The Mother of all Carry Trades

US indexes - in fact global indexes - surged on weekend news that G20 nations shall largely continue their policy of stimulate, print, and stimulate more. The irony at this point is actual strength has the potential to hurt the markets, since it would be followed by tightening measures - so instead the market is having its cake and eating it too. When positive economic data is out, that is good for stocks (for obvious reasons)...and when negative economic data is out, that is also good for stocks because it means no end in assistance from central banks and governments. Gains were broad as the NASDAQ, S&P 500, and Russell 2000 all logged returns of 2.0-2.2%. The dollar continued its downward ways... closing at a 15 month low; and all was well in the world after the hiatus experienced a few weeks ago.

• The Dow Jones industrial average stormed to its highest level in more than a year Monday as a falling dollar boosted prices for gold, oil and other commodities. Stocks also jumped as investors grew more confident that governments around the world will keep interest rates low to help the global economy.
• Investors around the world see the dollar as weaker than other currencies, and so they're using it for what's known as a "carry trade," to finance purchases of investments in other countries. That trend takes the dollar down further when those purchases are made.

We've written in depth about the carry trade here; and it has become the *only* trade in town.

While extremely crowded, so was the "long technology" trade in 1999 and "long US real estate" in 2006. It is not so much the "US dollar should go down" part that has flaws, but the idea that every asset in the world is bullet free and can be bought as long as the US dollar falters thesis that has taken on an "over the top" pretense. But until it ends, it can continue for a long time... so we might be repeating this broken record for many more days ahead. Let it be known however, that when this relationship does shred you will see massive dislocations as so many speculators try to exit the same narrow door. Nouriel Roubini had an appearance on CNBC last week calling this the "mother of all carry trades"- 9 minute video.

What will be interesting is when this trade drives up the price of commodities to a point they turn from "neutral" to a major cost impediment both for consumer and corporation. If oil starts sniffing >$100 can we still pretend everything is fine? For now, that appears to be a worry for another day (month? year?). As the dollar was crunched, gold rallied to new nominal highs, breaking the $1100 threshold to finish at $1101.40.

• Gold prices climbed to another new high Monday as the U.S. dollar sank to a 15-month low. Gold for December delivery soared as high as $1,111.70 on the New York Mercantile Exchange before settling at $1,101.40 an ounce, up $5.70, or 0.5 percent.
• The gains came as the ICE Futures US dollar index, which measures the dollar against other currencies, dropped more than 1 percent to its lowest level since August 2008.

Silver gained 9 cents to finish at $17.46 and as we predicted Friday, the weakness in oil due to a frail US economy we saw in last week's closing session was forgotten after a weekend of speculative joy... crude jumped $2.37 to finish just under $80. What horrific unemployment figures?

If you are wondering where all that liquidity is heading, aside from direct purchases of US Treasuries via quantitative easing by the Fed, another sort of Ponzi scheme is running in the background. As the banks build reserves, courtesy of 0-0.25% Federal Funds rate, much of that money is simply going into.... (wait for it)... US Treasuries. Can you find which shell the US Treasury bill is hiding under? So when you hear of "insatiable demand" for US debt... here is the reality. After all, why lend money when Ben Bernanke offers you risk free returns?

• You know an economy isn’t healthy when banks are using as much of their money to buy government debt as they are to make loans to businesses. That’s just what’s happening right now. At the end of October, business loans were down 17% from a year earlier, while Treasury and agency debt holdings were up 8%.
• ... this helps explain why yields on Treasury bonds are so low even with mammoth U.S. budget deficits. Credit-wary U.S. banks are helping to finance this deficit because they’re afraid to put their money anywhere else. They can still earn a good, low-risk return buy borrowing very cheap short-term money and parking it in higher yielding Treasury bonds. They’re not the sole factor, but they contribute.

Europe and Asia were similarly thrilled by the pledges of sustained easy money. Britain's FTSE 100 rose 1.8 percent, Germany's DAX index jumped 2.4 percent, and France's CAC-40 rose 2.1 percent. In Asia, Japan gained 0.2 percent, China 0.4 percent while Hong Kong (+1.7%) and India (+2.1%) were the standouts. Brazil gained 2.1 percent.