We have talked at length on the sinking Dollar and at Davos the “Mnuch” stated that “the weak dollar is good for the U.S. as it relates to trade and opportunities.” Gee thanks Mr. Secretary, but what do you guys really mean? We will tell you what it means…it means that the FED cannot have its cake and eat it too. It cannot on one hand raise rates and on the other have sit- idly by with an ever sinking U.S. Dollar.
Now all econ fundamentals aside, one should be asking, why is the dollar moving lower when our rates are moving higher. Shouldn’t that make our debt more attractive on yield a level vs another countries debt? One would think but in a central bank, in a globally coordinated central bank world you have to realize that the central banks are not working independently but in unison. We will dig deeper into that at another time, but the crux of the statement is every nation cannot be an exporter and when countries go to war with their currencies; the outcomes globally are usually disastrous and swift. Are we there yet? Yes we tend to think we are and how long the markets will continue to ignore this is anyone’s guess. Anyway the problem with the FED raising rates coupled with the U.S. fiscal support, means a whole bunch of debt is going to have to be swallowed and higher rates have to attract such unwilling participants.
The last decade will go down in the history books as the decade the central banks hijacked global financial systems and decided that it’s in everyone’s best interest to work together. That is, obviously until it is not. Who will be the first to balk? Our guess is the Chinese. They have the most to lose, domestically and internationally and it’s why they have been so reticent in shoring up their gold reserves and trying to internationalize their financial exchanges. However their underlying distrustful fiscal policies and their too good to be true WMPs, no not WMDs of the good ole Bush era, but potentially a synonymous acronym none the less as these WMPs will be like economic weapons of mass destruction. WMPs are Wealth Management Products, which basically package deposits and attract buyers with higher rates of interest, we hate to say it, but they sure do look a bit Ponzi in nature. Then again, isn’t the entire leveraged, rehypothecated, fractional reserve system, exactly just that? So let’s get to some other market news this past week:
- Starbucks was out this week saying it’s going to spend $250m on new employee benefits.
- Credit Suisse was out stating the Pension Funds sector should be a natural seller when it rebalances this month. No doubt equity outflows will benefit bond inflows, but in realty how big of a dent will this be?
JPM commented upon this and gave us this nice chart below. When we looked at this chart what stood out to us as odd was that the Pension Funds have flat lined their bond purchases, seems a bit odd considering the fixed payment obligations they have. This made us think pensions have been overreaching for yield for decades and in return receiving massive convexity risk. none the less we feel that if Pensions decide that equity risk is too much, we could see some massive reallocation into bonds and lower yields would beckon and equities will have a few less fools, anywhere here is the chart: