I can appreciate yesterday’s rally; really I was up almost 9% thanks to a tepid oil recovery that sent my UCO shorts higher by a paltry few tenths of a percent, coupled with massive rallies in all my other names, most especially AEC and CLP.
However, the action was mostly a product of how far we’ve come, and not necessarily an indication of happy times resuming.
Consider this: the Federal Reserve announced yesterday that they will retain zero interest rate policy and some aptly pointed out that thanks to mortgage restructuring, the Fed will be capable of relending more money that was previously tied up elsewhere.
However, these actions do not add currency to the system; they simply retain existing currency and slow systems designed to remove dollars. It’s a net neutral maneuver, on the Fed’s part.
Meanwhile, Europe is beginning the first stages of quantitative easing themselves. This will add euro’s to the system.
What do you think that is going to do to the USD/EUR relationship? And what will that do to the markets?
The last time the Euro was depreciating, the DOW collapsed. That was the summer of 2010, remember?
And all that from the EUR/USD losing about 10 cents. What do you think would happen if Europe intentionally began to devalue?
I understand many of you are intent on the point that the USD is weakening. But weakening against what? Who cares if the Swiss Franc or Japanese Yen appreciates? The EMU is so much bigger than all of those, and what I am seeing is the beginning of the decent of the euro.
This will roil our markets before the Fed is forced to intervene. Count on it.
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Quality post, Cain. But I think it strengthens the case for equities. Money cannot flow to the Euro for the reasons you’ve mentioned. It can neither flow to the USD thanks to perpetual ZIRP. It will flow to equities and assets that don’t give you a negative yield (gold). End of story.
I would have agreed with you back in 2010. That was my strategy. Then I got my shit rocked.
euo, for double jeopardy alex please
mr.thaler.i’m not into fx,but if there is bank failure in france,how does that effect the euro dollar
I’ll be totally honest with you. I haven’t the slightest idea.
In our system, the bank failure led to a much stronger dollar. Potentially, we could see a stronger euro, which would put much of what I implied in this post in question (although our companies still have huge foreign market exposure). However, a large scale bank failure would wreck the European economies. I can’t imagine that any EU response would leave the euro intact.
Nice post. I think there are three things important in the statement. The first that we will be in a slow growth economy for the foreseeable future. That’s constructive for equities. Secondly, the Fed has implicitly reserved the QE3 option for what it’s worth. Third, and most importantly I think, they’ve put the ball back to the politicians as far as fiscal stimulus. Congress and the administration will have to decide on what path they will take regarding the economy.
So overall, as long as we don’t tip back into recession, I’m constructive on equities.
I guess it all depends on how selective you are with your equities. I really don’t think the government is going to be stimulating any time soon. You have very large portions of the bodies who think the last round was a complete waste of resources.
I think that’s true about the stimulus from the left, right and objectively. It was badly designed, meant to (or effectively used to) patch over the states income problems, not targeted at things that would increase demand immediately. At the start of this mess, I thought a steep payroll tax cut on both sides (employee/employer) would have provided demand on the consumer side, and on the business side a cushion so companies facing funding issues (I was in one that did), would not have to lay off because they couldn’t finance their payroll.
I guess bottom line, the politicians need to figure out what they are going to do on the fiscal side whether is reworking the tax code, regulatory relief, mortgage/housing relief to clear the market, or straight out stimulus. It’s in their court. I’m not optimistic that the President can provide the leadership needed. Robert Reich, in yesterday’s blog, citing sources inside the administration, said they are now focusing on the deficit and not unemployment and the economy, because they believe the deficit issue will resonate with independent voters. This is just bullshit. They should be focusing on the economy, which will make the deficit better faster, rather than on getting re-elected.
Well said.
The plugs on the HAL 9000’s need to be pulled. The SEC needs to focus on making this a more investible market, instead of the HFT casino it’s become. If they can’t/won’t stop the HFT’s, then stick a 95% capital gains tax on same-day trades. When we see movements on utility stocks of +-10% in a single day on no news, it should be obvious there is something wrong with the system and is the reason many people I know won’t go near the stock market. The brainiacs working for Wall Street coming up with algorithms that produce nothing of value or substance for society need to have their talents redirected toward something more creative and beneficial.
Stepping off soapbox.
Euro to zero!!!
(laughter)
@ jack burton, yes, we do need to unplug the hal 9000s
in a way the markets of the last 1.25 years have been old sci fi movies brought to life, computers blowing everybody up. longs on the way down and then shorts on the way up…