Did you hear that sound today?
It was the sound of our currency collapsing.
The dollar sank to an ALL-TIME LOW of 78.19 against it's indexed basket of currencies and, if the Yuan were included, we'd be down around 75 as we've lost 10% against that currency alone in just 2 years.
Today we got TERRIBLE news, it seems home sales are now off 8.3% – SINCE LAST MONTH! That is almost double the expected 4.6% decline but, even worse, the median price of homes fell from $243,900 last year to $225,700, a 7.5% decline. The rate of new home sales dropped 21% since last year.
Despite all the bad news, the market went up, a move we caught right at the beginning of the afternoon rally when I noted: "Strong demand for treasuries – 4.25% for $13Bn, huge buying interest probably based on fears the Fed will continue to lower rates but the demand is a surprising and good sign that foreigners (including China) are willing to support the Fed move. That should goose the markets a bit, now we’ll see if refiners can recover.. " What is going on is that the dollar is now so low that people are starting to play it like it's some stock that's going to bounce. This is based on a global premise that fundamentals are meaningless in trading. Investors are rushing back into the carry trade, borrowing Yen at low interest rates and then using them to purchase dollar-denominated assets hoping to make money off both the interest they collect as well as a return of the dollar to "normal" levels.
Brazil's Real is at the highest level it's been against the dollar in 7 years, the Columbian Peso is at an all-time high and that means, in addition to the record high corn, wheat an soybean prices we are paying, we can look forward to price hikes in textiles, bananas, sugar, coffee and cocoa (and cocaine). It is very important to note that Columbia and other South American countries have been operating under capital controls that were implemented last year to curb the appreciation of the Peso to the dollar but IT DIDN'T WORK! Our currency cannot be saved by the intervention of foreign governments.
"Currency controls are a risky, stopgap measure, but some gaps desperately need to be stopped." – Paul Krugman
And what is the net effect of a declining currency? Why it encourages you to spend of course! There is no reward for saving as the money you save is worth less when you want to spend it later and a low-interest, high inflation, devaluing currency environment can only have one possible effect – it forces people not only to buy as much stuff as they can but to buy more stuff on credit, because if they wait too long they can no longer afford the stuff they can barely afford now.
That's why MA had a great day – charge it! Oil shot up to $82.88 with an insane 342M barrels traded in the front month contract (although the count is STILL 349M open barrels – no change all week!).
This scam can continue as long as our banker (Japan) keeps lending us money at ultra-low rates because THE YEN IS THE ONLY MAJOR CURRENCY WE CAN AFFORD TO BORROW:
Japan's 0.5% lending rate has devalued their own currency against the rest of the world allowing the carry trade to flourish. Were EITHER the Yen to appreciate in value (meaning you need more foreign profits to pay back the loan) or the BOJ changes policy and raises rates more than a quarter point (a 50% increase over the current rate) then the consequences for the US economy could be stunning.
Meanwhile our markets continue to move higher, despite the news that 100M homes in this country, which had a median value of $248,400 in 2005 and $243,900 last year, are now down to $225,700. That's $2.27 Trillion that has simply been sucked out of US homes! That's $2.27 Trillion less to borrow against, $2.27 Trillion less money realized when selling a home, $2.27 Trillion less in net worth (and for poor folks, the home is the majority of their net worth you know!), $2.27 Trillion worth of "value" that the banks think they have backing their loans that isn't really there…
That's a lot of money to ignore. And – even though that median home is still worth (until the next survey) $225,700 – don't go trying to exchange that home for one in England, British home values have increased 10% over the same period AND the dollar has lost 15% against the Pound so that $248,400 of 2005 buying power would only net you $172,660 worth of British home in 2007.
Now let's get back to that market rally!
