I don’t write on Thursday evenings (i.e. don’t post on Fridays), during the sailing season, as I race on an SR21 in Lake Ontario and have no time to write at night. But given the action in the markets yesterday and the fact that the race was canceled due to poor weather conditions, here is a quick summary of thoughts:

-Yesterday, I pointed out that both the USD depreciation and oil crude appreciation were not consistent with what the markets seemed to be expecting: Higher interest rates. I therefore suggested the explanation was that in fact the smart money believes the accommodative policies of the Obama administration are here to stay for longer than most thought…I am now more convinced of this alternative explanation and yesterday, for the 1st time, I think we saw all the stars aligned: Weaker gold, weaker VIX, really tighter credit (CDX IG12 closing at 117bps and catching up with the LCDX12 stellar outperformance), weaker USD, higher crude, higher EUR/Yen cross, etc. etc. On the back of what? On the back of a stronger than expected nascent recovery (shy recovery) in the housing market. Do I think the market went to cover shorts? Not really. I think this was a directional trade this time, fuelled by convexity hedging in mortgages, which brings me to my next point:

-I ‘ve always sustained (as a contrarian to many) that the yield curve was going to remain steep…and steepened it has over the last 3 sessions. You add this to the approx. 30bps Libor-OIS swap spread and the combination gives you a fertile ground for appreciation

-We still need to see investment demand picking up here. We won’t see consumption driving us out of the mess, but investment demand. So far, I think we’re getting closer and closer to that point, and equities are already discounting the fact.

-Lastly, I really fear the USD will collapse this time. Think of this: If we are really facing the definitive recovery, the starting point is a long-term benchmark rate of 4.5%, with high unemployment and colossal structural fiscal deficits in the US and….with record low fed funds rate. For this latter rate, the sky is the limit, and with 4.5% as a floor in the long end, the crowding-out effect is going to crush a lot of swimmers (= those who are noy on a boat like T-pain!) out there. Barak will feel forced to sustain fiscal expenditures high, to offset the fall in demand by the private sector. This should inevitably lead to a weaker USD. Why did it not happen before? Because the rest of the world was also in a lot of pain. But if countries like Canada and Australia take the lead, the gap will be there, and given their flexible exchange rate regimes, the pressure on the USD will not go.