US DOLLAR AND CURRENCIES- SUMMARY 

The Dollar moved slightly higher on Tuesday on more safe haven buying.

The US Dollar Index gained.034 to settle at 79.552. 

Spain successfully sold 4 billion euros of 3 and 6-month bills on Tuesday, although yields were higher than the previous auctions. Spanish Prime Minister Rajoy on Thursday is expected to unveil additional austerity measures when he presents his 2013 budget. Italy today successfully sold zero-coupon 2014 bonds at 2.532%, down from 3.064% on Aug 28. 

Spanish ten year bond yields rose over 6 bp to 5.745%.

The GfK Oct German consumer confidence index of 5.9 was unchanged from September’s 5.9 and was in line with market expectations. 

The Euro was up .22% against the Dollar.

Japan’s Sep small business confidence index rose slightly to 45.1 from 44.8 in August. 

The Yen was down .05% against the Dollar.

China’s Aug leading economic indicator rose 1.7% m/m after a +0.6% m/m gain in July, which was a possible sign that the Chinese economy is stabilizing. Positive factors in the leading indicator included a rebound in real estate and credit growth, and an improvement in consumer expectations. The market consensus is that Chinese GDP likely eased to about +7.4% in Q3 from +7.6% in Q2. 

China’s central bank today injected a record 290 billion yuan ($46 billion) into the banking system to address a liquidity squeeze ahead of next week’s Chinese holiday week.

As long as there is faith in the dollar and fiat money as a whole-and by and large there is, I see the system holding together for quite a while. I think it’s Ian McAvity who calls the dollar “the prettiest horse in the glue factory.” This became dramatically evident this week.

Owning Dollars other than for trading purposes is a fool’s bet in my opinion. As a long term plan, you should be looking to exit Dollars and move into hard assets or strong natural resource based currencies. I particularly favor the Canadian Dollar. Other choices include the Australian Dollar, the Singapore Dollar and, of course, the Chinese Renminbi. My view is that we’re ultimately headed back to the March 18, 2008 low of 70.698 and will later see 66.00 or much, much lower, possibly even the 30.00 area. This could occur between 2014 and 2018. Short-term (between now and early 2013) we should see the 73.00-74.00 area. For political reasons we may never experience the sudden overnight sudden devaluation as seen by Argentina, Brazil or Mexico in recent decades, but instead continue to see a slow diabolical deterioration. -Ed Note: Try Mark Leibovit’s Special Trial Offer HERE

Mac Slavo: If you think the Federal Reserve’s quantitative easing will only affect the U.S. dollar, think again. Now that the United States has officially begun it’s third round of money printing to the tune of at least $40 billion monthly, central banks around the worldwill also act to ‘defend’ their currencies in kind.

Moreover, because everyone is joining the fray, all of that extra money will make its way into key resource stocks and commodities, adding further upside price pressure to essential goods like food and fuel.

It’s a race to the bottom, and the losers are the 99.9% of us who aren’t being kept in the loop.

Quantitative easing is really another word for currency wars. A weak U.S. currency puts continued pressure on the Japanese Yen, the Chinese Yuan, the South Korean Won, the Australian dollar and other currencies.

Cheap money also fuels speculation and this money quickly drifts into commodity markets and the ETFs that help propel commodity market speculation. This is inflationary for food prices.

The lower the U.S. dollar the greater the intensity of currency wars.The break below the key uptrend line on the Dollar Index chart was an early warning of the third round of quantitative easing (QE3).

The most important question now is to use the chart to examine the potential downside limits of a QE3 weakened U.S. dollar.

The weekly close below this uptrend line was the first signal of a major change in the trend direction. It came before the announcement of QE3, last week.

The third significant feature is historical support near 74.5. This is the upper edge of a consolidation band between 73.5 and 74.5. This is the downside target for the Dollar Index following a fall below 79.

This target can be reached very rapidly over three to four weeks. A rapid collapse of the U.S. dollar puts immediate pressure on other dollar-linked currencies.

There is a very low probability the U.S. dollar will resume its uptrend. The move below the value of the uptrend line and a fall below 79 confirm thata new downtrend has developed.

The weakness in the U.S. Dollar will hurt export dependent economies and companies.

CNBC

There are two ways this may end – neither of which is going to be good for the average Joe:

• The Fed et. al. continue to print, so much so that prices for food, gas, utilities and other key commodities that are linked to US dollar movements will rise exponentially. This rise in prices will accelerate the pressure on consumers as more jobs are lost in an ever progressing, self reinforcing economic death spiral. The pressure of rising prices, even though the Dow Jones may reach 20,000 or 50,000 points, will be so great that American consumers simply won’t be able to pay their bills or put food on the table.

