John Lounsbury

Dollar's Stunning Drop, Ten-Year Treasuries' Huge Rally - What's Going on?

Excellent article and good comments. I'll pick a few nuggets (dots) and try to connect them.

1. Quantative easing, or the expectation of same (mentioned by jepittman), gives strong support to treasuries.

2. Banks are being pressured to lend more as treasuries rise because these assets do not pay enough interest under these current conditions to keep the banks cash flow positive (mentioned by jepittman). However, banks may still be more concerned with solvency than profitabliity at this point and keep on buying treasuries until their future exposure to toxic debt is better understood.

3. The major problem may still be risk of deflation (mentioned by cruiser 9806), at least for a while. The big question is: How long?

4. The reservoir of dollars that can be released, when when those held in reserves are deemed to be excessive for remaining bad debt exposure, may flood the system, pushing the dollar down and causing treasuries to be dumped at much lower prices before the dollar drops further. This would be the time of sky-rocketing interest rates and hyper-inflation. (See Kunst and Gregory Orr)

4. Stocks may have gone up for the past month, and may be at the 50-day moving average (mentioned by Alex Trias), but charts are showing an acsending triangle pattern usually seen before break-outs. The question is: Up or down? I am an amatuer viewer of candlesticks and see none of the customary bull or bear signals. The only significant pattern I see is a divergence for the S&P 500 rising for the last 3 weeks while volume is falling, a bearish indicator. However, I have long since learned not too depend on individual timing signals. We'll wait and see.

The author has undertaken an ambitious task in addressing the anomalies of the current markets, especially treasuries and the dollar. I think he has done an excellent job of putting issues and questions on the table. It's too bad that none of us has better answers, but the commenters may be doing better than most with these questions.

One last thought, I read somewhere last week (sorry I can't remember the reference) that the sudden drop in the dollar was no more than a 50%-60% corrective pull-back after the rise of the past few months. I'm not ready to buy that, but somebody has to right and maybe its not me in this case.

5.