the regulatory failings on Wall Street. Without real transparency on that front, Wall Street will continue to work diligently to maintain its ‘business as usual’ mantra which it believes is in its own self-interest.
Speaking of self-interest, that is the base principle in which economic institutions tend to act. With no real enforcement to change behaviors (and the G-20 has never had real teeth on the enforcement front), the economic leaders of the countries will ‘smile for the camera’ but then return home to continue pursuing their self-interests and remain prisoners to each other. That pursuit of self-interest is the very essence of “The Prisoner’s Dilemma” which I highlighted last January.
LD
Related Sense on Cents Commentary:
Increasing Chinese Protectionsim: A Real ‘Prisoner’s Dilemma’ (June 23, 2009)
No Quarter Radio’s Sense on Cents with Larry Doyle, Sunday Evening at 8PM
Posted by Larry Doyle on September 19th, 2009 6:09 PM |
UPDATE: This episode of NQR’s Sense on Cents with Larry Doyle has concluded. You can listen to a recording of the episode in its entirety by clicking the play button on the audio player provided below. Once the audio begins, you can advance or rewind to any portion of the episode by clicking at any point along the play bar.
***********************
Please join me this Sunday evening for NQR’s Sense on Cents with Larry Doyle as we dig deeper and work harder in navigating the economic landscape.
What is on your mind? What would you like to address? Please share your questions and thoughts by calling in to (347) 677-0792, and also join our live chat room, which I’ll start up about 10 minutes before the show begins.
There is no shortage of topics that deserve real attention, including:
> developments within our bank deposit insurance (FDIC)
> the upcoming G-20 conference in Pittsburgh
> what is happening to our dollar? will it recover?
> Wall Street compensation practices
> market performance . . . what is it telling us?
> what is happening with ‘credit?’ Is it loosening or getting worse?
> unemployment trends
> economic data, especially in regard to housing
> the federal deficit
> the SEC
> can we afford health care reform . . . can we not afford health care reform?
. . . and much more. My special guest this week is YOU, the readers and supporters of Sense on Cents. What is on YOUR mind? I look forward to the show and thank you in advance for your support.
As a reminder, all of my radio shows are archived and can be listened to right here at Sense on Cents by clicking on the No Quarter Radio tab located under the page header. (FYI, I keep an audio player of my most recent episode in the right sidebar). In addition, all No Quarter Radio programming is available as a free podcast on iTunes. From the iTunes Store, type “NQR podcasts” in the search window.
Many thanks to Larry Johnson and the rest of the team at No QuarterUSA blog for providing such a vibrant media vehicle as No Quarter Radio. I look forward to having you join me Sunday evening as we collectively navigate the economic landscape!!
LD
September 19, 2009: Month to Date Review of the Markets
Posted by Larry Doyle on September 19th, 2009 6:46 AM |
The market trends remain very much in place. Assets across virtually every market segment continue to rise in value. Are we supposed to merely “close our eyes” and be thankful? Never. Market participants and investors should always want to know what is driving the markets and, more importantly, the economy. On that note, let’s read the market ‘tea leaves’ in terms of the month to date performance. I will offer commentary as I see it and together we can continue to ‘navigate the economic landscape.’
Equities
DJIA: 9820, +3.4%
Nasdaq: 2133, +6.2%
S&P 500: 1068, +4.7%
MSCI Emerging Mkt Index: 919, +7.8%
DJ Global ex U.S.: 196.5, +5.8%
Commentary: equities on average added another 2% positive returns to their monthly performance. Markets had nary a pullback during the week. While positive price action is nice to see for investors, the fact that there is not a ‘backing and filling’ process in the price action is troubling. The backing and filling process is an indication of good two-way flow in which new buyers are replacing sellers exiting the market. Additionally, that price action serves as a foundation for the market. A market in which prices move higher in a virtual straight line has not developed the support base. This chart highlights the price action for the last two months. One can see that the September price action has been a straight line, adding 500 points to the DJIA. Markets typically do not track in that fashion. That said, the market is the market.
