10/08/2010 - The Dollar Melts, The Dow Cooks

The Fed is now intent on finishing what they started in 1913. The US dollar is history. Whether it is quantitative easing or debt as far as the eye can see, the currency has become the sacrificial lamb. The Fed is of course buying Treasuries to manipulate the interest rates lower than the market would price them. The Fed's chief trader, Brian Sack, gave a speech this past week (10/4/2010) in which he detailed this idea. He also mentioned that the Fed figured to manipulate the stock indices higher as well by using the same strategy. The link to the speech is:

http://www.ny.frb.org/newsevents/speeches/2010/sac101004.html

I would suggest we all read what the new leaders have to say and what they want from us. With out a doubt, they want the stock indices higher. The economy is still in a fetal position from the real estate depression so the Fed's only recourse is to inflate, inflate, inflate. Now, for the first time in history, they are even putting their objective in print. They are backing up their words with $30 billion dollar injections into the system each month. Here is what is going on.

The Fed has $2 trillion dollars in bad MBS (Mortgage Backed Securities) paper. They obtained the paper by taking $2 trillion dollars from the Treasury and then buying the garbage from the big banks. This expanded the Fed's balance sheet and they are not going to allow it to contract. As the MBS garbage rots and dissolves, they are printing up some $30 billion dollars per month to buy Treasuries from the big banks. That gives the big banks ammunition to buy stocks knowing that another $30 billion is coming next month and another $30 billion is coming after that. The current rally is completely artificial but that's the way a fix works. Back to the Fed.

So now the Fed is going to exchange the MBS paper for freshly issued US debt Treasuries. The heist should be completed in a year or so and the Fed will then have $2 trillion in Treasuries. Ain't that swell! But what about the poor old US dollar that they are throwing under the bus?

The Fed wants control and owning the debt is control. When they finally kill the dollar, the Fed will no doubt issue some currency that they themselves conjure up. To the rest of us, we can look at the chart below for an insight as to what to expect going forward. The US dollar is the green line, the Euro currency is the gold line, the Dow is the blue line, and the Euro stock ETF, VGK, is the black line. Very simply, the dollar is inversely moving everything. Since we now know the Fed's full intent is to destroy the dollar, we can assume that other asset classes will be inflated. Enjoy the 'rally'!

Dow= blue, VGK = black, US dollar = green, Euro = gold
Chart courtesy StockCharts.com

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.