December 16th, 2008

Is That The Sound of the $US Being Dumped?

The 2008 financial crises continues to spread like a bad virus. A couple of weeks ago, the Fed set aside $200 billion to buy credit card, car and student loans from banks and other lenders to try to get money flowing in those areas. Last week, there was news about budget and credit problems at the state and municipality level (several state unemployment funds have scraped the bottom of their barrels). Madoff’s $50 billion heist has decimated the treasuries of scores of non-profit agencies and charitable foundations. Soon it could be university endowments and pension/retirement funds.

As the Treasury and Fed continue acting as backstop by lending and printing money, it begs the question of whose going to lend money to the US? When will foreign purchasers of US debt stop buying government debt or, even worse, start selling off the huge amount of debt they own (and to whom)?

When you think about it, the reason the $US quickly reversed itself and is now quickly heading lower becomes obvious. Last July 14, the day of the Feb backstopping Fanny and Freddie, felt as if someone turned out the lights (see “Central Banks Market Intervention” for charts comparable to those below). The $US started weakening along with everything else priced in $US’s like precious metals and gold. However, that could have been a flash in the gold pan (pun intended) since after surging for four months, the $US has done a 180 degree turn and is taking along with it, again, hard commodities.

Perhaps the other central banks gave the Fed five months to the end of the year to “fix” the US economy by year-end before they ended their support. Take a look at some of these charts:

  • FXE (Rydex CurrencyShares Euro Trust ETF)

  • FXY (Rydex CurrencyShares Japanese Yen Trust ETF)

  • GLD (SPDR Gold Trust ETF)

Something is happening here. You can see similar, though smaller, moves beginning to take shape in other ETFs, like: FXF, SLV, DBA, MOO, DBN. No one can predict how long it will continue and explanations at this point would be mere speculation (as I’m doing here). Perhaps its inflation fears starting to creep in, perhaps its a rush to get rid of dollars and put them into things “more secure”. [Take a look at the TLT, SHY, IEI, IEF – ETFs I mentioned in “The Parking Lots Called ….” on November 17. TLT is up 18.89% since that date.]

I’m guessing we’ll hear more about this over the coming weeks and months. But for now, it’s something that may warrant small positions.

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