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Dollar Headed into Perfect Storm

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For spin-free analysis of the global economy, the Australia-based  The Privateer is one of our favorite reads. Amidst a cacophony of hubris and unwarranted optimism, its editor, William Buckler, provides a fact-filled perspective that reduces the mainstream media’s reports of “recovery” to drivel. Buckler notes drily that “the signs that the party is indeed almost over are all around us and becoming very difficult to ignore.”  The same goes for the U.S. dollar. When Nixon cut off foreign holders from redeeming dollars for gold in 1971, says Buckler, the U.S. initiated a reckless global experiment with fiat paper. “Forty years later, the bill for this adventure has come due,” he warns, “and there is nobody to pay for it.”

News of a yuan revaluation brought short-lived jubilation to Wall Street

Like Rick’s Picks, The Privateer regularly finds something to amuse in mainstream-news headlines on the topic of the economy. Here’s one that caught his eye — and ours as well: “China Makes Good on Flexibility Vow – Yuan Falls”. As if any of the central banks actually support flexible markets. If it had been Hitler’s invasion of Poland that was being reported, the headline might have read, “Hitler Makes Good on Vow to Seek More Room for Germany”.

Ominous Signs

Recall that U.S. stocks got barely any lift from the news.  Abetted by short sellers caught on the ropes last Sunday night, DaBoyz and their pigeons were able to pretend for only a few hours that China’s decision to let the yuan rise was good news. Stocks all around the world rallied sharply if fleetingly, but by Monday morning most traders seem to have figured out that a pricier yen would subject global financial markets, particularly the U.S. dollar, to killing stress. The Dow Industrials fell steadily for the rest of the week, failing to attract even one decent short-squeeze rally the whole way down.  Ominous.

And here’s why: Imagine everything the U.S. and the rest of the world buys from China costing more. Then imagine China’s exports falling as a consequence, leaving the country with far fewer dollars to buy U.S. Treasury debt. Well, it is no longer something that needs to be imagined, for that is exactly what China intends. With the nation’s foreign currency reserves edging toward $3 trillion, most of that in U.S. dollars, it was time for China put an end to a greenback-support operation that had long since grown beyond the bounds of sanity.  That is not to say, however, that Chinese support for the dollar has outgrown its usefulness, for the arrangement has given the U.S. Treasury the appearance of solvency, freeing up easy credit for U.S. consumers with an insatiable hunger for Chinese goods.

Serene Detachment

All of that is about to change, though, and with it the status of the dollar as the world’s reserve currency.  We find it remarkable under the circumstances that, a week after China’s decision, the dollar has yet to implode — nor Gold to erupt, presumably with sufficient force to leave the $1300 threshold behind in a cloud of dust. It is difficult to think that both of these things will not occur, although it may take a shift in the sheep-like behavior of money managers, since they are deeply conditioned to believe that the dollar and Treasury paper are “safe havens” even though a U.S. without recourse to printing-press money would look far worse than that supposed financial basket case, Greece.

With both Europe and Japan abandoning deficit spending as means of spurring their moribund economies, the U.S. dollar can only fall, and gold rise, as the former confronts a perfect storm of tough comparisons and bad tidings.  This will happen even with the support of a dying coterie of money managers who may pretend for yet a little while longer that black is white and that 1 + 1 = 3.  It is predictable that they will all have their epiphany at once. When that day arrives, investors who are hedged with gold will be able to ponder the consequences with serene detachment.

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  • FranSix June 29, 2010, 4:08 am

    Just this evening, 6mo. treasury yields have collapsed, while 3mo. treasury yields continue to be propped up. The whole yield curve was flattening, with the exception on the shortest term yields for the last week, but this is a twist:

    http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

  • mario cavolo June 28, 2010, 8:55 pm

    …Most of what goes on is just the the trader’s lair…oil up 3% then down 1%…nat gas tanks 3% ….give me a break people…this is just the big boy traders pumping and dumping positions, longing and shorting chart and pivot point and TA numbers, they’ve got BIG big accounts just a mouse click away….any attempt to be a short term trader to make money is like a guppy in a pool of sharks…I’m not saying it can’t be done successfully and consistently well, even I’m getting better at it as time goes by, I’m saying you gotta know what reality is and what the rules really are…

    Someone argued with Rick awhile back that the markets are too big to be manipulated….wrong…for example you don’t need to buy the whole DOW to move it…when it comes to the stocks you just need to pump or dump certain sector bellweathers like GS, C, AAPL, etc. to get a reaction going…it doesn’t take zillions to do that….hey, don’t listen to me, maybe I’m very wrong here…Cheers, M

    • gary leibowitz June 28, 2010, 10:16 pm

      On a short term basis it is possible. It only increases the eventual response though. You can’t “force” investors to accept the imbalance. Once large corporations fall in line with future eanings reductions there is nothing the Fed can do to prop up the market. greed will quickly turn to fear.

