Last week we had one of the most volatile weeks in the stock markets that we had seen recently. Globally most stock markets saw a significant and sustained downturn in stocks.
Whether one blames Ebola, ISIS, lack of growth concerns or a mix of all of the above and then some, the markets were definitely very concerned.
The slide started around Oct. 8, when the Dow Jones Industrial Average closed near 17,000, and by Oct. 16 we saw 16,100. One would imagine that the truth of a house of cards economy was finally dawning on the masses.
Right on cue, St. Louis Federal Reserve Governor James Bullard came out and made the announcement that he believed the Fed should consider halting its tapering program. In simple words, he wanted the Fed to continue the quantitative easing, albeit at a low rate of $10 billion a month or so. Instantly the markets rejoiced and since Friday we have seen a rally, with Dow now sitting at 16,600. Gone are the worries of Ebola, ISIS and declining world growth.
As long as the Fed is continuing to serve up free money, who cares about inconvenient truths like slow world growth.
What the honorable Bullard is not telling us is that rising interest rates in the U.S. would crush the Fed much faster than it would most businesses. I do not know about any other business that who has bought $4.3 trillion worth of U.S. debt like the Fed has. Any serious interest rate increase would bankrupt the Fed.
All those in the camp of "interest rates will rise soon" (I find it incredible when I see the talking heads on CNBC spout this line with no regard to any fact checking as responsible journalists) are all in for shock and surprise.
Last week we also saw the 10-year Treasury fall below 2 percent. Now it is back above 2.21 percent and rising. Let this move back up not fool you, dear reader. You will see the 10-year Treasury yield fall below the 1.5 percent mark not too far off in the future. With German bonds below 1 percent, French bonds in negative territory and Japan in a perpetual mess, the 1.5 percent seems like a bargain in today's crazy world.
As the European and global money chases yield, the investors are buying dollars and selling their respective currencies. As a result the U.S. dollar will strengthen some more while the euro falls to around 1.20 in the next few months.
Word of caution in terms currencies: As much as I do not like the fundamentals of the U.S. dollar, we will see the dollar rise.
Never stand in front of a speeding bus — you will be crushed. So I suggest selling the euro and buying the U.S. dollar for the short-term trade of the next few months.
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