In the nine days since my last public post, the S&P 500 has tacked another 40 handles onto the August rally, the buck sliced its way down to long-term support, and gold capped a tenacious rise out of July with a $60 surge. The impetus for all this action has been the Federal Reserve's threat to counterfeit more money under the guise of helping the economy. In fact, Friday's session began abuzz with talk about Ben Bernanke's virtual guarantee of a resumption of the Federal Reserve's counterfeiting operations.
Such talk was the latest salvo in the currency wars being waged by the world's top economic regions. I have news for you: the war is not being fought between the euro and the dollar, nor between the dollar and the yuan. The war is being waged directly against us citizens. The excuse used by the central banks to print... and a lame excuse it is... rests in the desire to improve current account balances via exports.
Our politicians claims that by weakening the currency, one's exports become more attractive, and hence the current account balance improves. Anyone who bothers to take more than a few hundred milliseconds to ponder this claim will realize that a weaker currency also means more expensive imports, and the last time I checked, the U.S. imports a heck of a lot of raw materials. I don't know about you, but $650/ton for imported steel seems like a much better deal than $1050/ton. A dollar a pound makes coffee more appealing than at $1.90/lb. Oil at $45/bbl was much more palatable than the current $80 price tag.
The list goes on, and the point is that the current account (im)balance cannot be tackled by shuffling paper around. The only way to improve a nation's trade is to make industry more productive. We need cheaper input costs. We need to cap unions in the knees. We need to provide lower taxes and higher incentives to innovation. We need to rebuild our manufacturing base. Ironically, all these points are conducive to a stronger dollar, not a weaker one.
Politicians are feeding us this nonsense about improving exports simply so the public will support the notion of a weaker currency and allow the Fed to print more dollars. The politicians then receive this freshly printing fiat... which looks and feels like all the hard-earned money in the hands of us citizens... to spend as they please. Ultimately, these fake dollars constitute nothing more than a stealth tax. a tax that doesn't show up on one's tax return, but rather on a grocery bill or energy bill down the road. It is time for folks to realize who the enemies really are and stand up for the right cause.
Moving on to market action, we can begin with the current setup in the dollar (click to enlarge images):
Friday's huge reversal off the 3-year trend should lead into a relief rally. One should note, however, just how unusually violent the recent decline has been. My cycle analysis calls for a more significant low in early December, and those larger lows are typically the ones that see the buck stretch 9% or more below the 200DMA. The fact that a minor low stretched so far provides an ominous clue regarding the extent of the damage being done to our currency and also foreshadows the greater currency crisis I anticipate to unfold by the second quarter of 2011.
Another ominous development is transpiring in the Treasury market, which is signaling that it will not let Bernanke get away with these malfeasant efforts to hold rates down.
A breakdown in the Treasury market is going to be the public's wake-up call that a currency crisis is in the making, and in spite of a plunging dollar, I do not expect the stock market to survive the shock.
If we combine the technical signals above with the high likelihood of seeing a dollar bounce initiating, we get a very bearish picture for equities for at least the next two weeks. The characteristics of the coming correction will provide valuable information with regard to whether stocks have printed an important peak or whether the market has yet another rally under its belt.
Disclosure: Author is short S&P 500 futures calls, long U.S. dollar futures