Trade

I couldn't resist taking 8% on my FXA short. An 8% swing in Forex in 6 weeks is just too much to pass up.

The short commodities/long financials trade reversed today. We'll see how long that lasts. One thing I do know is that this cannot be longer than a short-term trading phenomenon. Everywhere there is greater and greater evidence that the global economy is plunging deeper into recession.

I am thinking more and more that I am on the wrong side of the bond trade. The strongest bearish argument is that a commodity/China/emerging market collapse will remove a large part of dollar recycling demand for Treasuries. At the same time, the government will be borrowing more than ever to get out of the hole it's dug for itself.

To play devil's advocate, I'd say two things. First, a commodity collapse will strengthen the dollar, which could outway the loss of demand from dollar recycling. Also, Treasuries have been sharing the dollar recycling market with agencies. The short Treasury/long agency trade that I had anticipated has not materialized. Dollar recycling won't go away, and the shift from agencies to Treasuries might keep demand for Treasuries pretty much the same.

Another way to look at this is that demand for credit is very weak. Few want to borrow. Those who do are encountering the greatest tightening of bank credit since the Great Depression. Even prime mortgages are being tightened. It is highly unlikely that Treasury yields will rise in this environment. As for the dollar recyclers, it is the outflow of dollars from the US that pushes yields up. The buying of bonds is on the back end, not the front. There will be no need for dollar recyclers to push down Treasury yields when the dollars don't leave to begin with.

I'll wait for one good down day to buy my bonds. I will take a half or a full position, but I haven't decided yet.