• The Fed and their brethren around the world won’t be able to print fast enough to maintain stable financial markets, leading to stock market crashes in Europe, Japan, China and the United States, which then leads to a shift of capital to US Treasury bonds, ironically strengthening the dollar. A weak US economy that isn’t creating jobs and is adding tens of thousands of people to an already overburdened social safety net every week will eventually lead to confidence being lost in the US government’s ability to repay its debts. As we noted in 2012 Predictions of a Mad Tin Foilist, the end result will be a currency crisis, or de facto default by way of hyperinflating away our debt.

Both scenarios are virtually the same, as both will end with complete and utter destruction of Americans’ wealth.

Despite the mainstream notion that inflation is under control and most of the money is sitting on the sidelines with banks, all we need to do is look at the price increases for consumers since private and public bailouts begin in late 2008. Gas has doubled. Food is up over 25%. Electricity costs and the cost of just about every other non-debt based asset has steadily risen.

This is not going to stop.

While timelines remain elusive because of never ending government intervention into financial markets and economies, the policies being instituted by central banks around the world can only lead to continued degradation of paper currencies and the rise in prices of all goods linked to those currencies.

In January of 2010 we suggested a strategy of buying physical commodities at today’s lower prices and consuming those commodities at tomorrow’s higher prices. The trend for fiat paper money and physical assets has not changed and is, in fact, more pronounced now than ever before.

The US dollar is being systematically weakened until it no longer exists as a viable means of exchange. When this happens you’d better be prepared to operate in a society where traditional money is replaced with mechanisms of exchange like precious metals, food, critical supplies and production skills.

You can begin taking simple steps to prepare now. The collapse of the existing global paradigm is accelerating and if you’re not ready for it the price you’ll pay will be severe.

Related Tickers: SPDR Gold Trust (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), Ultra Silver ETF (NYSEARCA:AGQ), Dollar Bullish ETF (NYSEARCA:UUP), Dollar Bearish ETF (NYSEARCA:UDN).

 Quotable 

From February 2010: 

“Shorting Treasuries is a ‘no brainer…every single human being should have that trade.’” 

Nassim Taleb 

LOL…hoisted on the horns of a Black Swan petard were you Mr. Taleb? 

Commentary & Analysis 

Guru Follies 

The newsletter crowd, to which I plead guilty, loves to tell you scary stories that often seem to be missing an important element—facts. Let’s take a short stroll down memory lane and review the latest stories from the gurus.

1. Always a favorite, the US dollar is going to get killed. This one is back on the front burner thanks to QE3. Of course, the fact that the dollar didn’t get killed by QE1 or QE2 seems not to matter. It is QE3 that will surely do the dirty deed this time. The newsletter gurus seem to lose sight of one very important axiom of price, it is this: If supply increases, but demand for the increased supply increases even more, price doesn’t collapse; it tends to rise (cateris paribus). The demand for dollar liquidity in a world where the European banking system is desperately deleveraging and many in the private world are doing the same likely means the world reserve currency remains supported. 

2. Inflation will soar. This is one of my favorites, as the newsletter crowd remains stark-raving loony over this one despite the facts. After all, this inflation call is simple…more money means more inflation. Slam dunk! But we haven’t seen inflation as defined by the newsletter crowd. We have seen some commodity prices surge on investment liquidity and supply problems, granted. As I have shared with you many times before, if money doesn’t make it into the real economy to be used by real people to bid up the prices of real goods, it isn’t inflation in the normal sense we think of when we say “inflation.” But if we say there has been a massive inflation in financial assets; that would make sense. That’s because much of the money the Fed has created has leaked into financial assets. We can say there has been asset inflation driven by the financial economy. We can say that overall there has been a decline in the purchasing power of global fiat currencies as we view the price of gold. But this is different and more easily deflated. 