      In fact I believe the supposed manipulation you talk of is already happening. I am counting on it. How else do you get crashes.

  • Bruce June 28, 2010, 8:08 pm

    Well Rich, did you think that all money printing activity documentation would be provided to you personally? When trillions of dollars appear out of nowhere, where do you suppose it all came from? Do you believe that all of the debt being issued is being snapped up by foreigners, or do you think some of it might be being purchased by the US government. Where do you suppose the 2 trillion dollars that Bloomberg is trying to track down through the courts came from? No one is denying quantitative easing. When a debtor nation comes up with a trillion dollars for stimulus, where do you suppose that comes from?

    • wmd_wtf June 28, 2010, 8:37 pm

      you still have to monetize the debt

  • Bruce June 28, 2010, 6:22 pm

    The market crashed in Sept 2008 and gold dipped for three months and never looked back after that. I suspect that if the market crashes again that gold will hold up even better than 2008. If the market crashes, then the dollar will rise again on an index of other failing currencies. However, against a real currency like gold it will continue to lose value. The moment you print dollars inflation has already occurred. It does not matter when that inflation reaches main street. The event has already happened. It never ceases to amaze me that people argue a currency will appreciate in value while the printing presses are pumping it out in quantity. Is there anything these people will not believe?

  • mike June 28, 2010, 6:19 pm

    has anyone read the krugman article in the times today?
    I know,I know…

    what is anyones take on it?

    thanks

    By acknowledging that the economy is already mired in a deflationary depression that will last a long time, Krugman gets it half-right, which is about as good as it gets for him. But he runs off the rails with the thesis that more easing is needed. Could it have escaped his notice that $13Tr has already been shot at deflation to no avail? Meanwhile, and to the best of my knowledge, he has never acknowleged that deficit spending entails borrowing and that every dime of it will eventually have to repaid, with interest. RA

    • Rich June 28, 2010, 7:30 pm

      http://www.nytimes.com/2010/06/28/opinion/28krugman.html?ref=paulkrugman
      Those that do not know history are condemned to repeat it.
      Too bad Krugman does not apparently know economic history beyond the usual academic orthodoxy headlines. (One hopes Uncle Ben does.)
      For starters, every recession used to be called a depression until the Great Depression made NBER define the difference as a -10% decline, which we already had, until month-to-month GDP reporting obscured it.
      Secondly, Hoover, a successful Stanford Engineer not unacquainted with either economics or politics through his work with Soviet Central Command Economy Famine relief, created a whole host of alphabetic agencies that FDR inherited to spend our way back to prosperity with taxpayer money from Woodrow Wilson’s resurrection of the IRS to fund the Fed. (Raising taxes didn’t work then and won’t work now.)
      Third, the Fed, like now with few exceptions, did it’s best to push on a loose monetary string. No one wanted to borrow while assets declined three years to the bottom. After the bottom, few had balance sheets or cash flow enough to borrow.
      It become clear Krugman and his apologists, blinded by the glint of his Nobel, want hyperinflation for their gold hedge friends.
      At least Bernanke is trying to provide a little balance in monetary policy, having slowed monetary base Fed Balance sheet growth -90% and contracted it 9% this year, after almost trebling it from 2008 to 2010.
      He and his Harvard Winthrop classmates Geithner and Blankfein know the bond vigilantes are poised to pounce if they see the monetary base or 83% money multiplier creeping up again. Timmy has Four-year average durations on his $13 Trillion Treasuries, not to forget the Fed’s Mortgages, and is keeping a careful eye on the 2, 5 and 10 years to extend quietly and safely, without jumping interest rates that could easily make service on the voracious debt, the number one budget item during his term, instead of #3 if we lump Social Security and Medicare, both now paying out more than they are talking in.
      Doesn’t Krugman realize this?
      Or his he just content to repeatedly pen the same old simple headlines and uninformed logic.
      Talk that Uncle Ben is planning to double the Fed Balance Sheet to $5 Trillion may be just that, DC poker table talk designed to smooth worried markets.
      $5 Trillion is still a drop in the bucket compared to $755 trillion of deflating global GDP, unfunded government agency mandates and defaulting derivatives.
      Deflation is a blessing in disguise for everyone but those committed to inflation…

  • warren June 28, 2010, 6:18 pm

    None of this is news. All of it is predicted in a book I read regularly. No, I don’t pound on it.
    All the talk changes nothing. What this planet needs is a swift kick in the backside to start breathing again.

