Here's the semantics, and my SWAG. There has been excess "liquidity" provided by the CBs. This has really occurred in spades over the last two months, but especially between 11-10 and 12-8 (see my previous post for the numbers). They added 25.589 billion a week during that period, and that's twice the rate of the last year.
jessel.100megsfree3.com
Thus it appears some "emergency" was going on behind the scenes, and I have theorized it was monetizing some of FNM offside (too long duration)portfolio positions. More clues to that, note the quid pro quo, a FNM purge, somebody has to go.
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Theory two relates to Hoyts and Xie's reference to Japan and China reserve holdings also being too long in duration.
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In otherwords three of the main bond portfolio holders (FNM, Japan, China) have been too long in duration, and probably still are too long. Since they are such huge buyers, it has distorted the yield curve, making it too flat. And as Hoyt says, this is speculation, not standard reserve positioning. I believe the Fed has been monetizing to allow some shifts to shorter duration to occur. I also believe (and Hoyt says the same thing), that there is a correlation between the weak USD and monetizing. The commercials have picked up on this, and are positioned accordingly for a widening of the yield curve; long EDs/bills, short 5s, and 30s. They are also long the USD, but sold off about a third in the feeble little rally of the last few weeks, which I thought was revealing.
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If the USD does a little bottom testing by year end, do they load back up? So as Hoyt suggests, any USD rally will be a process, and picking a top might be impossible at this point.
In the "financial disturbance" Hoyt is alluding to, money (liquidity gets overused and can mean contradictory things) will filter back into greater "safety", and that means less credit risk, and shorter duration, translate wider credit and yield spreads, and certainly less stock market exposure. We all should know what that means: a sell off in the more aggressive trades out there, which Hoyt seeks to define, and then offers a series of SWAG timing scenarios.
All this money printing has just caused an even greater surge of speculation in "everything". So we ended on Dec. 8 with a hyper stimulated financial system, and clearly not business as normal (which was already incredibly loose). However, if the Wizards are to engage in successful currency interventions (and I would say inflation fighting too boot), the excess printing of USD at twice the normal levels must cease, or at minimum least "get back to normal" ($12 billion a week). This will be a steroid withdrawal to the markets, and all the speculation out there. Indeed in the latest week the perms (9x), fed bought outright, and foreign custody holdings were NEGATIVE -1,212 B, signalling a withdrawal of excess liquidity may be underway? That will be the key to timing going forward. |
