Quote from Mvic:
The $ could get very important fast. Until now stocks have been doing well in an environment of a falling $ as one might expect them to. But at some point the falling $ is going to hurt the economies of the people we are selling stuff too. Notice how the EEM stalled out the last few days and the falling $ is a major headwind in EM both in terms of equities but also in terms of exports and cost of imports. In short the falling $ represents a liquidity squeeze on the rest of the world but EMs especially.
Also read that if the Chinese let the yuan appreciate against the $ it will create an immediate increase in the demand for oil as all of a sudden oil will be cheaper for the Chinese. This will mean higher oil prices and higher costs in the US. In fact if you consider the effect that China's artificially low yuan has on our own inflation figures any revaluing of yuan (and we all know it is a matter of when not if) will have a significant impact on US inflation.
The late players to the carry trade (and there are many ) are taking on a huge risk with the $ at current levels. When you have people on Et employing a version of the carry trade you know that the weakest players are in.
I know the bulls are having their party right now and good for them. I am skeptical because I see so many things lining up from the mispricing of risk, to the record levels of leverage by the weakest hands, to the pressure on margins world wide by the $ decline, to the quant models that are not based on all the possibilities just the recent rosy past, to the above, that I agree with Hussman when he makes the point that maybe markets move another 5% higher this year but what do you risk for that 5%. Since I am seeing a perfect storm of factors that could make any significant market decline turn in to a liquidity squeeze of epic proportions( that the Fed will large be unable to control) coming together, I think the risk being long for all but the most nimble and careful traders is not worth it for 5 or even 10%. The fact that everyone and their mother seems to be long and loving it with little if any protection or even concern just adds to my conviction that this period will end no differently than all the previous periods like it in history because while black boxes can run things in the short term there will come a time where market action will not conform to the models they have been programmed with and then human psychology will take over once again.
