Since it was revealed that the Fed began normal repo operations last week after 4 years of reverse repos the equity and commodity markets have been pushing higher, albeit in the case of equities on very thin volume. But, since this is the summer and the markets are so completely cocked up it should be no surprise really that volume is thin. After MFGlobal, PFG and LIEBOR-Gate, I’m sure there are a number of people who have just thrown up their hands and said, “That’s it, I’m done.”
The problem is, of course, that there is still this small problem of a vast pool of U.S. Dollars floating around out there that need a home. Everyday that goes by finds another place for these dollars to crash for the night having said, “Sorry, sleep it off in the park, bum.” This is beginning to cause a bit of havoc during a time when the Fed is supposed to be acting hawkish, and they are. A cursory glance at the monetary base and the stock of Fed credit tells you that they have indeed been very tight with their creation of new money.
As time goes along and the E.C.B. and the E.U. make it abundantly clear that the Euro is going to survive no matter the cost, the market will wake up to the fact that no matter how bad Europe is, the U.S. is in worse shape. The fear trade is unwinding a bit in the U.S. Treasury market and this has money flowing out of the U.S. Dollar (AMEX:UUP) and into equities, dividend yielding ones by the way, and structural commodities, gold (AMEX:GLD) and oil (AMEX:BNO).
Since Draghi’s statement last week Gold is up $27 and Brent Crude is up $6.30 per barrel. Yield on the U.S. 10 year note has risen from 1.47% to 1.67%. All of this in a week. the S&P 500 (AMEX:SPY) cracked 1400. The flow of dollars is becoming more than the Fed can sop up as the petrodollar is truly beginning to unravel. If the Fed has to start printing to save the banks, the USDX will crash quickly back towards 76 and possibly 72.Previous Post » CME to Raise Oil Margins and Re-Elect Obama