November 21st, 2009
Have you heard the story about the man who bought a U.S. Treasury Bill for $1000 knowing before hand that he’d only get back $995 at the Bill’s maturity. “What kind of idiot would do something like that?”, you ask. It’s irrational, it doesn’t make sense. Give someone $1000 knowing you’re going to get back – not more money in the form of interest but less money. You’re paying someone to take your money. Again, it makes no sense.
I pondered how and under what circumstances something like this might make sense and then – I figured it out. No one living in the US would do something so irrational. But there are some who would. People who live in, do business in and aren’t dependent on the $US might do it. If I lived in the U.K., for example, I might convert my Pounds into $US in order to buy some Treasury Bills if I thought, or knew, that when I converted those Bills back into British Pounds they converted back into more Pounds than I original paid. As a matter of fact, if I lived almost any place in the world other than the U.S. (or China, for that matter) I could see making a profit by parking my money in $US’s if I had a fair degree of certainty that $US’s become more valuable to me in my currency down the road. What I gave up in interest (or paid in “negative interest”) I might recoup in exchange conversions.
That’s what I’m guessing might be happening. Foreign investors or sovereignties are looking at the distinct likelihood that the $US will soon increase in value, more than the increases over the past 4 days (the DXY, US Dollar Index, is up to 75.61 from 74.88, or 1%, since November 16).
Does this signal the end of the Dollar’s decline? Has a deal been made to prop up the $US. Does this have anything to do with negotiations to have the Chinese allowing the Yuan to edge up in value also?
One can speculate about all sorts of conspiracy theories that are way beyond our understanding or comprehension. What we do know and fear, however, that a rise in the $US, a rise in the US Dollar Index, will probably be detrimental to US stocks. Perhaps that’s what has lead to the market’s recent weakness.
Something like this was last suspected about a year ago (November, 2008) when the rise in the Dollar’s value of came to a surprising, abrupt and screeching halt. Perhaps its mirror image has begun to be re-enacted today. And what better time to pull something like this off than Thanksgiving week, a time when many have already begun taking time off for an early Holiday break.
By the way, while you’re contemplating, look at the tops that have been made in the graphs of most of your foreign exchange and foreign market ETFs. Conspiracy theories are so much fun …. unless you’re counting on a continued fall in the $US.