Bonds/Interest Rates
2yr Treasury: 1.00%, an increase of 2 basis points or .02%
10yr Treasury: 3.47%, an increase of 6 basis points
COY (High Yield ETF): 6.35, +4.9%
FMY (Mortgage ETF): 17.53, +.69%
ITE (Government ETF): 57.38, -.7%
NXR (Municipal ETF): 14.74, +4.6%
Commentary: government bonds gave a little bit of ground this week, but still maintain an overall firm tone. We do have large monthly auctions (2yr, 5yr, 7yr) next week so Wall Street would like to back the market off in an attempt to buy the auctions a little cheaper. The price action in the U.S. Treasury market still strikes me that there is a growing camp that believes we will experience asset deflation. That phenomena would support bonds, but I do not see how it could possibly support equities. This debate is not receiving as much attention as 6 months ago . . . but it should!
The riskier parts of the bond market generally treaded water this week. That fact is a positive, in light of the positive trends in equities. Typically, if equities are trending higher, then bonds would head lower due to concerns of higher inflation. The fact that bonds in general are firm plays into the point I highlighted above.
The conundrum between the equity markets and bond markets continues.
U.S. Dollar
$/Yen: 91.38 vs 93.11 at August month end
Euro/Dollar: 1.4702 vs 1.4338 at August month end
U.S. Dollar Index: 76.45 vs 78.14
Commentary: the dollar strengthened by approximately 1% vs the Japanese yen this week, but overall continued its decline vs the Euro and other major currencies. The greenback closed lower by approximately .5% on the week and is now down 2.2% for the month.
The silence from Washington on the dollar weakness remains deafening. The Fed’s charge is ‘price stability’ and to ‘grow the economy.’ The Fed has clearly failed to achieve its goals and is now faced with pursuing a weak dollar policy to promote inflation. This seeming necessity is a very dangerous game. Why? Other countries may similarly look to devalue their currency in order to support their exports. I am hearing this concern coming from Japan and we see that as the Yen weakened vs. the greenback this week.
If we do get some dollar strength, look for a selloff in our equity markets as clearly a large number of funds have entered into the dollar carry trade in which they have sold dollars and used the proceeds to buy global equities.
I feel compelled to repeat my statement from last week. This ‘positive carry’ trade is nothing more than implementing leverage. Do not confuse leverage with brains when a market is rising because as I said the other day, leverage is death when that bull becomes a bear. As I think of market developments, I am convinced that this ultimate unwind of leverage trades currently being implemented is Jeff Gundlach’s reasoning for being bullish on the dollar. How will this work? Investors will look to exit their risk based investments (emerging market stocks and the like) and buy back the dollars which they have borrowed. In the process, the dollar may rally significantly. The timing of this unwind is the critical question.
Commodities
Oil: $71.85/barrel vs $69.93 at August month end
Gold: $1008.5/oz. vs $952.4 at August month end
DJ-UBS Commodity Index: 127.5 vs 125.73 at August month end
Commentary: gold largely marched in place this week. There was an announcement that the IMF may look to sell upwards of $13 billion of its gold reserves. The fact that the gold market took that news without selling off is fairly impressive. It is likely an indication that global central banks would like the gold as they look to diversify away from the U.S. dollar.
Commodities overall did have a decent week and the Commodity Index is now up approximately 1.5% on the month. Given the strength in equities, commodities have actually been a recent laggard. The Baltic Dry Index continues to run in place. I view that as reason for concern. How can global equities in general and commodities specifically continue to increase in value if the major indicator of global trade, that being the BDI (Baltic Dry Index), is not trending higher?
Summary/Conclusion
Economic data seem to indicate hints of strength, but the data comes with major qualifications. For example, the perceived strength in retail sales was largely driven by the ‘pull demand forward’ benefit of the Cash for Clunkers program. Housing starts were positive, but it was focused on multi-family units while the much larger component within this data — that being single family units — actually declined. Unemployment claims declined, but unemployment actually increased in 27 states.
