Wednesday, September 9, 2009

The Debts of the World: Debts Markets React to G20 Continued Stimulus

A few days ago, I posted the question of whether high yield debt might be losing its steam (see link below). That was before the weekend G20 meeting of finance ministers.
In the updated HY.NA.CDX chart, you can see how the credit markets have reacted to confirmation that the world will continue to be awash in liquidity (translation - an ocean of dollars provided by coordinated money printing efforts by central banks).

In late August, I also posted a short piece on the new dollar carry trade.

The markets have reacted predictably - the DXY dollar index (which measures the dollar against a basket of commonly traded currencies like the yen and euro) continued to make new yearly lows. Meanwhile, precious metals and base metals have soared. Most notably, gold is flirting w/$1000 ounce. Commodity currencies like the Aussie, Real, and Rand have all appreciated substantially against the dollar. To see a truly remarkable correlation, try superimposing the UUP ticker over FXA and you will see what I mean - the two move in near inverse harmony!

But does this ocean of dollar liquidity herald inflation? Not really. Across the board, macro fundamentals continue to read like deflation - consumer credit, bankruptcies, unemployment, retail sales, etc. are all down. Cautious investors continue to stock up on treasuries - even as the Fed adds to its balance sheet through unconventional measures (e.g. money printing).
Also note how gold's movements are seasonal in nature.

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