A View from the Trenches, November 6th, 2009: "Not out of the woods yet"
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The trade out of the USD (money) and into risky (and not so risky)
assets continued yesterday. Again, as I have written so many times,
this is nothing to be surprised. The trade has had the help first of
Buffet’s bet on Burlington Northern Santa Fe Corp. and the reduction in
crude oil inventories (on Wednesday) and later that of the weekly
jobless claims (yesterday), which came at a level lower than expected
(512k vs. 530k). But the real trick here was the Federal Open Market
Committee’s statement yesterday, with the firm message that low
interest rates are here to stay.
In our comments yesterday, we addressed the dynamics of gold. Gold
is not a hedge against the Consumer Price Index, but against
uncoordinated monetary policies, which are reflected in volatility in
the foreign exchange crosses.
Below I show the intraday chart of the 30-yr Treasury (white line) vs.
the S&P500 (orange line), for yesterday (Nov. 5th, source:
Bloomberg). As you can see, the rally in stocks was not accompanied by
a sell off in Treasuries. Both stocks and Treasuries rallied. We’ve
seen this one before:
The trade therefore was not out of fixed income and in favor of risky
assets. The trade is simply out of “money” and into everything. Money
is here described as the medium of indirect exchange. Money is being
debased and given the slack in the system, there is a case for still
being long Treasuries. This will only help exacerbate the low interest
rate period and the imbalances created by it. Are we therefore out of
the woods with the correction in stocks? Personally, I want to see the
S&P500 close above 1,066pts, for three consecutive days. Yesterday
was one of them. Below, I show the chart for the S&P500 (source:
Bloomberg), to visualize my point.
And, of course, as we said at the beginning of the week, we must enjoy
a period of calmness, without idiotic moves or statements by
politicians. The news out of the UK and European Union these last days
have not necessarily helped us on this regard. But if everybody stays
calm and “plays cool”, we should see the 1,066 level behind us, and we
shall move beyond.
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