U.S. Dollar, Bonds Reverse Course: Scenario For Year-End Upheaval?

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 |  Includes: FXE, FXY, GLD, SLV, TLT, UDN, UUP
by: Sid Klein

In my initial Seeking Alpha piece, I looked for a flush-out in the SLV before accelerating higher.

Yesterday, it bounced off of the 31.50 level, just as advisors were recommending shorting Friday and yesterday. As warned, when highs ($34.08) are made within a countertrend, the common error is to see a correction as getting underway just when it is ending, which I believe silver did yesterday. Now, let's look at long rates and currencies.

Since the bond peak, the USD has also undergone a transition phase. So:

The printing in Europe begins after Spain requests the funds. If they don't, the euro would collapse under the weight of panic, especially if the refusal of the Americans to unblock the IMF from giving it the money were the cause. The euro's future might be negative either way.

I reiterate that the Japanese yen has peaked, with that country's central bank being the last to have printed among the world's largest central banks -- the U.S., Europe, China, Britain and, now, the Japanese.

The Japanese can say that the IMF was told during the summer (in Japanese parliament) that Europe's exchange rate is not acceptable. And now they can say that they "will act without the U.S.'s permission."

The Japanese yen and U.S. dollar have been co-directional, which has kept the Dollar Index "balanced." Printing in Europe and Asia at the same time will give the dollar its countertrend bounce from a low to be seen soon.

Ultimately, the U.S. wins. Bernanke first sees how much the Europeans and Japanese print. Then the rationalizations for monetizing its debt kicks in.

Then one may at last see both the GLD and SLV rallying at the same time as the DXY, with all of the major players printing en masse all at once.

Again, the world's major exchange rates will have been managed amid massive global printing, working out in a perfect balance among the participating central banks.

The largest central banks each represent that sovereignty's share of global wealth, and will have settled on rates among themselves, notwithstanding changes in rates versus the rest of the world.

In the art of war, the Japanese are not unskilled, especially if they feel that they are acting in self-defense. Ergo, the Japanese will imminently and finally announce their bazooka.

For 20 years, I have written that the Japanese do things (A) in grand style, (B) just as they repeatedly warn, and (C) only after the westerners no longer believe them.

So again, get ready for the bazooka.

The Germans had Spain wait to see how big QE in the U.S. would be, I believe, just as the Japanese waited on everyone else to pass on ahead first.

Meanwhile, the U.S. printing scheme is as all-charged and flexible as monetary policy could be, and basically allows itself the flexibility to print as much as it wants, for as long as it wants, when it wants. A money grab between states is war. This is critical to understand to be protected from the unexpected.

For instance, if the blocking of Chinese companies leads to a disaster in China as this just-commenced recovery there gets underway, then expect the unexpected at any time. For example, an effect could be a would-be-bubble-bursting in precious metals.

Spain can wait no longer, due to pending financing needs.

At the IMF talks in Japan last week, a Spanish senior IMF official said that the Japanese banks could imperil its national credit, stating that the Japanese must take steps to prevent any crisis that could, in turn, damage the holding of European debt.

He added comments about creating fair measures, in determining conditionality and related matters, as sundry demands are also made of the Spaniards and other Europeans.

The point is that each government wants the other owning as much of its debt as possible, precisely due to each one's printing. So, consistently and simultaneously, he added that Spanish banks should not get hit by any contagion from Japan.

The Japanese will have strategically caused the world to beg it for what will have been the bazooka that monetizes a great deal of Japanese debt.

Meanwhile, the ECB will have had its invitation to ask for the money accepted by Madrid.

Together, the European and Japanese central bank actions will have triggered the precious metals' accelerations above recent highs. It will also have ultimately led to higher long rates, after a correction that follows the completion of this present bond decline.

With a global spike in long interest rates before the end of the year, following 2012's global panic into bonds that caused virtually ALL major investment groups to be overweight debt, markets could be roiled by the destruction of paper wealth.

The exit out of bonds as global financial panic augments, will ultimately cause the precious metals' bubble to burst after clearing new highs into November or mid-January. That will be in the interest of the U.S. government; so trade wars serve dollar strength -- the currency that will have been paid to Chinese and other debt-holders.

As the reserve currency with the most charged and flexible monetary policy in the world, in all, this global condition allows the U.S. to set international exchange rates. This is at the heart of the currency wars and brewing global trade war.

So, the game is on: The pull among states, regions and corporations for pieces of the Total pie. "Standardization," or something akin to it, will be a major buzz word in the future, as those major banks must agree on currency "prices" in divvying up the world's spoils.

That is just business, as everyone seeks to assure their deemed fair share. Therefore, to identify major changes in global asset classes and markets, one has to attempt to analyze everyone's vested interest.

In part, such is the basis for my interpretations.

A minor test of a slight new low in the 5-year FXE (Euro Trust ETF) chart would look technically similar to the 1-year silver pattern, before the reversal contemplated below.

(click images to enlarge)

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Notwithstanding a possible retest of recent highs, the euro had been correcting after an advance from the 120-level that many had feared would break. The crowded trade had been the bearish position, then it became the bullish position.

Still, from one week to the next this month, traders turned bearish, hence a final push to the 130-131 area to get rid of the fickle traders.

Following the present rally, the return of old euro sorrows and the prior psychological reactions to them can ultimately take the FXE slightly below the 120 level, and then, after the flush-out, as per already existing plans in the drawer, Greece (at the minimum) will be dropped from the euro, prompting an eruption in the currency to 140.

The latter will allow the U.S. to print massively. All major players win, as the bull market shifts to unofficial debt repudiation, to the benefit of the largest central and para-subsidiary commercial banks.

Technically, I reiterate my view that the 5-year FXY (yen ETF) chart below could be crushed to the 113-117 zone. We'll judge magnitude as events unfold.

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Based on this article's views on the yen and euro, the DXY should complete this correction above 78, before a new leg toward 84.

{Beware of old relationships between the dollar and the precious metals, if not the commodities in general (note last week's smash, ex the PMs). With the advent of eternal QE, the relationships to gold and silver mean as little as the currency's paper.

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The present smash in long rates (1-year chart: TLT Barclay's 20-year U.S. Bond Trust) should be over by Monday, with the TLT in the 120 area.

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So the fundamental and technical puzzle above could therefore, conclude with a year-end that sees Chinese retaliation that would negatively affect long U.S. yields, which would be rallying simultaneously with global bond market disruptions.

Precious metals prices also have a December that might not extend November's trend.

Global stock prices would not be unsurprisingly linked to the above, with potentially violent year-end and New Year's sell-offs.

The currency war is at the heart of the determination of prices in all asset classes, and, to exacerbate matters, political considerations in serving one's financial interests will affect prices.

Therefore, realistically understanding national interests is a factor in one's capacity to manage these turbulent times, avoiding pitfalls that would otherwise not exist within more common fundamental analysis.

Disclosure: I am long TLT, SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.