Today saw an unwinding of some of the more frothy positions that have been built up since the FOMC announcement on SEPTEMBER 21. All asset classes, from stocks to commodities, have been rallying as the FED promised that it would do what it could to insure against the onset of a deflationary spiral. Many news outlets reported that the silver markets broke hard after CME GROUP raised margins on SILVER positions. The talking heads compared this to the Hunt brothers in 1980, which is COMPLETE UNADULTERATED RUBBISH. The margin increase was relatively small and nowhere near the type of actions taken in 1980 when some nearby silver contracts had a margin of 100 percent of the value of the contract. Also, margin rates are relatively low on a value of contract basis and as we also know much of the investment in silver is taking place in the ETF market where the future exchanges have zero influence.
Some pundits pointed to the commodity selloff as proof that the DOLLAR was set to rally as the European DEBT situation was coming back to center stage. I am always amazed that everything now correlates but yet the market seems to be able to focus on one fundamental variable at a time. If quantitative ease is all the rage then the problems in the European peripheries seem nonexistent. Is the DOLLAR problem moving off the stage? I guess that it would be highly doubtful.
The most significant rumor that was spread invoked the theme that the FED had heard the cries of the G-20 and was going to delay the full implementation of QE2. It seems that the world’s leaders had their views heard and the Geithner/Bernanke team would heed the calls and move slowly in purchasing more DEBT and causing further weakening of the DOLLAR. What gave this rumor some validity was that the harsh comments that were made over the weekend about FED policy was softened by statements from the Chinese and others who understood that the U.S. was doing all it could to foster growth and overall that was good for the global economy.
If the FED were to backtrack as suggested by Kevin Warsh’s article on Sunday, the mere possibility would lead to a correction from the rapid rise of myriad assets. This rumor again could have some truth to it but we still would look to buy certain asset groups on any large correction. It is important to remember interest rates are still zero and will be so for an EXTENDED PERIOD. The commercial and residential real estate markets are still under severe stress and the FED will do all it can to keep mortgage rates low, very low. If the FED were to back off of the NOVEMBER 3 statement, it would probably mean that the FED would do all its buying further out the curve to ensure that the long-end rates were propped up. I would look for less buying to take place in the 5-year note as its impact on mortgage rates is not as great. So we would want our readers to be aware of that possibility and pay close attention to the 5/30 curve for any hint of that taking place. The G-20 has now taken on some new importance as to whether the U.S. and its harshest critics have reached some type of D’ETENTE CORDIALE.
While invoking the spirit of France it is important to remember that President Sarkozy will assume the leadership position of the G-20 after this week’s meeting in South Korea. Interestingly, Mr.Sarkozy sought to recall the ghost of de Gaulle at a speech he made on Tuesday, commemorating the 40-year anniversary of his death. The principal basis of de Gaullism was the necessity of knocking the U.S. off the pedestal that it commanded in the Post-World-War-II world. It was the French who forced the U.S. to exchange its GOLD for French-accumulated DOLLARS, thus resulting in NIXON ultimately closing the GOLD WINDOW and putting to bed BRETTON WOODS. If that is the spirit that Sarkozy is hoping to invoke, the markets had better prepare for high levels of volatility.
An aside, we note that Fitch downgraded the DEBT of some Portuguese banks sending the BUND/Portugal 10-year spread out to new highs. If the Chinese are going to step into the Portuguese debt market we wonder just how much they are willing to invest. Trying to buy friends and influence people on the cheap is just not going to work. MR.MARKET IS IN A VERY TESTY MOOD.