The Contrarian's Fear

From the Fed: "The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks." By my math, the amount of dollars that was available by the Fed for short term loans to banks and investment banks was around $300 billion through TAFs, TSLFs, and PDCFs. Now, with this, it sounds like close to half a trillion is available to the financial industry through cycling short term bonds originated by the Fed.

This is a response to the turmoil in the wake of Lehman's Bankruptcy and AIGs de facto conservatorship by the Fed, with the DJIA dropping 500 points on Monday and 400 Wednesday, with a modest gain on Tuesday—plunging it well into 10,000 territory for the first time in years. Treasury bonds and gold rallied, such that investors are now taking three-month treasuries with interest payments approaching 0%. This is a highly defensive position. Dollars are in high demand. Institutions are running to treasuries, gold, and cash. The TAF expansion is a response to a scarcity of dollars. Banks worldwide are holding on to dollars and reluctant to lend to one another.

Which raises that uneasy tingle in the back of any contrarians mind when the sheeple start to agree with him, and the position he holds shows signs of becoming mainstream. Lately, the U.S. dollar has been strong against all investment classes: assets, securities, and commodities, and even the Euro. Dollars are a hot item.