Nov 6, 2004

Where we came from

This is an email I sent to a friend on August 26 of 2004.
Hey ###,

Just wanted to pass along that a lot of people are beginning to see the possibility for a long countertrend rally in the dollar. The main premise is that something will squeeze the large build up of dollar shorts out there. My personal guess is some version of Chinese economic softness which leads them to push back the Yuan revaluation. All that needs to happen though is anything to spook the dollar shorts and there will be a substantial and largely self perpetuating rally. In here I am generally feeling like the trends from 03 are about to resume, with the exception of the dollar of course. That means gold and commodities up, yields down, and stocks up.

I can reconcile most of it with current low corporate borrowing rates generating a spending spurt similar to early 2003, generating growth and putting more pressure on commodities like steel. Oil prices have probably topped and if they revert to the mid 30's then tsy yields can stay low as people perceive the fed as having done its work. Most of thesis based on taking what the market feels like it wants to do and then trying to come up with some themes to fit. I have most confidence in the idea that either corporate yields need to rise or stocks need to rise.

And check out that VIX here. An alternate scenario would to continue this whippy grind lower in stocks for another 6 months as all the liquidity simply sloshes around the system while the economy deflates. I can't reconcile this with the low corporate yields though and lots of technical bears out there now because of the new yearly lows made in August. Just wanted to ping this to you as it is a bit different than what we talked about when I was there.


The dollar rally never materialized but you did not need to be short until last week. I would say the markets have clearly selected the positive option with stock prices vaulting higher. Economic growth should accelerate for the next 6 months and 10 year yields will move higher, probably slowly. It seems like oil prices are contained and may head lower. I am not sure in here whether other commodities will be up with the growth or down and providing fuel for the growth.

My reason for posting this is to highlight just how similar this juncture is to the Spring of 2003. The easy borrowing for companies should lead to stronger growth than people are anticipating. I would then expect rates to move higher putting the brakes on again. In moments of doubt I will be expecting all the trends we saw then to emerge.

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