US$ Decline / Equity Market Rally Continued, Obama's Orwellian Comment

Arguments about earnings and "green shoots" are a waste of time and actually a distraction when trying to understand the current strength in the equity markets.

We are confronted with a useless barrage of conflicting opinions as the debate rages on every financial news channel. The image that comes to mind right before I turn off the TV and begin writing this missive is that of the pug, Elvis. He is on the floor beside me ferociously chasing his tail. The similarities are stunning. What's going through his mind we can only guess and when he catches the tail he looks as confused as a TV anchor reading an earnings release.

The explanation for the strength may actually be simple:

1- U.S.$ weakness is leading to the inflation trade. As I've written before, inflation is a currency event not an economic event. Please see the July 21st post for more on this topic.

2- Hedge funds are receiving 0% interest on cash balances held at GSEC and the like.

3- Money market funds pay close to 0% interest and in some documented cases have a negative return.

4- Hedge funds received inflows of $146 billion in the last two months. This new money must be put to work; cash is not an option.

To conclude, the equity markets collapsed last year as massive amounts of hedge fund redemptions forced selling. The markets have exhibited the opposite effect in the last few months as cash inflows have forced buying amid a desire to sell U.S. dollars as the dollar continues to decline.

I'm posting the following story simply because I can't believe it. Words like fatuity, absurdity, hubris and his favorite, audacity (the second usage in the dictionary) come rushing to mind. If this story doesn't disturb you then your name must be Hugo or Fidel or perhaps more appropriately, Orwell.

Obama proposes new transaction fees for financial firms' riskiest investments - WSJ
President Obama said for the first time that the government might assess new fees against financial companies engaging in what he labeled "far-out transactions," in order to protect taxpayers from future bailouts. Mr. Obama on Wednesday compared the possible fees to the assessments that more than 8,000 banks pay the FDIC to guarantee deposits. He didn't describe what sorts of transactions might trigger the fees, though the way he described it suggests the proposal could cover exotic instruments such as credit derivatives that some believe played a key role in escalating the financial crisis. He also indicated that the fees might be levied against transactions the government wants to discourage...