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I am an analyst, trader and software developer. I write trading analytics and systems for use in tradestation, multicharts, esignal, ninjatrader and strategy runner. I have worked for the large blue chip financial firms on wall street and am now independent.
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m3, ltd. and Breakpoint Trades
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  • The Future of the Dollar - the biggest short squeeze EVER 0 comments
    Jan 25, 2010 8:04 AM | about stocks: UUP, DX
    Fibonacci is here to help us understand what may happen. 1.272 is a derivative fibonacci number that always seems to popup in natural series movements and is a common target for me in trading. As you can see in the charts below 27.2% is a good number to remember as a retracement target.
    In this post I want to illustrate that nearly every major bankruptcy or insolvency was or is being preceded by a substantial rally. Even insolvent institutions like Bear Stearns, Fannie Mae, Sallie Mae and GE have reflex rallies tied with their final unwind.
    The dollar is just the Corporation of the United States of America - why should it be any different. There is a huge short position on the dollar in the form or actual shorts and demand for dollars created by requests for return of borrowed ones. (just like the stock market version but executed differently)
    1. Debt satisfaction creates a demand for dollars. 
    2. Demand for debt satisfaction creates a demand for dollars. 
    3. Bankruptcy reduces the number of dollars available to use to satisfy debts. 
    4. Asset deflation reduces the theoretical amount of dollars available to satisfy debts. 
    The huge reduction in dollars available to transact real value exchange creates an inflation of the value of the remaining dollars and a reduction in the value of assets that are valued against them...
    I have included a projection of the dollar with regard to what i think is the most likely movement of the next few years. The scaling of time relative to the last 80 years is not accurate...but the concept and the target date of 2015 is reasonable.
    Keep in mind that if the dollar short squeeze produces even a portion of this kind of reaction...we are looking at price s returning towards 1945 levels...Wasn't gas something like 20 cents a gallon then...just a wild guess.

    In any event, the dollar can go to ZERO or very close in my opinion - but needs a huge short squeeze first. That means redeeming all the dollars people traded that they don't actually have - in the form of credits.

    Please note that my projections are the green and red line on the dollar chart below.

    Check out these charts:

    One of the other points I would like to make in regard to some of my earlier posts, is something that has grave impacts economically and for investors. People need to be very active in managing and understanding what is going on in order to protect themselves and understand the real impacts of a potential dollar rally on their purchasing power, assets and employment.

    First and foremost, I would like you to take a close look at this dollar chart? Do you notice anything? Okay, look very carefully at the only significant dollar rally since the Fed has been responsible for the dollar?

    Clearly debt pushing policies inflated asset values from 1913 to 1929. During this time dollar purchasing power declined markedly if you want to call 50% markedly. This was Fed engineered. There was a reason so many banks popped up during the 20's...and its the same reason that this century has been the era of the banking - so far - THE FED and its conflicts of interest...and fractional reserve lending.Fractional reserve lending is the manner in which 95% of the money in the world is created and the primary dilution factor for the dollar.

    Now lets go back to my previous post, in which I refer to the dollar as a certificate representing the corporation of the United States of America. Well, the dollar IS the stock certificate of the United States...and that certificate is currently not an asset or value but an IOU. 

    The selling/issuing of dollars through credit (IOU's) - is a short sale that by implication will need to be covered. Its just the same as a short on Pets.com or AIG common shares or ES SP500 futures...the sale of these securities needs to be covered with the purchase of same to close the transaction. 

    Ron Paul has said it many times, the dollar reserve system has ended and the question is what is next. But the question is also how are all those short sales going to be closed...what kind of mess will that create?

    We have appointed people to be responsible for our national value and stock certificates who are the equivalent of appointing a bunch of AIG shorts to run AIG. Additionally, you can tell that the Fed and it's governmental co-conspirators have done a terrible job...the chart says they did.

    Why are they still employed? Normally you would try to cover your tracks or at least do a bad job not a catastrophic one if you were trying to steal from someone while smiling at them at the same time. This dollar chart is catastrophic.

    Subsequent to the debt pushing of the 1913 to 1920's, when that debt became oversupplied and dollars to service the debt became scarce - as has happened now - we had the only rally in the dollar purchasing power of consequence in nearly 100 years. That rally for the dollar was the great credit contraction called the "Great Depression" - curiously, this was roughly a 27.2% rally (see: The Future of the Dollar - the biggest short squeeze EVER).

    The the Fed used the depression to ensure that their goals would be achieved. The panic of those times led anyone who was scared to the conclusion that its beyond imagination the Fed could engineer such a condition. Worse yet, to be able to conceive that they, instead of attempting to fix the problem, would implement an agenda to make a much bigger one. So, fear led to more and more power which the Fed used to continue to expand its policies - ironically under the guise of preventing a depression which they engineered in the first place.

    In achieving these objectives they did an excellent job. Is it any wonder that the SP500 bottomed at 666? I wonder?

    Is it any wonder that your Dow Jones Industrials certificates are now worth less in purchasing power in real terms than at the peak of 1929?

    So, where to from here? Well, that is a very good question. Look again closely at the dollar chart. Theoretically, the dollar is worth .04 cents. Under a reasonable scenario (but still a bad one), a short squeeze capitulation rally could take the dollar's purchasing power to between 15 to 30 cents...that could be a 750% increase in the purchasing power of the dollar. I am not going to go into details as to what that would do to the values of stocks, real-estate and other assets such as silver/other commodities.

    Though I really hope to god that none of this happens...recognizing that it can happen - because it has happened before - is an important thing to do given where we stand currently.

    There may be some further efforts to fuel a hyper-inflation story. If gold rallies for instance people will think that inflation is about to explode...but that rally will likely be short lived.

    What to do:

    Learn as much as you can.
    • Watch the dollar. If the dollar breaks out strongly...then we know a bad case or worst case scenario is playing out. For the scenario discussed here to not take place - the dollar MUST sell-off and remain weak. If that does not happen (I know i am repeating) things are going to get very bad.
    • I also recommend that you evaluate and subscribe to a very good investment newsletter calledBreakpointTrades.com. They have made amazing calls on the big and the short-term picture and really help you to put things in perspective. In a practical and easy to understand way. In addition, they have done a lot of work on mechanical/automated trading systems and have a lot of resources and guidance for this on the site.
    • Make a plan...do not trust the FDIC...they are the primary enabler of the debt pushers...I heard these two guys on CNBC discussing how "you should not even worry about the FDIC - its backed by the full faith of the US Government." That's called complacency...complacency and investing do not go together. If politicians were rational, we might not have to worry. But if politicians realize that they will be voted out of office for putting the US taxpaying on the hook for another trillion here and another trillion there...we can not be sure that the faith of the government will be there when its required. I know it seems improbable...but if you told me that we would put the supposedly smartest minds in fiance on the job of protecting our purchasing power, managing prices and protecting the dollar and they would run it into the ground by 96% - I would say that is improbable too.
    • Watch this movie: Money as Debt. Show it to people you care about.
    • Help Ron Paul and Rand Paul defend the constitution and reign in the Fed
    To help put this stuff in perspective please see my previous posts:
         Bernake - Hurray for the guy who has been wrong 90% of the time 
         Warren Buffett - the ultimate bull-market manifestation 

    Disclosure: Long Dollar
    Stocks: UUP, DX
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