When the Dollar Rallies, the Market Will Crash by Mike Whitney

[Crewleader]

November 3rd, 2009

Interest rates. The Fed does not need slinky women in plunging necklines to peddle money. All it needs is low interest rates. When rates are pushed lower than the rate of inflation, the Fed provides a subsidy for borrowing. This is not as hard to grasp as it sounds. If I offered to give you $1.00 for very 90 cents you gave me in return, you would buy as many dollars from me as you could. The Fed operates the same way. It generates market activity by creating incentives for borrowing. Borrowing leads to speculation, and speculation leads to steadily rising asset prices. This is how the game is played. The Fed is not an unbiased observer of free market activity. The Fed drives the market. It fuels speculation and controls behavior by fixing interest rates.

When Lehman Bros flopped last year, markets went into freefall. A sharp correction turned into a full-blown panic. The bubble burst and trillions of dollars in credit vanished in a flash. Trading in exotic debt-instruments stopped overnight. A global sell-off ensued. Markets crashed. For a while, it looked like the whole system might collapse.

The Fed’s emergency intervention pulled the system back from the brink, but he economy is still wracked with deflation. Billions in toxic waste now clog the Fed’s balance sheet. The dollar has fallen like a stone.

http://dissidentvoice.org/2009/11/when-the-dollar-rallies-the-market-will-crash/

[Warpy]

1. The market rally is largely being supported by foreign investors

who are taking advantage of bargains that a cheap dollar affords them.

When the dollar rallies, many of them will take the profit and run.

So yes, the OP is correct.

[DJ13]

2. but the economy is still wracked with deflation

I sure would like to experience first hand some of this invisible deflation I keep hearing about.

Im not seeing it in anything that the consumer buys.

Oh I understand these financial types try to fudge things, like when a stock doubles overnight, then falls 40% over the next 6 months, the experts will say its "down 40%!", while ignoring that its still 60% overvalued from before the price spiked.

Much as they claim the price of gas is an example of deflation, when in actuality its still $1 above the point it was 2 years ago, and well over $1 above where it should be in relation to the supply of oil on the market.

(The law of supply and demand is never invoked when supplies are high for some reason....)

Prices still well above the mean are not deflationary, except to those who were counting on the profits from gouging.

[Birthmark]

6. You're behind the times.

Lower inflation is the new deflation. :)

[DJ13]

7. But our lower wages are falling behind the lower inflation

Just cant catch a break, can we?

[Birthmark]

8. You're not supposed to notice that, or...

...you're supposed to blame it on the Democrats' "tax and spend" policies.

[DJ13]

9. That page was missing in my citizenship manual

Oh great, now what do I do?!

:)

[Birthmark]

10. Oh, it's not there.

It's in your employee handbook. I admit it's getting more and more difficult to distinguish between the two.

[Double T]

3. The 'market rally' *cough*, *cough*.....*cough* is largely due to..........

domestic job elimination and destruction.

[TheWatcher]

13. Not to mention high Frequency Trading, manipulation, Corruption, artificial support

Fake Profits, and Ridiculous Propaganda that you would have to be a drunk ape to believe.

Thanks to Warpy for pointing out the Foreign Investment angle as well.

That would be logical considering the devaluation of the currency.

:thumbsup:

[Double T]

15. After conferring with some drunk apes, they don't believe any of it either.

[Go2Peace]

4. In 8 years the dollar will be replaced as the world currency. That has already been decided.

That will be our greatest challenge unless we have truly gotten our fiscal act together.

[TheWatcher]

14. But THAT'S Just a kooky CONSPIRACY THEORY.

I guess G-20 leadership likes to talk about kooky conspiracy theories too, since some of them think it's a good idea.

But that's not important.

Who is that Hot Chick Alien on 'V'?

:crazy:

[bossy22]

21. show me a link

[orwell]

5. So if capital is being de-created at an alarming rate...

...why is flooding the market with new capital wrong?

If a giant sinkhole is created, shouldn't it be filled?

