Election day rally and dollar dive

First, check out these headlines from the front page of the Bloomberg site yesterday. Do these look like the stuff of big stock rallies?

But as noted in my most recent Martenson Report, my expectation was for a return of the Dow to the 9800-10000 level.

One of the prime reasons for a rally was that the dollar was due for a fall. Anybody who has been watching the currency and stock markets over the past two years knows that an unusually tight and inverse correlation has existed between the strength or weakness of the Yen (primarily) and the US stock market.

Yen up = stocks down.

Today the Yen went down and stocks went up. Is it that simple? Not entirely so, but to a much larger degree than the average person would suspect.

Today the dollar fell by a record amount against the Euro. It was due for a pullback, but this is a pretty solid move right here:

I find it disconcerting that major currencies are trading like Internet stocks. Moves of 3%-10% are not supposed to happen in markets this large. It's like watching a school bus navigate an F1 race track at 100 mph. Or an elephant on a bobsled run.

It's just unnerving. I had to peek between my fingers at these charts today.

Part of the reason I found it unnerving is that we now know how much borrowing the Treasury has been doing lately (emphasis mine):

WASHINGTON, Nov 3 (Reuters) - Facing the need to borrow up to a staggering $2.1 trillion in the current fiscal year to fund economic rescue programs, the U.S. Treasury is expected to significantly expand its debt securities arsenal.

The Treasury Department said on Monday it would need to borrow a record $550 billion in the October-December quarter, including a likely $300 billion in financing for Federal Reserve liquidity operations.

The total was $408 billion higher than previous estimates announced in July 2008 due to outlays for economic assistance programs, lower tax receipts and lower issuance of non-marketable debt securities to state and local governments.

The Treasury anticipates $368 billion in borrowing in the January-March quarter.

So the Treasury is right in the middle of borrowing $550 billion in this quarter alone, and now the dollar is backing up a bit. That kind of cause-and-effect could be real, but I have my suspicions.

The dollar strength recently has been explained in various ways, "deleveraging" being one of the better ones, but nobody really knows. The fact that the central banks made so few noises about the largest ever currency moves during a time of heightened financial uncertainty tells me that the dollar strengthening served their purposes.

Most oddly, even as the stock market went up strongly, even after the announcement of huge new US Treasury issuances, T-Notes were bought today. This is quite unusual. Normally with the stock market in rally mode, money is flooding over there and there is less available to snap up treasuries.


Bottom line: There's suddenly a LOT of money in the system looking for something to do. This bears watching. And so I will.



This is a companion discussion topic for the original entry at https://peakprosperity.com/election-day-rally-and-dollar-dive-2/

Bottom line: There’s suddenly a LOT of money in the system looking for something to do.

Chirs, can you please expand on this statement?

Bottom line: There’s suddenly a LOT of money in the system looking for something to do.

Chirs, can you please expand on this statement?

I second that. I read Mish’s site and he pointed out, on inflation, that if credit dries up (banks not willing or consumers not borrowing) then we will see the same deflation that they saw in Japan.

I mean, other than AIG spending half a million of our tax dollars at a spa, where will it go. Bonuses?

I don’t presume to speak for Chris; my take is…people don’t really trust the market right now and are in cash.

I only assume that central banks are keeping down gold somehow because you would think that’s where they’d be going.





Here are some thoughts from Bob Moriarty of 321 Gold.

Bob Moriarty
Oct 30, 2008

This last month has been a
real barnburner. I though I had seen everything until I found
a couple of new pieces today. The first tells of the Fed
supplying new lines of credit
to Brazil, Mexico, South Korea
and Singapore to, now get this, "help those countries deal
with the global credit crisis." The Fed will start off with
$30 billion apiece and will make a maximum of $100 billion, per
country, available.

They talk about helping countries
facing liquidity problems but they aren’t telling the real story.
The Fed is pouring $120 billion into those countries so they
can dump the dollar. The dollar has been going too high as a
result of the deleveraging going on and the world has determined
that what we really need to do is destroy the dollar. They will
sell dollars so they can buy their local currency. Bye, bye dollar.

Don’t stand under that particular
knife when it falls. The dollar index was up from 77 to 87.5
in less than a month. The Fed’s new program of dumping on the
dollar seems to be working; the dollar is down from 87.5 to 83.5
in less than 24 hours from yesterday to today. Did I remind you
not to try to catch that particular falling blade?


Since a couple of people have asked about this, I’m going to take a stab at an explanation. I want to first emphasize that my role at PeakProsperity.com is in the back office, and I’m not an economist. But as an active private investor, I think I have a pretty good understanding of the point Chris was making and will try to offer some elaboration.

As a matter of policy, Chris generally reads everything but we’re trying to avoid having him personally respond to questions like this in the comments. The problem is that not all site readers read the comments, so we like to keep Chris’ writing in the top-level blog entry, where we know everyone will have the benefit of reading it.

