Dollar drop unleashes buying frenzy
Dovish comments from Ben Bernanke boost global markets, especially emerging economies and materials stocks.
The market's cheap-money addiction is in full effect on Thursday. This after a tidal wave of buying pressure was unleashed by Federal Reserve Chairman Ben Bernanke's comments Wednesday night.
He noted that a highly accommodative policy stance will be needed for the foreseeable future and that the current unemployment rate of 7.6% may overstate the health of the job market. He also said it's too early to say whether the U.S. economy has weathered federal budget cuts.
Traders went nuts. The dollar plummeted against the euro and the yen, bolstering beaten-down emerging-market and materials stocks for the first time since April. And by all indications, the uptrend is just getting started.
And that's because not only is the move in emerging markets being driven by the vagaries of the currency markets -- in which a weak dollar boosts the performance of foreign assets due to changing exchange rates -- but the economic fundamentals are improving as well. Or are at least showing signs improvement is coming.
Consider Wednesday's disappointing export data out of China. June exports fell for the first time in 17 months by 3.1% (vs. a positive 3.7% result that was expected), while imports were also down by 0.7% (vs. the drop of 0.3% expected).
The team at Capital Economics notes that official efforts to clamp down on illicit cross-border capital flows may have played a part in the export slowdown. Remember that liquidity has been tightened in the Chinese shadow banking system, and much of this was used to finance black market trade.
Moreover, with evidence building that economies in Europe and Japan are regaining momentum, manufacturers in China could be preparing to spool up again as evidenced by stabilization in raw material imports, shown above.
Not only will this help boost emerging market stocks and related plays, such as the iShares Emerging Markets (EEM) but it will help steelmakers and other metal companies that have been left for dead over the past six months. The dollar's drop helps here too by bolstering commodity prices.
Disclosure: Anthony has recommended EDC and MTL to his clients.
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The markets wait all day for the Fed minutes, do a little up and down action which is to be expected when nothing of much consequence is in the report, then Bernanke takes to the mic after hours, makes a few comments, and the markets explode today.
Tell me the markets are not being manipulated by the Fed. It has nothing to do with earnings, fundamentals, or anything else that normally dictates market direction. It is all in the hands of ONE man and his Wizard of Oz status that our government has bestowed upon him to move the markets dramatically with just a few words. Be afraid. Be very afraid.
Total collapse of the US banking system by Sept 13,2015
that is when the Fed is going to stop pumping money into the system.
The selling of dollars in the currency markets will means that our trading partners are getting out of dollars and into other currencies. The effects will be two fold.
First, imports will become more expensive, thereby reducing the outflow of dollars to buy foreign manufactured goods.
Second, US priced goods become cheaper to other countries as less of their currency is needed to buy them, increasing US exports. However, because we will be selling more of our goods overseas, we will have less supply here in the states and prices will rise (inflation). More jobs will be available to service the overseas demand while domestic prices rise reducing purchasing power.
One hand gives and the other hand takes it away.
Ok so the Fed is propping up the market and they like it, they pout when there is a hint they will be taken off the sugar tit and the market drops 600 pt. in just a couple of days. Bernanke caves and even though half the reserve board wants to start cutting back Bernanke agrees to keep propping up the bond market.
Bernanke is retiring in January after a 2 year short term, I guess he don't want to watch the crash on his watch. What do you think will happen to Q3 after next January? Does not anybody see this coming?
Flushing out the last of the chumps before January, this thing is going to crash so hard the ground will shake.
Offthedole, I can give you a brief simplified scenario of what happens when the bond buying stops.
Consider this. The fed injects currency into the banking system allowing large sums of capital to be available. Since the banks have money (from the fed window at practically 0% interest), they don't have to pay depositors any either. So the money they get from the private sector can be used to create loans at low rates because their cost of funds is low. Low interest rates in mortgages, car loans, business loans, etc.
When the fed stops injecting this money and as currency held by the banks dries up by loan activity, the banks will have to pay depositors more to get them to bank with them. Interest rates go up and "normal" market forces of supply and demand for funds happens.
If there is a strong demand for loans, rates will rise faster, and if there is still stunted economic activity, then demand for money will be lower and rates will rise slower, or even remain the same. Since there is the "carry trade" where international traders borrow money from countries with low loan rates and puts them into countries paying higher rates (thus generating profits), excess funds in any one country is sucked out and put to work creating profits for these traders. The amount moved can be massive and in the billions. Thus excess currency is shifted from one country to another. Also, as you occasionally hear of how a country's central bank will move money into or out of their accounts to keep the value of their currency within a range to prevent excessive economic shocks to their industry and trade.
Dollar devaluation comes from a variety of origins, and nobody is saying that
Central Bank purchases are the least of them, however, price appreciation
is a far greater concern at present, at least among those individuals not in
possession of large sums of money or enhanced incomes. True dollar
devaluation will not occur until hyperinflation occurs.
As far as buyers of Treasury Bonds go, the charts will assist you in configuring
where our monies are lent from. Despite all the hyperbole, the situation is simply
that our dollar is still king of the currencies and will probably remain so, given our
potential and special nature as an economic powerhouse. There will be plenty
of demand for our dollars.
No, the Federal Reserve is 'not the US government' but ask yourself one key
question: Do you honestly prefer that the power to create and disseminate
money returns to the U.S. Congress? What else might result from this, do
you think? Everything we have witnessed about the excesses and corruption
emanating from our legislators throughout history is evidence we must restrict
the money control from 535 individuals only concerned with their next election
and who constantly put the welfare of our great nation at jeopardy by doing so.
What is criminal is what those 535 have been allowed to do all these years
without impunity as if they were a 'royal class' immune from the sanctions which
we peasants have to endure and obey. In America no-one should be above the
law, ESPECIALLY those who legislate it and enforce it.
Other than that, everything else about your post has great merit.
I can see the Fed's balance sheet topping $4 trillion next year. it will be politically impossible for the Fed to unwind this. In fact, the only course of action will be to increase the balance sheet even further.
Wall Street will rue this party.
Forthose of us who have some savings, the FED is de-valuing the value of our dollars. If the FED weren't buying all those bonds, wouldn't someone be willing to pay higher interest rates when borrowing my dollars (already in the bank) instead at a fair market rate?
The Federal Reserve is not the US government, but rather, a consortium of the fattest-cat bankers. This is criminal.
The dollare weakening is good for USA production and in many ways, good for our economy, though it will be rough on consumers as inflations sets in.
There have been comments about the USA government needing to stop printing more money and get back to fiscal responsibility.
Think about that and ask yourself... "Why?" Why do we need fiscal responsibility? The USA so far has been able to spend and spend without anybody calling them on it - nobody, not even foreign or domestic lenders.
Despite the USA pumping trillions and trillions of fake dollars into the global money pool, the world has not responded negatively. The dollar remains fairly stable.
So, WHY? does the USA need to be fiscally responsible? In today's world, it does not have to be financially responsible as long as there is no other currency to challenge the USA dollar and today - there is not currency in sight or on the horizen or even in the imagination that can unseat the dollar.
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