Tuesday November 29, 2005 - 12:06:02 GMT
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Black Swan Capital - www.blackswantrading.com
One-day wonder or something more?
“Love built on beauty, soon as beauty, dies.”
Did we see the beginning of a dollar “correction” yesterday, or was it simply a one-day wonder?
If we had to grasp at fundamental reasons (or swing in fundamental expectations) behind a dollar correction, we would grab on to the same others are talking about—a Fed blink! The catalyst yesterday seemed twofold:
1) From The Wall Street Journal:
“In an unusual event known as a partial inversion of the yield curve, investors kept buying five-year Treasury notes until their yield, which reflects expectations of how the economy will fare over the next several years, fell below the yield on two-year notes, which tracks expectations of what the Federal Reserve will do with interest rates in the shorter term.”
2) From Bloomberg:
“Rising mortgage rates and skyrocketing prices put home-buying out of reach for more
Americans in October, a new report showed. Sales of previously owned U.S. homes fell a greater-than-expected 2.7 percent last month to a 7.09 million annual rate, the slowest since March, the National Association of Realtors said today in Washington. The number of unsold homes was the highest since April 1986.
The inverted yield curve has been a pretty decent forecaster for future recession and a weakening housing market could be a pretty decent indicator of trouble for Mr. Consumer.
“[T]hose betting against the curve should be aware of the odds — eight inversions in the last 40 years, and all eight were related to either recession or, at a minimum, material equity bear markets. The fact that the Fed has dismissed the curve this time around only increases the chances, in my view, that the curve will again be spot on, as the Fed tightens into a recession,” says Morgan Stanley economist Neil McLeish.
“Bottom Line: The supports under consumer spending are giving way and it is only a matter of time before households tighten their belts. We do not expect a major retrenchment, but a slowing in real consumer spending growth to the 2-3% range will set the scene for an end to Fed rate hikes,” according to the Bank Credit Analyst.
Many have prematurely forecasted an end to the Fed’s tightening campaign. Many believe the move in metals is all about inflation, and the Fed is woefully behind the curve. But others believe the Fed’s hikes are already draining liquidity and the move in commodities is MORE about liquidity than inflation. The chart below shows the movement of global commodities prices vs. a measure of global liquidity:
Source: Niels Jensen, Absolute Return Partners LLP; John Mauldin’s “Outside the Box”
Because declining global liquidity is bullish for the dollar AND this trend in declining global liquidity will likely intensify, we think any dollar correction predicated on “Fed blink” is only a temporary affair—quite possibly a multi-week event (though this morning it’s looking more likely a one-day wonder).
Black Swan Capital
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