That does not mean you shouldn’t ask questions! Just don’t expect a direct answer here. If there are consistent themes in the questions (Chris really does read everything), he will try to address those questions in a future blog post. That way everyone gets the benefit of his insights. The other option is to use the subscriber-only forums. Chris puts much higher priority on answering questions asked there because we know they are coming from the paying subscribers who make it possible to keep the site running.

Getting to the point:

A good way to think about financial markets is in terms of where assets are being moved to and from by investors. So when somebody says "The stock market is down because a recession is coming", that statement isn’t quite accurate. The real reason the market went down is that investors were taking money out of the market and putting it someplace they thought they’d get a better investment return. The reason that they decided to move that money from the stock market to someplace else was that they expected a recession. But the way financial markets really work is that assets move back and forth from one asset class to another. By watching the price movements, you can tell where the money is moving from and to. From that, you can deduce or speculate about the probable intent of investors. So people watch where money is moving to and from all the time.

The usual movements of assets from one asset class to another are very well known and understood. When investors panic or become uncertain about what’s happening, money almost always moves out of the stock market and into treasuries. This is called a flight to quality. On the other hand, when investors start to get optimistic about the economy and future earnings, there is generally a big move of money out of treasuries and back into the stock market. The patterns are pretty well known.

But what Chris reported in this blog post was an anomaly. A whole bunch of money just went into buying the stock market. A whole bunch more money went into buying treasuries at the the exact same time. That just doesn’t add up! The usual movement would be from treasuries to stocks (optimism) or stocks to treasuries (pessimism). But today money came from somewhere and a whole lot of it went into both the stock market and treasuries at the same time. Where did that money come from? Why is it moving into two places at the same exact time, when historical norms suggest that usually one or the other is in favor? That’s a darned good question, and the point I believe Chris is making is that there is no obvious indication of exactly where it came from or why. Any time something unusual like this happens, it’s cause to question what’s going on and why. But on election day? That’s a huge red flag, and makes one wonder who’s moving big piles of money around, and why. Whoever they are, their actions are not consistent with typical market trends. As Chris said, he intends to continue examining the situation, trying to figure it out. I’m sure he’ll post again if he comes to any significant conclusions.

I hope this answer was helpful and provided the clarification sought. A final disclaimer: I didn’t speak with Chris before posting this, and these comments are not intended to represent Chris’ opinion. This is just my own personal perspective on what this means. If I got it wrong, Chris will address it with more clarity in a future top-level blog post, not here. If he responds here, that would indicate that I really screwed up the answer! :slight_smile:

The anomaly is because of the PPT. The markets had to be propped up for the elections.

"The other option is to use the subscriber-only forums. Chris puts much higher priority on answering questions asked there because we know they are coming from the paying subscribers who make it possible to keep the site running."

OK, thanks Erik. I’ve been a subscriber for a while now and I didn’t see we had our own forum, so that’s good.


Thanks Erik,

Even if that wasn’t what Chris meant, I found your explanation very helpful.

You’re welcome. We’re doing our very best to focus as much as we can on delivering value to the paid subscribers who are basically footing the bill for this site. When it comes to answering questions in the blog comments, Chris always likes to be as helpful as he can, but it just doesn’t make sense for him to focus his time answering one person’s question, especially when they may not be a subscriber.

I should be clear that there is no promise of a personal answer from Chris in the subscriber forums - if other knowledgable subscribers answer the question adequately, Chris won’t reply if there’s no real need to. But the way we see the world, when a question is posted here, it basically means to us "Some guy (or gal) has a question". When a question is posted in the subscriber-only area, we see that as "One of the people making all this possible has a question". For the sake of everyone getting the best experience, Chris still may not answer the questions in the subscriber area personally. If another subscriber or one of us on staff can answer it adequately, that’s what will happen. But we make a conscious effort not to leave relevant and appropriate questions unanswered in the subscriber-only area.

As a team, we’re committed to making sure paid subscribers feel satisfied with their experience here, and we’ll escalate posts in that forum to Chris’ personal attention if we feel it’s warranted. If you see a question answered by another subscriber and nothing from Chris, that indicates that Chris saw the other answer and was satisfied with it.

You guys have absolutely no idea how many hours this man works. Believe it or not, "everything you see here" is just part of what Chris does. He’s also immersed in the DVD project right now, as well as a bunch of site technical issues, plus trying to manage a small staff on a shoestring budget. So far as I can tell, he doesn’t sleep…



Thanks Eric:


I have to re-up again this month, my better half is squandering every cent on silver and gold…

Also excellent answer!

Other Governments are Buying Stocks…


In spite of negativity from many quarters, stocks, currencies and
commodities are rallying globally. Governments are buying stocks,
sometimes secretly,
sometimes openly (several countries, including
Russia have announced that they are buying stocks). Other countries are
supporting their currencies and buying stocks more discreetly. Many
experienced observers think that the current market rally may last for
several weeks.