  • storfisk June 28, 2010, 6:07 pm

    Storfisk is confused. If the dollar is going to fall, why are treasury bills rising? To my mind, there is not enough QE to account for the rise in T Bills.

    qe

  • DAN June 28, 2010, 2:38 pm

    All currencies will morph into one, as is the plan.
    TPTB will not have it any other way.
    Total control and ALL sheeple relying on some form of ONE WORLD GOVERNMENT, for support.

    Nation States will either comply or die a hyper-death

  • Andrew Gutterman June 28, 2010, 2:01 pm

    Everyone might want to read http://www.kitco.com/ind/hamilton/jun252010.html for a slightly different perspective on what is going to happen to the dollar. If you expect a market crash then the dollar goes up and gold most likely goes down.

    It all depends on what the stock market does. Nothing much else matters.

    I get email from some wag named John Lansing who claims the DOW is going to 14,000 by early next year. I can’t see that happening unless the economy takes off, and this chart says that isn’t likely to happen: http://www.consumerindexes.com/index.html

    So what’s it gonna be? Bull market for gold and stocks and dollar crash or bear market for gold and stocks with a dollar rallying to new multi-year highs?

    Andy

    • mario cavolo June 28, 2010, 8:30 pm

      I’ll side 100% with your scenario Andy…as anything and everything else may go to hell, it will then be a flock to the perceived sentiment safety of the USD as the world’s reserve currency which is a status and reality that is not going to change anytime soon…logic has nothing to do with it.

      None of us sees the world’s economies somehow taking off, but it would be nice for all of us if they somehow did! It could happen by a somehow consciousness decision by those who have somehow hoarded their riches to go out and spend/invest it instead of sitting on it. It is NOT going to happen because of any more lending as lending has gone far beyond its point of such benefit in today’s global economic environment. 400 million newly asset-rich Chinese may help by their joyful newfound ability to spend (that is exactly what it is) to save the world from a deflationary death spiral, or at least save their own country from getting sucked too far down into it with the U.S and EU…

      Cheers, Mario

  • Benjamin June 28, 2010, 12:13 pm

    @SDavid

    “Where will that leave WalMart??”

    I heard they’re gonna relocate a ways up Sh*t Creek. Everyone is going there. I guess that’s the only place to be!

    As for this RP article… Indeed. I know this is about the dollar, but it’s much easier for me to see through Europe.

    Is Europe really rejecting Keynes in announcing austerity measures? Is it really a case where politicans and people alike are straightening their backbones, squaring their shoulders, and boldly tightening their belts as they proudly proclaim that they are saying no to Keynesian economics?

    One should ask where bloated government came from in the first place. It is the result of a failing private sector over the years, which over-issued debt ran into the ground. As the ship has sunk, people came to depend more and more on government employment. And now, government employment is dying. So this is not going to reverse into better times through a period of hard times. Hemophilia has killed the body. To reject Keynes at this point is to do too little, much too late. So it is not a rejection of Keynesian economics, but rather a funeral because of it.

    The central banks have been buying govt debt. On the back of this, I suspect, other credit was also created because the interest payments are “secured” by government. Thus, personal debt can be made to run high, and higher still. So the money the central bank issues goes to government. Govt pays an employee, who then pays off some of their high debt. They spend some, or perhaps all, on other things. In turn, debt-ladden hands receive that money, and use it pay their debts. And so on down the line.

    Money does not long last in circulation at such high levels of criminality as devaluation presents, and so the worthless money actually comes to see strength in demand even as its value drops. So not only is that odd phenomenon explained, it also tells what we’re going to see. Hyper-inflation is ruled out, at least in terms of circulating money that would cause trillion dollar homes and thousand dollar loaves of bread. It simply is not going to happen. What will happen is that debt in currency balances will remain (and remain high), but no currency to pay them with! So any jaw-boning about which will rise against which is a waste of time. There is no good currency to be in because they’re all going to disappear.

  • SDavid June 28, 2010, 8:09 am

    Quote: “Imagine everything the U.S. and the rest of the world buys from China costing more. Then imagine China’s exports falling as a consequence, leaving the country with far fewer dollars to buy U.S. Treasury debt.”

    Where will that leave WalMart??

    There is nothing I would like to see more than America take back America.


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