When did the campaign trail for the WHITE HOUSE become a cascade of misdirection from ALL sources? We were supposed to have been given to credible candidates by both parties for the highest office in the land so that we could spend this crucial time debating issues, policies and solutions. Not being mis-directed into fact checking and he-said, she-said nonsense. We’ve set the stage for both candidates to enter the White House without much direction from the electorate on policy. Regardless of who wins we’ve abandoned our democracy.
Update on Bank Risk: Looks like Bank CDS narrowed today, however the 3 month TED spread has broken its recent resistance. Mixed signal, but I’d lean on the widening TED as the dominant indicator.
All this on a day where the 3-month T-Bill closed yielding zero percent. Last time any T-Bills yielded zero percent was just before the most recent bout of stock market bi polar disorder.
Oh, and did anyone catch the spazdic Repo rate print at the time of the debt ceiling issue? Showing the overnight and the 1-week Repo rates below, but all tenors had the same event.
In other news, anyone notice that the US is back to the number two safest sovereign credit. The rest of the world must be really upside down if we are the most sober drunk people in the room. Note, however, that the party probably won’t last long as the cost of insuring the US’s debt has been steadily rising since it fell post Lehman.
Lastly, it occurred to me to spend a few moments looking at the US Dollar Index, DXY. I wanted to see if recent stock market performance was in part attributable the the known current inverse relationship to the USD. This quickly inspired me to take a look back at the DXY chart, as far as I could go. A few things stood out. The last two times the dollar rallied considerably were 1. during the late 1990’s when the US began actually running a budget surplus, and rates were at the top of the cycle. and 2. at the peak of the crisis in 2008/2009 after Lehman’s collapse and liquidity crisis. Additionally, the dollar rallied last year at the onset of the Eurozone Debt Crisis 1.0.
It is of interest to note that the most recent bout of risk avoidance did not dent the prevailing dollar weakness, and has not caused a dollar rally, like in 2010 or 2008. Despite the flows into Treasury Bills over the last few weeks, historic low rates have managed to help keep the dollar massively weak, relative to other global currencies.
Additionally, something else stood out. The dollar seems to have maintained three prior strength/weakness cycles, peaking in 1969, 1985, and 2001 respectively as illustrated in the chart above. The rhythm to this cycle has been about 15.5 years. If this cycle continues, we would be due for a major dollar rally circa late 2016. It is of interest to note is that the policy decisions in the US best suited to reign in our debt problem today, cost cutting or tax increases (or both), will likely have strong dollar consequences. What is also of interest to note is that 2016 will bookend the next election cycle.
Lastly, the chart above illustrates the US Dollar Index plotted versus the S&P 500 over the last 14 years. The chart represents a spread between the DXY and the SPX. In 2002 the market bottomed into a weakening dollar, having come off of strength in the late 1990’s due to sound balance sheet management under Clinton. The 2008 market bottomed into a strengthening dollar (but relatively weaker than in 2002), due to prolific balance sheet expansion under George Bush to fight two wars and to launch TARP. This cycle has been a 7 year cycle. (I did not post a longer series because the nominal price of the S&P obfuscates the spread data with the S&P at lower prices, and I was not sure how to create a log normal series.) Nonetheless, the 7 year cycle also culminates in the 2016 time frame, if this were to repeat again. If these cycles collide, we could have a fairly draconian market plunge, with massive dollar strength weakening the economy at precisely the time the next major recession hits.
There may be a reason the 5-year treasury is yielding 1% these days. Its probably because we are headed for massive deflation.