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Wednesday, November 4, 2009

Market Thought... new equation?

The Fed vote said it all. Unanimous to keep rates low. So much for the rhetoric about rising rates. Wonder why the WSJ even allows Fed Governors to write op-ed pieces, when the governors themselves do not practice what they preach.

Fundamentally, nothing has changed. The low rate liquidity that has been driving this rally is still very much in play. (The unanimous vote is what is really bothering me.) There is no indication from the Fed that they will do anything regarding the excess liquidity, despite the positive data that is being seen. (CSCO's report is simply too telling.)

One market indication that I found interesting today was that the 10yr note declined, causing the yield to rise.

Granted the trend of the yield is still negative, but the fact that it went up today, imo, means something. The 'reflation' is kicking in, and the bond market seems to want to anticipate the inflation.

Along with the dollar decline, the market acted like crap after the decision. The combo troubles me.

The rise in the 10yr yield, while liquidity is everywhere (with the dollar falling) and the equity market now sluggish, to me signals a market (bond, equity and forex) about to get hit by inflation. (Equity markets do not like this type of inflation... aka stagflation)

With this scenario, IMO, the TBT is still the play.

If the new equation takes hold, ultimately the bond markets will force the hand of the Fed, and they will have to raise rates. Similar to what Volker did in the late 70s.

IMO, this delays the dollar rally, and takes Roubini's threat of the dollar carry trade unwinding off the table. (Although holding some UUP would not be a bad idea for a hedge, in case something triggers the carry trade unwind.)

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