The Irony: A Strong USD Index   

• Last week, the fire raging through US financial markets jumped the pond and is now rapidly spreading in Europe, i.e., the 14-month old credit crisis has morphed into a more dangerous new phase that is choking off credit to healthy companies outside of finance and spreading globally. We (including central banks, national treasuries, regulators, investment professionals and the investing public/taxpayers) are in unchartered waters without a compass and no wind for our sails.
• While having to bail out the very financial institutions that perpetrated this crisis in the first place is despicable, it was even more despicable to have an original 3-page (Treasury proposed) “emergency” TARP become a 450-page monstrosity dripping with pork in order to pass the Congress. Even with TARP 2, no one is sure when this will end, or if Europe will need its own version of TARP.
• It is a foregone conclusion that this financial wildfire will end badly for the global economy, and this is what is behind the plunge commodity prices, whose bear markets have now been confirmed by “dead crosses” in their 50-day and 200-day moving averages.
• Ironically, about the only investment going up these days is the USD index, which has seen a golden cross in its 50-day and 200-day moving averages, and recently hit a rebound high. Ostensibly, a recession in the U.S. would hit personal consumption, lower US import demand and result in a significant shrinkage in the US balance of payments deficit?thus boosting the USD.
• On the other hand, a significant reduction in the US BOP means a sharp shrinkage in global liquidity that was provided through an ever-growing US BOP  deficit. This liquidity was particularly favorable for the emerging economies, and the lack thereof (as well as slowing exports on shrinking US demand), means that the BRICs and Asian economies will be the next shoes to drop in the global recession.
• Japan in this regard is in the same boat, as its economy also was also driven by export demand, and its stock prices primarily determined by foreign investors,  who are in no shape to support Japanese stock prices. 

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