The overriding fact remains that the ‘Uncle Sam economy’ is continuing to adapt to the very changed nature of our underlying market and economic dynamics. That dynamic in which the securitization of assets remains a distant memory will force credit to remain tight. Consumers need to adapt accordingly.
The markets are discounting a more robust economic recovery than I see on our horizon. That said, ‘the market is the market.’
Thanks for your support. If you like what you see here, please subscribe via e-mail, Twitter, Facebook, or an RSS feed.
Thoughts, comments, questions always appreciated.
Have a great day and weekend.
LD
Money Market Funds Losing Uncle Sam’s Support…Today!!
Posted by Larry Doyle on September 18th, 2009 3:34 PM |
Our equity and bond markets reflect lessened risks and increased economic recovery, right? Well, investors in money market funds are taking on significantly greater risk today, whether they know it or not. How so? Today is the day that Uncle Sam is ending his federal backstop for money market funds. What does this mean? On a going forward basis, money market funds may very well ‘break the buck.’
Traditionally, the money market industry has prided itself on its ability to market these funds as being the effective equivalent of bank deposits. Bank deposits, however, are federally insured up to 250k. Money market funds were presumed to have such safe investments that they would always maintain a $1.00 NAV (net asset value). That ‘sales pitch’ worked for a long time until a year ago when Lehman failed. A number of funds holding short term debt issued by Lehman, as well as other questionable assets, were poised to ‘break the buck.’ Hank Paulson and Ben Bernanke realized they needed to step in to stem this flow of money so they implemented a federal backstop of these money market funds. That backstop ends . . . today!! As such, whether investors appreciate it or not, they now have significantly more risk in these funds.
This story is receiving very little focus in the midst of all else that is going on along our economic landscape. That said, it bears real attention. The Wall Street Journal provides a cursory overview today in writing, Treasury Winds Down Money-Fund Backstop:
Now that the panic that flowed through financial markets last year has eased, the U.S. Treasury Department is making way for an usual rescue program set up to protect money-market funds to expire Friday.
U.S. officials established the Guarantee Program for Money Market Funds one year ago, during the height of the financial crisis, in the wake of the failure of Lehman Brothers Holdings Inc.
But now that an economic recovery might be taking hold, the government is allowing the program to wind down.
“As the risk of catastrophic failure of the financial system has receded, the need for some of the emergency programs put in place during the most acute phase of the crisis has receded as well,” Treasury Secretary Timothy Geithner said in a statement.
Secretary Geithner may be premature because although markets have recovered, a number of sectors of our overall economy remain severely stressed. The investment assets correlated with these sectors are no longer deemed as safe as once thought.
While the panic on Wall Street has obviously passed, investors in money market funds should not blindly accept that these funds will maintain a $1.00 NAV going forward. The fact is, many of these funds do have investments in a variety of short term instruments that have declined in value.
While the SEC has recently implemented rules in an attempt to insure that money funds will have sufficient liquidity for investors, those rules do not guarantee that funds can’t or won’t break the buck.
I strongly encourage investors in money market funds to check with their brokers or financial planners to review the nature of the underlying assets in their money market funds. I would particularly look out for investments in any type of auction-rate securities.
In addition to this caution, I would also strongly encourage investors in municipal money market funds NOT to invest in funds which have investments in the newly designed municipal auction-rate security known as x-Tender or Windows.
In the Brave New World of the Uncle Sam economy, ‘Buyer Beware!’
LD
Related Sense on Cents Commentary:
No Time for Complacency on Insurance and Money Fund Exposures (July 29, 2009)
Municipal Money Market Funds: Caveat Emptor (June 29, 2009)
The Buck Is Beginning to Break (June 25, 2009)
FHA and FDIC Getting Ready to Ask Uncle Sam for a Bigger Allowance
Posted by Larry Doyle on September 18th, 2009 12:27 PM |
It was only a matter of time before both the Federal Housing Administration (FHA) and the Federal Deposit Insurance Corporation (FDIC) would walk over to the U.S. Treasury and ask for a ‘bigger allowance.’ That time has come, despite what some officials may say. High five to MC for bringing the FHA story to my attention.
