Lou Thomas

Dollar Valuations Built Into FOMC Cut?

The issues that you raise are reasonable, but the trigger point is still fairly far in the future, so far as economic stabilization and the end of deleveraging are concerned. Dozens of hedge funds are still to fail and disgorge their assets into the mix, repatriating dollars in the process whenever foreign assets are sold.

I agree that the dollar is an animated corpse, jerked upward by deleveraging, without sufficient fundamentals to give it sustainable viability. But that deleveraging is still going on, and so the dollar still twitches. As for equities being over-valued, Nouriel Roubini opines that the markets could fall another 30 percent, and bases his conclusions on price/earnings.

Yesterday's rally is weird and unwarranted. Maybe something to do with the election? Nobody can seem to figure out what is causing it. Some combination of coming rate cut and Plunge Protection Team, perhaps...? Whatever it is, it will not last long. The Dow futures already are at negative 2 percent prior to Wednesday's open.

Whenever the market jerks upward briefly, as it did Tuesday, we see a pause in deleveraging, and the dollar trends downward, as does the yen. That gives a preview of what might happen when deleveraging actually ends. But that has not yet occurred.

It seems to me that bond liquidation could occur by foreign creditors (e.g., China) even without an rally in equities. If China has less incentive to export to the U.S. because of the tapping out of the U.S. consumer, and needs to start building its own middle class, it could take some of its dollars and try to spend them on its own population. I would guess that before that occurs they'll buy up everything in sight that they might possibly use through their SWF, a process that does not push the dollar downward so long as those selling the assets are doing so to get cash to pay dollar-denominated debts (i.e., the dollars they convert to euros or whatever to buy assets from distressed firms will get converted right back into dollars to pay the sellers' debts).

Frankly it is depressing to see everything falling apart so rapidly. Nobody really knows how this will turn out, and but here's my contribution to the confusion.