The Diminishing Safe Haven Matrix

It would be prudent to watch the US Dollar Index closely in coming sessions, and the most useful indicator which can be traded is the ETF that represents a bearish view on the Dollar Index, UDN. Monday's drop of the US currency against many major currencies could be a harbinger of some larger dislocations in the forex arena in coming months.

Coordinated inter-market strategies are starting to reveal themselves again as risk aversion appears to have diminished somewhat. The Citigroup (C) deal has undoubtedly provided another layer to the safety net under the banking sector and with ever increasingly new dimensions of public sector underwriting of the systemic default risk, notwithstanding the distress still being felt by many hedge funds, we should expect to see a slightly more benign environment for renewed asset class speculation.

The way that asset class speculation may unfold in terms of inter-market strategies is laid out very simply in the following Diminishing Safe Haven matrix.

Less risk aversion -> Higher US Equities prices -> Lower US Treasury prices (especially long term) -> Lower appetite for US dollars -> Higher gold, oil and other hard asset prices.

Needless to say, this is a loop that will ultimately become self-defeating and in the longer term US equities will have been snookered. But we have a ways to go before that unfortunate spiral kicks in.

Every once in a while, during plateau periods of cheerful sentiment when traders seem to get glimpses of the green shoots of recovery and believe that the worst of the recession has already been discounted, and we may be in such a period now, the loop will cause some to worry about what the next critical scenario for markets might look like. Somehow it doesn't feel as though it is going to be a pleasant scenario.

Disclosure: None.

Comments

[Greg Pinelli:]

Well written and to the point..That NEXT scenario is most interesting. My take is we are very likely to see a divergence coming. Equities will likely take another dose of strong medicine in the early Winter..only this time the US$ may not fare so well as a safe haven..and UDN looks very appetizing with far to go.

2008 Nov 26 09:41 AM

[axelrod608:]

Yes, excellent article. I don't know what anyone else is doing, but I'm adding to positions in Canadian oil royalties while oil prices are down and the dollar is high. Recently one of them was selling so low, the yield was over 40%. We may use less oil in the future, but we are NOT going to stop using it completely..

2008 Nov 26 09:59 AM

[John Lounsbury:]

Good comment. I have a wider window for a potential bottom for the current bear, which extends to 4Q 2009. On the other hand, there is a small probablity that the bottom is already in (7552 on the Dow, 11/20/2008). I agree with the outlook for the dollar because the stimulus of money dropped from helicopters has a high probability of over shooting the amount needed to stem deflation.


On Nov 26 09:41 AM Georealist wrote:

> Well written and to the point..That NEXT scenario is most interesting.
> My take is we are very likely to see a divergence coming. Equities
> will likely take another dose of strong medicine in the early Winter..only
> this time the US$ may not fare so well as a safe haven..and UDN looks
> very appetizing with far to go.

2008 Nov 26 12:28 PM