Weekly CFTC Report - Kill (Dollar) Bill
This week's CFTC Commitment of Traders reports validates what everyone knows: that the "short dollar" is now the biggest groupthink trade in the world. Or let us paraphrase - the "Ben Bernanke QE2 Is Imminent" trade is now the biggest groupthink trade in the world. One glimpse at the move in the COT data confirms what we speculated earlier when we discussed Goldman's virtual certainty that QE2 is coming in 31 days: that if there is no QE2 announcement, the shock that would reverberate from this as all the Kill (Dollar) Bill trades are unwound, may just blow up world markets and make the flash crash seems like a dress rehearsal for midgets (of the SEC intellectual variety). Of course, what this means for contrarian traders is more than obvious.
First, here is the commodity net spec position summary. Someone missed to tell all these guys that deflation is in the cards. And yes, as the ISM confirmed today, input costs are surging, margins are collapsing, and sooner or later, companies will be forced to raise prices.
Next up: treasuries, which for the second week in a row are up to 2010 cumulative net spec positions between the 2, 5 and 10 year. Here, contrary to above, the bet is that prices will continue to rise ever higher. However, this is not due to deflation expectations, as seen above, but due to expectations that the Fed may soon be forced to purchase up to $3 trillion in USTs over the next year, thus becoming the marginal buyer across the curve.
Last, and certainly not least, is the FX chart, which speaks for itself: the red arrow highlights what the funding currency of choice is nowaday (and where it is headed).
In summarizing the above data: to say that QE is priced in is an understatement. There are currently trillions of dollars on the line that the Fed will launch QE on November 3. The impact of that announcement will be one of a flash of asset price euphoria followed by the realization that monetary intervention will be just as failed that time as it was before, and that even as rates drop to zero, it will do nothing to reduce the excess slack in the economy. As for housing, zero rates will merely keep prices artificially high, and coupled with the recent M3 scandal, it will make transactions even rarer, as few if any will be willing to buy at inflated prices when their economic outlook is not only uncertain but deteriorating. More importantly once the Fed has engorged its balance sheet with $3-5 trillion in assets, all naive hopes that a normal unwind of these economic supports can proceed in a normal manner without triggering full dollar collapse, will be extinguished. One thing is certain: the midterm elections will be a very memorable date. Look for forced leaks of the Fed decision ahead of November, and not just to Bill Gross. Indicatively, we still believe the best tell on what the Fed will do will come in Mid-October when the TRS will disclose its latest holdings, which we will present immediately when available.