Amazing! The recent victory of rhetoric over reality!
Greenspan's very slight intimation that "someday" rates will have to rise, sent the dollar soaring and gold and the income markets plunging!
Now, this could all have been a shot across the bow of the CARRY TRADERS. And, if it was, it worked!
Liquidation of all manner of income was en masse, and violent. The NYSE "new lows" list is filled with closed end income funds and preferred stock!
Since many closed end income funds were already selling at a discount to NAV, it will be interesting to see how much damage was really done, when things settle down.
In truth, income and metals had "got ahead of themselves," at least as far as The Street and The Fed were concerned.
So, it will be fascinating to see if Greenspan actually follows up the rhetoric with a REAL INTEREST INCREASE later this year.
I still say: He WON'T!
A STRONG DOLLAR WILL SINK PROFITS ON WALL STREET.
AND, A CRASH IN THE REAL ESTATE AND MORTGAGE MARKETS COULD BRING DOWN SOME BIG INSTITUTIONAL INVESTORS. EVEN FREDDY AND FANNIE COULD BE PUT AT RISK.
And, Greenspan's confidence in recent "hedging of risk" seems like a risky two edged sword. A Rube Goldberg Devise really!
BECAUSE, WHEN ALL OF THESE "EXOTIC DERIVIATIVES" START KICKING IN, WHO KNOWS WHAT WILL HAPPEN?
INSTEAD OF "PROTECTING" INSTITUTIONS; IT MIGHT CAUSE THE ENTIRE MESS TO IMPLODE IN ON ITSELF.
REMEMBER, THERE IS NO FREE LUNCH IN ECONOMICS.
There is also a good arguement that the recent unpleansantness was a "conspiracy" to boost the dollar; in the face of record US deficits, and increasing geopolitical doomsday scenarios in the middle east and in Iraq.
Clearly, recent dollar events have defied any logic. With the Iraq War running out of money now, and record twin deficits in Washington, where's the beef for a strong dollar?
And, the giant plunge in gold and silver and oil was too clever by half!
I mean, the House of Saud is bombed; and oil and gold drop sharply on the news? Pleaseeee!
MY HUNCH IS THAT THIS IS ALL A "MARKET EVENT" THAT IS BEING MANAGED BY THOSE EVER POPULAR "MYSTERIOUS FORCES" AGAIN.
THE STRONG DOLLAR CASE MAY BE NECESSARY FROM THE POINT OF VIEW OF WASHINGTON;
BUT IT FLYS IN THE FACE OF ALL KNOWN MACRO-ECONOMIC THEORY.
SO, HOW STRONG IS THE DOLLAR REALLY? NOT VERY!