No national government wants a plummeting currency or a plummeting stock market, and they are trying to stop the chaos, panic, and forced liquidation. We can be certain that if further bouts of forced liquidation and panic occur, governments will come in to support their currencies and to buy stocks.

I was thinking the same thing.

rumor has it he does not bathe either

What happens now? Does nothing really change? Does anyone else feel really bad for Obama? That he has inherited a mess he probably can’t fix? He’s such a great guy I think it will be a shame if "tshtf" with him in office because it will be mostly blamed on him. I just hope that somehow, by some act of a higher power, that he will find the mettle and the strength to lead us through this without war and terrible desperation, as I fear.




One hell of a mess he is stepping into.
My hunch is Dick, who I heard is invested a lot like everyone on this site, and has been now for years and years, and W will do everything they can to keep the illusion going. Right now the average family knows things suck, but they have NO idea how bad it really is. It’s the difference leaving with 20% approval and what he deserves 0% approval.
Well, at least BO didn’t pick the http://www.motherjones.com/news/feature/2008/07/foreclosure-phil.html foreclosure Phil or an ex-Nixon assistant to the Watergate plumber for the Treasury or a Navy tailhook sex scandal throwback to staff his administration.
That said, it is going to be one hell of an uphill battle, and no welfare checks (stimulous (more debt)) is going to help.

The stock market could rise and the T-bills could fall not on an increase in money per se, but an increase in money relative to what is being sold - what were the trading volumes yesterday, if they were down that could be the answer?

I’ve read the posts on the deleveraging effect resulting in the strength in the USD but I don’t think that’s as big of a driver as the ‘flight to safety/liquidity’. If you, for a moment, think beyond the deleveraging effect, the reason behind a lot of the movements suddenly become clearer. Currencies do not just represent the overall unit value of a country’s monies, it allows you to invest in their federal interest rates. The currency value is just the result of the demand/supply of dollars seeking to be invested for the highest risk adjusted return. If volatility is high due to reasons like debt/gdp, ability for the economy to handle stress, etc. then the return required will be much higher aka Iceland. As volatilities fall, the USD should fall, not just because of whatever’s left in the deleveraging wave, but because people will now adjust their returns required to put money into a certain currency and its corresponding deposit rate. I would be very careful to translate this into stock market targets. To be honest, I don’t know how anyone here, including Chris, who can make targets on a market that has so many more issues than just what’s happening with currencies. Today is a good example where earnings reports of some of the financials (ABK) disappointed and showed that there is still a lot of risk in the system. This was partially offset by RDN reporting good numbers. This should be a good time for solid long/short funds that have good fundamental analysis capabilities. Currencies definitely play a huge role, I posted on this a month ago where my attentions had shifted away from the financials and more to currencies and how I thought volatility for currencies was going to increase. I am now starting to shift away from the currency issues (still expecting some blow ups) and now am focused more on the earnings season for the next few weeks.

The USD is experiencing a "death dance" at present.

Our exporting partners (China and emerging markets), have produced goods for US consumption, only on US debt.

They agreed to the purchase of Bonds and Treasuries, to support this debt-feast.

However, the party is almost completely over - the chairs are knocked over, the wine is on the carpet, and the drapes are down.

Because China et al only purchased US debt, to keep their export supply going to the drunken US consumer, but the present puts them in a precarious position, that debt purchase will now stop.

That means, that although the USD has been hoarded over the last 45 days or so, to "reconcile" the huge global deleveraging - i.e., settlements, that process is also about over.

Here is a very interesting article on IMF reserves, which spells out the exponential debt party the West has been on, only until very recently.


In particular, check out the graph of IMF "currency pool" reserves over the last 6 months (mostly $USD). Is this a black swan event?

What does it mean?

The November 15 summit of the G20, will no doubt center on what to do with the USD.

I do not know the future, but I expect that in 2009 (perhaps early 2009), will include pronouncements from President Obama, that the USD will be undergoing a drastic "adjustment", as a proactive move to prevent a catastrophic collapse of the $USD and American economy (and prosperity).

Will devaluation occur? Probably.

Will the USD be replaced with a new world "reserve currency"? Perhaps not that soon, but not far off IMO.

This will have certain global flux results - both economic and political, and would certainly usher in a new world paradigm.

GDon, there was another good but scary article about the dollar on FinancialSense.com today. Did you see Chris Laird’s article at http://www.financialsense.com/fsu/editorials/laird/2008/1106.html ? He thinks the USD is going to go down within the next couple of years, midway in what he thinks is now the beginning of a depression. I’d be interested in people’s thoughts on his thinking.

One thing I don’t get is the assumption that the USD crash would wait until midway in the upcoming depression he predicts. I guess I just get the sense that if things turn worse for the USD, it could turn very bad very fast. But that’s just my gut feeling (or fear).