Whether Bailout Passes or Not, Implications for USD Are Bad 15 comments
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The past two days have been remarkable in terms of the volatility in the equity markets, but how has the dollar performed? Ironically the dollar rallied on risk aversion the one day, and then rallied on renewed optimism the next.
We are likely now sitting in over-bought territory, at least in the short term, but most likely the longer term as well.
The Global Outlook Weakens
A lot of the dollar's recent strength can be attributed to the global outlook (non-US) weakening and the re-coupling of risk appetite. Essentially people have realized that the U.S problem will affect the rest of the world and thus their respective currencies have been weakening.
Things look particularly bad in Britain and Europe, Russia has also been experiencing lots of turmoil and Japan's Tankan survey today can best be described as terrible. The weakening of the global currency markets and the expectations that global interest rates will decline and additional liquidity measures will be needed have led to a 'flight to quality', as it is called.
Essentially U.S Treasuries have rallied, putting yields into significantly negative real return territory and thus gold has rallied. The irony here is that all this bailout news has put the U.S. government's weak balance sheet into the spotlight, yet the dollar has rallied. This systemic rally can best be described as strength by default.
First The Short Term
Taking a look at the hourly USD Index chart, it is easy to see that MACD is trending significantly into over-bought territory. Technically a short looks like a great trade, but one must be careful as to how they play it.
Assets such as oil, the Aussie and the Canadian dollar, all will strengthen against the USD if the bill is passed and risk appetite increases. Gold, the Yen and the Swiss Franc will rally if risk appetite declines, likely in the case that either the bill doesn't pass, or it passes in a weaker form that doesn't instill confidence in the market.
Either way, the prudent trader should be risk neutral and focus on the over-bought state of the dollar itself. Create a basket of your choice and hedge any direction in risk appetite.
Oil and gold both rallied through dollar strength today and yesterday respectively, so you may want to stick to the pure currency plays.
(click to enlarge)
Long Term
Can any bill truly support the markets in the longer term? My definitive answer is no, partly because Congress doesn't fully understand the problem and also because they do not respect the size of the problem.
As soon as the MBS problem is 'solved', the market will likely turn its focus to the CDS problem, which may very well be larger in dollar value than the mortgage issue, at least in nominal terms. There's a limit to how much bailing out can occur.
Ultimately, I believe the U.S will get hit harder than everyone else, primarily because they were the most levered at the peak. A similar downturn in global markets will have a magnified effect on the U.S, followed by Britain.
It's likely that the U.S will be forced to allow foreign sovereign funds to go on a shopping spree in the U.S when no private firms are in the position to shore up the sort of capital that will be required to sustain the U.S economy. This puts the U.S currency at a disadvantage to its global counterparts.
Precious Metals
My last article, which was a while back, highlighted my negative stand on precious metals. Silver was trading in the early 20's and gold around $1000 an ounce.
I was ridiculed for my position that they were both getting expensive and I had taken profits. I'm embarrassed to say that I didn't buy gold when it dipped under $800, but I did buy silver at $10.50. I am now once again a precious metals bull. This is in part because of my bearish stand on the dollar, but also because of the global view that pumping liquidity into the market is the only viable solution.
That's not to say that I don't believe the market needs the liquidity, but right now a lot of it is getting backed up in the banks, which are using cheaper borrowing costs to shore up their own capital position and not pushing that credit out into the market.
Credit doesn't expand when the banks don't pass it on, so the central banks pump more in. I am confident that it will reach a point where this excess credit will explode out of the banks and the central banks won't be able to time the removal of all that excess credibility… hence inflation.
Crude Oil
Although this article is focused on the dollar, you cannot ignore the implications of the dollar on oil. Crude will likely remain volatile as demand destruction and a weak dollar battle to be the dominant theme. I will look to buy on dips, primarily through ETF's, and also keep an eye on the major integrated oil companies. If they get hit hard in risk aversion and crude takes a hit, it may very well present some good buying opportunities.
Summary
Regardless of what happens with the bailout, the implications for the dollar are bad. In addition, the global outlook for the dollar is currently net positive, which makes it a more attractive time to take a negative position as a contrarian.
The U.S economic situation will likely weaken either way, and a bill getting passed simply makes things worse for the government's debt. However you look at it, things can't be good for the dollar looking forward.
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This article has 15 comments:
Enough, the whole case was never anything but lets pretend. Lets pretend there is a grand hyperinflation in progress and any real asset is worth infinity in dollars. Nope. People tried that in houses, and guess what? It didn't work there, either.
There simply isn't any hyperinflation going on, there is instead deflation and a scramble *out* of future dated assets. Nobody is selling off t-bills as certificates of confiscation.
The whole case was never anything but an ideological wish pretending to be a thought. None of these ridiculous bubble prices are going to stick. For anything. They didn't stick for dotcoms and they didn't stick for houses and they aren't going to stick for oil, either.
Also I should point out that the elasticity of oil does make it attractive in a risk neutral play, because the price will likely rise faster on increased risk appetite than it will fall on decreased risk appetite.
Do you have any idea as to the timing of when the "excess credit will explode out of the banks" and into inflation?
I'm guessing that gold, and perhaps oil, will rally at the point. Do you agree with that? Thanks.
Meanwhile, interest rates in the Form of 3 month LIBOR are now up 50% since the Bailout was first proposed. Those of you who have home equity loans should read how the rates on them are adjusted, or take a look at the fine print on your Credit Cards for the same. LIBOR's rise is a Tax hike that most will incur.
Oil is NOT one of those bubbles...nor gold. Neither were bubbles..and the real world demand for each is enormous. Barrels of crude and physical gold don't sit for months on end with "For Sale" signs attached..they are bought before their even produced.
The Feds (US and the other equivalents around the world) will inflate..no one I know has said that we are or have recently been in a HYPERINFLATION...that'... a straw man. WE ARE in an unstoppable and predictable process of reliquifying the markets and 8-10% inflation will..if it isn't already..the norm.
The US tax payer faces the love knot between the US Congress and the mega cartels which it created and now servises by piling up US$ debt and real tax rates.
Rome started falling 2008 years ago under the same cercumstances.
Let the houe go to the bank. Move into larger living groups. Stop driving one or more cars. You will be just as well off with lower taxes and travel expenses. Consume less, spend less, exercise more. Eat home cooked food. Vote out anyone in office and vote in anyone never in office. Turn off the TV.
Take money out of the bank and out of CD's. Let the bankers sweat. Reduce spending 30%. Let retailers sweat. Let land lords sweat. Let home owners sweat. Let town tax collectors sweat.
The value of that roll of dollars will go up in real buying power over the next 20 years.
Do not buy falling knives in the form of real estate for 20 years.
Energy prices will collapse as they have been maipulated higher by your government and its wars. Blessed are the peace makers.
What about gold versus US currency. Hold gold in a foreign bank or in foreign gold mines. Remember failing governments usually confiscate gold from the public without compensation.
Good luck.
Yank
Until the banks can get that credit out, we will have deflation as credit, in reality, is extremely tight. However, these banks are in the business of lending out that capital, so as soon as the major players get a whiff of improving credit conditions, they will race to find as much business as possible. When all the banks do this, credit will flood the system.
The Fed's plan is to drain the excess liquidity at that exact moment in time. I foresee that being unlikely as timing it is as difficult as timing the purchase of gold at the bottom. In addition, they will likely be unwilling, because inflation will be the only way to have a V-shaped recovery in equities, which is the benchmark by which most Americans judge the effectiveness of their leadership.
Right on!
Do you think anyone is listening?????
thanks Hanky Panky, thanks BenDover.
regards.