3. There is a massive bond bubble out there just waiting to pop. I believe we are on our third fear-mongering bond bubble theme since QE started…it could be more, I really have lost track of this favorite scare story. And of course with QE3 fresh in the minds of newsletter buyers, this bubble story is hot again. The flimsy logic behind a bond bubble is the idea that money has moved into bonds irrationally, for some speculative gains and all these investors just don’t understand that hyper-inflation is just around the corner. And if you hold US bonds, you are really in trouble because QE3 is the straw that has broken the greenback’s back and that will add to the pain for bonds. Let us consider some real reasons why bonds are loved and why they could remain loved for a very long time: a. Global demographics – As people get older their portfolio tends to shift toward what they perceive is less volatile and more safe investments such as fixed income. 

b. Secular change in consumption patterns – The credit crunch really was a sea change I think. Massive personal balance sheet overleverage, coupled with the decline in the biggest personal asset—real estate—seems to have triggered a sea change in both real consumption and attitude toward future consumption. This means more savings. More savings tends to mean more money in fixed income net…net. 

i. The knock-on effect of a change in global consumption/increased savings is the catalyst for rebalancing the current account deficit nations with the current account surplus nations. It is especially bad news for those with export-dominated growth models who will take the brunt of the adjustment domestically…and we know who you are: China, Germany, and Japan… 

c. Massive global debt levels equals below capacity future growth. Below capacity future growth will tend to push down the expected return from growth assets—stocks—relative to fixed income. And slower growth is usually accompanied by lower future inflation expectations. And lower future inflation expectations are usually discounted into the current yield for fixed income. Thus, bonds will tend to remain supported. 

d. Risk bid. If I am right that the Eurozone crisis is far from over, and that China will likely experience either a hard landing or lead to a major negative growth surprise, the idea of a major risk bid of global money running for safe haven is still a high probability. And safe haven money flows into…you guessed it…fixed income. 

e. Historical parallels. This from Hoisington Research, a fixed income investment management firm based in Houston who has been more right on bonds and interest rates for the last five years than anyone I have seen…. 

“Long-term Treasury bond yields are an excellent barometer of economic activity. If business conditions are better than normal and improving, exerting upward pressure on inflation, long-term interest rates will be high and rising. In contrary situations, long yields are likely to be low and falling. Also, if debt is elevated relative to GDP, and a rising portion of this debt is utilized for either counterproductive or unproductive investments, then long-term Treasury bond yields should be depressed since an environment of poor aggregate demand would exist. Importantly, both low long rates and the stagnant economic growth are symptoms of the excessive indebtedness and/or low quality debt usage.” 

We know that debt levels in the industrialized world are in the ozone and still rising. Now take a look at what yields did historically during three similar crisis periods—Japan 1989, United States 1873, and United States 1929–when debt levels were much lower globally than they are now. 

Back to Hoisington: 

“In the aftermath of all these debt-induced panics, long-term Treasury bond yields declined, respectively, from 3.5%, 3.6% and 5.5 % to the extremely low levels of 2% or less in all three cases (Chart above). The average low in interest rates in these cases occurred almost fourteen years after their respective panic years with an average of 2% (Table below). The dispersion around the average was small, with the time after the panic year ranging between twelve years and sixteen years. The low in bond yields was between 1.6% and 2.1%, on an average yearly basis. Amazingly, twenty years after each of these panic years, long-term yields were still very depressed, with the average yield of just 2.5%. Thus, all these episodes, including Japan’s, produced highly similar and long lasting interest rate patterns. The two U.S. situations occurred in far different times with vastly different structures than exist in today’s economy. One episode occurred under the Fed’s guidance and the other before the Fed was created. Sadly, there is no evidence that suggests controlling excessive indebtedness worked better with, than without, the Fed. The relevant point to take from this analysis is that U.S. economic conditions beginning in 2008 were caused by the same conditions that existed in these above mentioned panic years. Therefore, history suggests that over-indebtedness and its resultant slowing of economic activity supports the proposition that a prolonged move to very depressed levels of long-term government yields is probable.”

Now, you may want to sell this bond market here based on the view it is a bubble. But before you do, let me share an anecdote. I remember it vividly. The recently deceased renowned global strategist, Barton Biggs, who spent most of his years toiling away at Morgan Stanley and was a rock-star when global strategists played those roles, made a bond bubble call back in the mid-1990’s. He said that shorting the Japanese government bond market was the “trade of a lifetime.” Well, maybe. Unfortunately Mr. Biggs didn’t live long enough to see that trade work out. 

Webinar Announcement: I edit two currency trading newsletters for Weiss Research. I am doing a free webinar on Thursday, September 20th, at 12:00 p.m. ET, covering key global macro themes and my view on the direction of the dollar and other major pairs as we head into 2013. I invite you to attend and encourage your questions during the event. 

The webinar is free. All we ask is that you seriously consider becoming a Member of one of our services offered by Weiss Research. 

Please click here to register. 

Thank you. 

Jack Crooks 

Black Swan 

www.blackswantrading.com