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Wednesday, September 26, 2012

$ heading up?

Rosebud - Vigilantes
QE3 made a commitment to keep rates low for a longer time and to buy Treasuries and mortgage-backed securities monthly until the unemployment rate drops a meaningful amount.

This is an interesting experiment for market observers.  Low rates typically push the dollar lower as speculative global money, like a roof leak seeking the path of least resistance, snakes away after higher rates elsewhere.  But so far, the dollar has risen since the 9/13 QE3 announcement.

This probably isn't good for stock investors (unless you're a boring dollar-cost averager, building a nest egg for retirement and seeking to buy at low prices!) because there has been an inverse relationship between the dollar and stock prices.  Check out this chart of UUP, a dollar bullish fund:
Source: ETF Trends

CLICK TO ENLARGE  Although this is early in the game, it bears watching.  Market participants of a certain vintage remember the days of the "bond market vigilantes."  Reminiscent of a hanging posse, those were days when the bond market looked at economic conditions and moved interest rates higher despite Fed policy.

This interests me for the simple reason that I've come to believe that there are underlying economic laws that can be violated for only so long.  One of those laws is that controlling prices, as Nixon did and as Bernanke is doing now, builds pressures that eventually cause prices to rise sharply.  In the present context, these pressures could be building on interest rates to result in a sharp spike down the road.  In conjunction with the accident waiting to happen (that regulators and legislators refuse to deal with) known as "high frequency trading," the end result could be ugly.

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