The Wall Street Journal highlights the FHA’s predicament in writing, FHA Tightens Credit Standards, Sees No Bailout:
The Federal Housing Administration said Friday its cash cushion will dip below mandated levels for the first time, but officials insist it won’t need a taxpayer rescue.
The agency, a growing source of funds for first-time home buyers, faces mounting concerns that it will soon need a taxpayer bailout. As of this summer, about 17% of FHA borrowers were at least one payment behind or in foreclosure, compared with 13% for all loans, according to the Mortgage Bankers Association.
Rising defaults mean the FHA’s reserves may sink below the 2% mark required by federal law. The FHA says a study being sent to Congress in November is expected to show that ratio dipping below required levels for the first time.
Please recall that FHA-insured loans require only a 3% down payment. In writing a previous blog post focused on the FHA, a well informed reader shared with us that builders will often offer rebates which effectively cover that down payment. What is the result? Homeowners purchasing properties with no money down, otherwise known as ‘no skin in the game.’ This practice was prevalent throughout the irresponsible stage of sub-prime lending. Make no mistake, plenty of this is continuing today with the support and backstop of Uncle Sam . . . all in hopes of filling that growing hole in the housing dike.
The FHA will certainly need more capital unless and until mortgage delinquencies, defaults, and foreclosures stabilize and decline. None other than Wells Fargo CEO John Stumpf shared the other day that he does not see a slowing on those fronts.
In regards to the FDIC, the insurance fund has exhausted the bulk of the initial $50 billion which it had prior to bank failures starting in 2008. The costs of these failures have far exceeded that $50 billion figure. How so? Some very large profile failures were brokered to stronger hands with FDIC support but without the FDIC having to make an initial outlay of funds.
The WSJ highlights the current dire straits of the FDIC in writing, FDIC Mulls Borrowing from Treasury:
Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday her agency may tap its $500 billion credit line with the U.S. Treasury to replenish its deposit insurance fund, though she appeared cautious about doing so.
“We are carefully considering all options” including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.
Ms. Bair has already warned banks that they may face an assessment increase to bolster the fund. Friday, she said there are also other little-known options available to the agency, including requiring banks to prepay assessments. The FDIC board of directors will meet at the end of this month to consider how to replenish the fund, she said.
Individually, the FHA and FDIC stories are both significant. However, in the midst of bailouts of other institutions (large banks, Freddie and Fannie, AIG, GM, and Chrysler), the funds likely to be injected into these entities are treated as merely adding another leaf to Mom’s dining room table for Thanksgiving dinner.
Is the American public grateful for the undisciplined and greedy lending practices that have crippled the FHA and FDIC? Perhaps I should rephrase that question: are these institutions grateful for the American public putting their taxpayer dollars on the line?
LD
Uncle Sam Literally Sold the Chinese AIG Asset Management for a Song
Posted by Larry Doyle on September 17th, 2009 3:59 PM |
Did Uncle Sam get his pocket picked in the sale of AIG Asset Management to Hong Kong billionaire Richard Li’s Pacific Century Group? It would appear as if Uncle Sam was ‘picked off’ . . . or is there something else going on contingent to this transaction? Why should the American taxpayer care about this sale of AIG Asset Management to a Chinese entity? For the very simple reason that you, me and every other American taxpayer own 80% of AIG. Are the power brokers in Washington or the people they have put in charge at AIG protecting our interests? On this transaction, further questions need to be asked.
