MARKET REVIEW: GRAVITY GETS ITS MANMARKET REVIEW: GRAVITY GETS ITS MAN
Friday was the single most pivotal day in the markets this year, we
commented to Addison via Instant Messenger.
Addison is in China... he had just woken up to a fine Saturday
morning in Shanghai... while your Baltimore-based editor was still
wrapping up his Friday afternoon at the Daily Reckoning HQ in
Baltimore. Addison hadn't seen the news...
He hadn't seen gold had just moved to levels not witnessed for nearly
16 years.
He hadn't heard that payrolls were hot, very hot. 337,000 new jobs
were added in October, said the BLS, including an upward revision of
113,000 to the two previous months. Wall street put in its best
weekly performance for nearly 19 months.
He didn't know about the weird behavior in the currency markets
either... the euro made a decisive move higher - high enough to make
a new lifetime record: 1 euro now buys $1.2962 - yet it should have
been falling, according to conventional wisdom.
We pondered why the dollar would fall on a day when short-term
interest rates rose.
After all, it seems that two such ponderous masses as the dollar and
its yield would move together. At least, that's how it would seem to
a couple of British men like Sir Isaac and your editor.
"Gravity," typed Addison. "The structural forces pushing the dollar
lower are so powerful, that one strong payroll report doesn't make
any difference."
By pushing the short end of the yield curve higher, Eurodollar
traders are signaling they expect the Fed to raise rates at both the
next two FOMC meetings, which should make dollar deposits more
attractive.
So far this year, the dollar has been incredibly sensitive to changes
in short-term interest rates, as it should be. When inflation
expectations rise, so do interest rates, and the dollar rises in
sympathy. Not on Friday, the dollar diverged from its yield.
Addison chalks up this strange behavior as just another piece o f
evidence that the dollar's bear market is alive and kicking.
Despite the dollar's swoon, Wall Street's rampant optimism was
palpable. A reborn president, 300k+ new jobs, oil pulling back below
$50 to $49.61 and stock indices surged higher. The Dow gained 360
points on the week, a 3.5% surge, to 10,388. The Nasdaq was up over
3% to 2,039 as was the S&P... it pushed 36 points higher to close at
1,166.
Bonds got crushed. 10-year Treasury yields climbed 16 basis points
last week, and are now selling for 4.19%. The long-end moved higher
as well with 30-year government bonds gaining 15 basis points on the
week. Over the last few years, bond yields have moved in virtual
lockstep with the dollar. "This is not, however, a situation we
expect will continue for much longer," argues the Speculative
Investor. "If the dollar keeps falling then it is bound to cause
inflation expectations to rise. On the other hand, if the dollar
starts to rise then the inter-market relationships that have
dominated the financial markets over the past few years should ensure
that bonds take a hit. In other words, regardless of what happens to
the dollar we don't see much scope for bonds to advance from their
current elevated level."
That the fundamentals are finally exerting their downward pressure on
the dollar despite other existing medium-term inter-market
relationships is great news for anyone holding that strange yellow
metal we shamelessly promote here at the Daily Reckoning.
The conditions for a stunning bull market in gold have been in place
for nearly a decade. Now the toil is starting to produce fruit, and
the markets are beginning to notice...
On Friday, gold made a new 16-year high at $433.40 an ounce.
Gravity always gets its man, and when it does, $500-gold will seem
unbearably cheap.
Tom Dyson,
The Daily Reckoning