Here's a nice chart from the WSJ showing the strength of the Brazilian real, Thai baht, Russian ruble and the Indian rupee versus the dollar. Here's the picture equity investors are missing.
The US economy is still the laggard in the world. We used to need the nations of the world to buy our bonds, to finance our deficits and to keep our interest rates low.
But our lenders in Europe bought bonds with our mortgages attached; and they are finding out, like Merrill Lynch, that those that leveraged these transactions, get pennies on the dollar.
Since our domestic economy is so weak, the influence of petro dollars and sovereign wealth funds pulling back on purchases of our treasury securities, (unlike subprime) is well contained. Here's where Treasury officials could of used that language.
But these nations around the world now have reserves, in dollars, that our depreciating, as the chart shows. So if the value of your dollar reserves has fallen, in your currency, by 20-55%, what's a central banker do to contain this dollar weakness contagion?
The housing and mortgage market is so moribund that the Fed has to continue cutting rates. Weakness in Caterpillar, Coach, Target, and Walmart give real and anecdotal evidence that the woes in housing have spread, and are affecting the consumer. So the Fed cuts. And even a central banker can recognize that.
Yesterday I chided a certain CNBC anchor for gesticulating on Friday's sell imbalances. Tuesday, when the market was romping, she was talking about "the flow" and the "conviction" of the buyers. In technical parlance you could call that the "hysterical" indicator.
It's not the flow from the programs that matter, it's the deployment flow from the long term strategic buyers of our stocks. And it looks like these sovereign wealth funds, like the NASDAQ names.
And that variable is not in the quant's equation.