What does Mr. Whitney want the Fed to do? Should they let "the free market" take care of it?

There is no "free market." There never has been.

[IrateCitizen]

11. All difficult questions with no easy answers

The problem is that the vast majority of paper money floating around out there -- I've read estimates where all the world's derivatives contracts now total over ONE QUADRILLION DOLLARS (yes, you read that correctly) -- is not backed up by anything with value. So, the choice we have is we either allow things to unwind to a point at which the amount of money in circulation is more closely related to the actual assets backing it up, or we fire up the printing presses again to bring liquidity more in line with the amount of money that was created through financial alchemy.

Except, if we choose door number two, we are only delaying the inevitable -- as we have done in the time since 1987 when the Federal government started direct intervention into the stock markets in order to prop up Wall Street speculation. There is no easy choice. The question is whether the pain will be distributed in proportion, or if it will be laid primarily on the backs of those who can less afford it.

[A HERETIC I AM]

12. So, do you expect that one quadrillion dollars worth of derivitives to actually settle?

How many dollars worth of insurance coverage in the USA is there? Add up all the upper limits of all the liability and comprehensive coverage currently in effect, eg. home owners insurance, car insurance, fire insurance, etc.

Now...

Do you actually think all of that will settle at full value?

You're likely to say "No", unless you don't understand the insurance industry at all. There are plenty of insurance policies in effect for more than the market value of the thing insured. This is not news.


The same is the case with that "ONE QUADRILLION DOLLARS (yes, you read that correctly)" statement.

So what. It could be one quintillion dollars. It doesn't mean it will settle, not by a loooong shot.

[Statistical]

17. you can't just take the sum of the contracts to determine exposure.

say you have a contract that pays $1B if a bond fails to mature. Say you also have a contract that pays $1B if the contract does mature.

Is your exposure $2B or is $0.00.
Well since the bond can't both mature and not mature if one contract pays the other is void.

You can't determine exposure by adding up the sum of the contracts.

[A HERETIC I AM]

18. I understand what you are saying, I'm just not sure Irate Citizen does...

because I've seen this sort of statement many times in this and other forums on this website;

The problem is that the vast majority of paper money floating around out there -- I've read estimates where all the world's derivatives contracts now total over ONE QUADRILLION DOLLARS (yes, you read that correctly) -- is not backed up by anything with value.

The point I was trying to make is that the overwhelming majority of these "derivatives" that so many DU'rs seem to be so concerned about will settle at ZERO or expire worthless. And the idea that they are "not backed up by anything of value" is a statement that does not convey reality in any accurate way at all.

[Statistical]

19. Yeah I think I replied to wrong post.

But it does back up your logic.

Also the 1 quadrillion dollars is the face value of contracts. Many are very exotic and have an extremely unlikely chance of executing.

Their are credit default swaps for US treasury. It costs about $1.20 per million dollars per month. So the cost to the insured may be $1200 but they are insuring $1B in US Treasuries. Now it is extremely unlikely US treasuries will default that is why the leverage is so high. CDS contract for commercial note might be 100x higher. CDS for a company in trouble might be 5,000x higher.

So most CDS will never execute however that is good because their face value is much higher than the premium. However to someone who take an ultra simplistic view like adding up the sum of the face values and reaching a giant number it overestimates the scope of the issue.

[Statistical]

16. Hypothetically lets assume the market willc rash when dollar rallies.

Well we are "safe".

As long as Fed keeps rates below other central banks (which is likely a long time) and as long as Congress spends more than it has in revenue (which is likely forever) the dollar will remain depressed.

I don't see the dollar rallying any time soon.

[roamer65]

20. ZIRP is here to stay till at least 2011, maybe 2012.

The Fed is going to reinflate, perhaps even mildly hyperinflate. They are not good at managing deflation, but they have some practice at managing inflation. They will force us back into inflation, where they feel more comfortable. If no one wants our bonds, the Fed will monetize them.

Just wait until all of this money gets "velocity" to it and the Fed will let it go on too long, IMO.