AIG Asset Management has approximately $89 billion in assets under management. Very credible sources whom I respect have shared with me that the assets consist of the following:
> $50 billion in equities which generate fees of 50 basis points per year or a total of $250 million
> $15 billion in private equity which generate fees of 2% per year and 20% of profits for a minimum of $300 million
> $5-$10 billion in fund of funds which generate fees of 1% per year and 10% of profits for a minimum of $50 million
> $15 billion of fixed income (bonds) which generate fees of approximately 65 basis points per year or a total of $97.5 million
Total it up and AIG generated a top line revenue of at least $700 million. My source indicates the top line was more likely between $800 million and $1 billion.
What did Hong Kong based Pacific Century pay for this cash flow? A mere $300 million with contingency fees based upon performance which may take the price up to $500 million. Thus, Pacific Century paid at most .7 times cash flow.
What does that price mean on a relative basis? Again in an attempt to be conservative, asset management businesses have traded for between 8-12 times cash flow. Even if I cut that estimate in half and said that AIG is a distressed seller and the premium for asset management business units has come down, 5 times cash flow would equate to a bare minimum price for this business of $3.5 billion.
What is going on? Why did AIG Asset Management trade so cheaply? Is this some form of payback that Uncle Sam is making to China? Is there a process in place to keep these sales honest? Where does one receive information and transparency on the sale of AIG’s assets?
Many people on Wall Street are scratching their heads on this transaction.
Recently appointed AIG CEO Robert Benmosche indicated that he was going to be patient and get fair value for AIG’s business units. If this transaction is any indication of Benmosche’s patience and measure of fair value, then he is clearly not the guy for the job.
In my opinion, though, the individual who needs to provide some answers here is Treasury Secretary Geithner. Recall that AIG was saved via TARP funds. Who oversees the TARP? Secretary Geithner. With sales such as this one, the American taxpayer will never get repaid for bailing out AIG.
Something smells here.
LD
More Wall Street and Washington Incest
Posted by Larry Doyle on September 17th, 2009 1:15 PM |
The other day I saluted Judge Jed Rakoff for exposing the embedded hypocrisy and contrivance in the $33 million settlement paid by Bank of America to the SEC. Why don’t we have more judges with the courage and integrity to expose the incestuous nature of the Wall Street-Washington relationship? Great question. As an example of this incest, Bloomberg’s Jonathan Weil exposes the pathetic performance of Judge Robert Chatigny, from the U.S. District Court in Hartford, in his adjudication of a fraudulent accounting case brought by the SEC against General Electric. Weil writes, GE’s Fraud Case Could Use the Judge Gone Wild:
Finally a judge has dared say no to the once-venerable Securities and Exchange Commission and one of its cozy corporate settlements.
If that wasn’t novel enough, this fellow first had the nerve to ask the SEC a bunch of questions about the way it does its business. Turns out, he got a lot of embarrassing answers about the government’s investigation of Bank of America Corp that the SEC hadn’t planned to tell the rest of us about.
This jurist gone wild, now a folk hero of sorts, is U.S. District Judge Jed Rakoff. But before we go further, let me tell you a quick story about another judge, this one at the U.S. District Court in Hartford, Connecticut.
His name is Robert Chatigny. On Aug. 4, he was assigned a settled complaint the SEC filed that day against General Electric Co. Under the deal, GE agreed to pay $50 million of its shareholders’ money to resolve the agency’s claims that it had committed accounting fraud. The SEC didn’t name any actual people as defendants. We don’t know if it ever will. Chatigny approved the agreement six days later, with no hearing and no questions asked. GE neither admitted nor denied the allegations.
That’s how SEC cases usually go. And just think how much more we the public — and certainly GE shareholders — deserve to know about this supposed fraud. Who at the company committed it? Why hasn’t the SEC sued them? Doesn’t the SEC know who they are? Why aren’t they paying fines out of their own pockets? And why wasn’t Chatigny asking these kinds of questions?
I tried calling Chatigny yesterday to ask him. His law clerk said he couldn’t be reached for comment.
Why do firms such as GE or BofA commit these frauds or promote shoddy business practices? Because it is worth it. How so? The returns generated far exceed the potential fines or penalties imposed, so the practices continue.
