Not Quite Right

(c) copyright View from Florida, 2009. All rights reserved.

A nagging, persistent feeling of something "not quite right" hangs over recent market events.

The dollar hits a new 52-week low while the market hits a new high? (OK, that one's felt so wrong for so long that people are now explaining it via carry trade, HFT & several other machinations that don't "feel" like the whole story.)

The market hits a new high while bonds continue to flirt with their highs? (Don't these entities classically move in opposite directions? Isn't that history the point of all the "money on the sidelines" touts?)

Bonds stay high (aka, rates stay low) while several commodities remain strong and gold hits a new all-time (nominal) high? (But why are bonds still strong?)

Depending on what or who you believe, at least one, probably two, of the above trends is "wrong." The big question now is which one???

Zero Hedge publishes pieces from a Nic Lenoir. Ignoring the run-on sentense, he seems to explain the contradiction below:
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Let's recap a little bit what China's economic policy has been: buy and store large amounts of commodities, to a point where recent reports indicate the country is freezing steel production capacity for 3 years because of fears of price collapse, peg the Yuan to the USD, buy EURUSD everytime the uptrend is threatened in order to de-facto devalue their currency, while being hedged by the stockpiles of commodities purchased prior to that, and make the most of the explosion in monetary growth (28% annually) necessary to keep the peg going to further buy commodities and stimulate the economy because 14% of GDP in stimulus might not just be enough. About China buying EURUSD by the way, if anybody has doubts talk to your nearest FX dealer and you will see: the PBOC supported the market at 1.4480 when we threatened the uptrend, and at 1.47 when we tried to reverse after hitting 1.48 the other day. These actions are not only visible by anybody in the market, they are also market-timed and clearly part of a plan a lot more elaborate than just diversifying currency reserves. I forgot to mention the talks of side deals with Russia to settle energy purchases in Ruble and Yuan. This has nothing to do with paranoia or conspiracy theory, in fact if I were the Chinese government I would probably do the same thing. After all China is simply trying to run a policy that maximizes the country's economic power. It's a perfect set-up for a bubble and implosion, but when it comes to the intentions behind the policies it's hard to blame China.

On the other end, it is absolutely unbelievable that anybody in the US government would be cheering about this. The game plan for the demise of the US economy might is being laid out in front of our eyes, and officials cheer about it? Are we that worried about European competition that we are actually winking at other countries in Asia organizing the USD devaluation for us so we gain a competitive advantage? Certainly concerns are rising in Europe that there is a secret handshake agreement between the US and China regarding an organized and controlled currency devaluation. Hard not to wonder about it at the very least looking at the facts.
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Maybe I'm too unsophisticated to see through this as a false or irrelevant argument, but it does help explain recent dollar /bond /gold trends. (i.e., China is selling dollars via futures but "protected" by hedges in gold and commodities. A convenient side-effect of such selling is the reduction in Yuan printing, thus dampening inflation inside China.)

The above reinforces my concerns that long-term bonds may not behave as they did in previous recessions /depressions and might be a poor bet going forward.

As always, invest at our own risk.