The fact that Judge Chatigny or those of his ilk do not truly hold companies and individuals to account gives a quasi-green light for firms to continue to push the envelope. Who pays? Shareholders and the public at large. What are the real costs? The erosion of integrity and principle in the pursuit of profit. Who benefits? Individuals within these corporations and those in Washington who conveniently look the other way as these frauds play out.
I commend Jonathan Weil for once again shedding light into another dark, dank, dismal corner of American finance. We need more judges like Jed Rakoff and we need more journalists like Jonathan Weil.
LD
Volcker Launches Bombshell on Wall Street and Washington
Posted by Larry Doyle on September 17th, 2009 9:31 AM |
Former Fed Chair, Paul Volcker
While the insiders on Wall Street and Washington pander about real financial regulatory reform, former Fed chair Paul Volcker yesterday hit ground zero on this hotly debated topic.
The heart of financial regulatory reform is centered on the implementation of leverage by our largest financial institutions. The leverage is exercised in a wide array of activities, both on and off-balance sheet. The capital utilized by the banks in these activities is credit that has not and will not flow directly through to the economy. Why? The banks believe that they will generate a greater return on the capital via proprietary activities rather than facilitating client business and addressing customer needs.
These proprietary activities, housed in balance sheet trading books and also in off-balance sheet SIV’s (structured investment vehicles), provided many nails in our economic coffin. While the Fed has provided the liquidity to refloat the markets (and to a lesser extent the economy), Wall Street banks are fighting hard to maintain as much of their proprietary activities as possible. Washington is largely dancing around the edges of the banks’ balance sheets in proposing financial regulatory reform. Until now. Paul Volcker hits Wall Street hard in promoting the end of the banks’ hedge fund like activities. The Wall Street Journal details Volcker’s bombshell in writing, Volcker Calls for Restricting Banks’ Risk, Trading Activity:
Former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation.
Mr. Volcker, who currently is chairman of the White House’s Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client’s behalf instead of making bets with their own money through internal units that often act like hedge funds.
“Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking,” he said in a speech to the Association for Corporate Growth in Los Angeles.
Mr. Volcker’s comments could put him at odds with the Obama administration’s proposal for new financial rules. The White House has called for more oversight of banks’ operations but doesn’t push such strict limits on what they do.
Believe me, the Wall Street lobby is working overtime to delay and dilute the impact of even the shallow regulatory reforms currently proposed by Washington. Volcker’s proposal would serve to dramatically change the very nature of how Wall Street operates. I welcome it on a number of fronts, as it would promote economic activity and financial intermediation, including: (more…)
Dollar Carry Trade Drives Global Equity Markets
Posted by Larry Doyle on September 16th, 2009 2:18 PM |
As the U.S. Dollar Index makes new lows, equities make new highs and the momentum continues. Where is the ‘juice’ coming from? Is this cash that had previously exited the market now reentering? Is this people who had gone short now being forced to cover? Is this ‘new’ money finding value? Is this a pickup in short term day trading? The answer to all of these questions is yes, albeit to varying degrees. However, the most widely held belief for the rally in the market is the dollar ‘carry trade.’
I highlighted this trade last week in my September 12: Month to Date Review of the Markets. On that day, I wrote about the U.S. dollar:
This morning, the Financial Times weighs in with Dollar Lays Claim to Being Top Carry Trade Currency:
The FT further adds,
Is utilizing the dollar for funding purposes a harmless risk-free trade? Anything but. A weak dollar impacts all dollar-denominated assets and dollar-denominated transactions.
For those entering into these transactions, a sharp reversal in the dollar or in the assets being purchased can lead to tremendous losses. For now, though, traders, hedge funds, and speculators the world over are selling dollars to put this dollar carry trade on . . . in size!
What do our ‘wizards in Washington’ have to say about the plummeting dollar? You can hear a pin drop.
LD
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Posted in General, U.S. dollar | 2 Comments »