Currency
‘Trade bullying has killed the dollar bull’: Joachim Fels
Donald Trump can’t point to much in the way of legislative victories over his first six months in office, but he might have something to crow about when it comes to a weaker U.S. dollar.
“Much of the world has been waging a cold currency war since the autumn of 2016, and so far the winner is Donald Trump,” wrote Joachim Fels, global economic adviser for asset manager Pimco, in a Wednesday blog post.
Trump regularly charged during the presidential campaign that other countries were taking advantage of the U.S. by manipulating their currencies, leaving U.S. exporters to suffer from an overvalued dollar. The Trump administration hasn’t followed through on a campaign pledge to declare China a currency manipulator, but has continued to at least talk tough on trade-related issues.
But Janet Yellen has a little problem and his name is Uncle Buck. The US dollar index and its pairing vs. several global currencies are on the verge of collapsing below important support levels. This update on currencies from this week’s NFTRH 457 explains why I am short the euro and prepared for the USD to find support and bounce. Now, at this point that is just a contrarian’s fantasy because the market says USD is in trouble. But have a look at the post and see if you might agree with some of its premises, especially where sentiment and Commitments of Traders are concerned.
So here we have the Fed, overseeing a massive bull market in stocks and ostensibly in accommodation removal mode. My premise since the election of Donald Trump has been that the Fed could now slowly and routinely remove the monetary policy stimulants it had injected into markets nearly non-stop during the Obama years because that admin’s goals depended on monetary policy (i.e. monetary stimulation, because there sure was precious little real economic stimulation going on) whereas the new Republican policies would depend upon fiscal stimulation. I would argue, however, that “fiscal stimulation” may be code for ‘dollar devaluation’ to spur exports and boost manufacturing.
So a big question now is whether the Fed, despite its slow tightening regime and stated intention to implement future rate hikes and reduce the size of its balance sheet (USD-supportive actions) actually means business, leaving the Trump admin to its fiscal policies; or whether the Fed will ‘play ball’ with this admin in a different way.
Core to the Trump fiscal agenda would be a weak US dollar. We just may get a look at Yellen’s cards today. If FOMC rolls over and keeps things well and dovish despite the weak USD, we’d have a clue that they are on board the weak dollar express. But what if the Fed chooses to support the dollar through some subtle jawboning about future hikes and balance sheet reductions? I have no real dog in this fight. I’m just trying to make sure NFTRH is on the right side of it.
Looking at it from a different angle and taking out the political while only considering market-oriented inputs, here is a big picture look at previous Fed tightening cycles. The stock market topped on the last two occasions that the Fed Funds Rate (FFR) caught up to and slightly exceeded the 2 year Treasury yield. But a more acute signal was when the 2yr began to decline and negatively diverge the FFR (note the red lines on the chart below).
Looking at the chart one might say that the 2yr and FFR have a long way to go before they reach a topping area equivalent to the 2007 example; but one might also look at the S&P 500’s mega hump and ask… ‘Really? That was 7 years of Zero Interest Rate Policy!’ The above is a picture of a distortion built on years of out-of-whack monetary policy (note how the 2yr began to rise in 2013 and the FFR did not start following it upward until late 2015). Maybe 1-2% is all that the Mega Hump and all that hot air can take on this cycle. It is the relationship between the 2yr and the FFR that will be important. At a current 1% to 1.25% the Fed is approaching the 2yr’s 1.4% but the market appears fine for now (and a bull trend is a bull trend until it no longer is).
A central question going forward is whether or not the Fed will choose to support the dollar and head off inflation, or wait to see the white’s of its eyes? Since the election the stock market has been very much tied to a dollar depreciation theme (and has, since 2011 been a primary beneficiary of the Fed’s inflationary operations). The last big rise in USD preceded a significant corrective phase in the markets (2015 into 2016). So which cards will Yellen show with respect to Uncle Buck and his current precarious state?
Gary Tanashian
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“Great call picking the [gold stock] bottom last week Gary!” –Frederick L 9.6.16
While the highly inflated value of the U.S. Retirement Market reached a new high this year, something is seriously wrong when we look behind the scenes. Of course, Americans have no idea that the U.S. Retirement Market is only a few steps from falling off the cliff, because their eyes are focused on the shiny spinning roulette wheel called the Wall Street Stock Market.
Yes, everyone continues to place their bets, hoping and praying that they will win it big, so they can retire in style. Unfortunately, American gamblers at the casino have no idea that the HOUSE is out of money. The only thing remaining in their backroom vaults is a small stash of cash and a bunch of IOU’s and debts.
According to the ICI – Investment Company Institute, the U.S. Retirement Market hit a new record $26.1 trillion in the first quarter of 2017:
This new record high in U.S. Retirement assets is most certainly a good moral booster for Americans. As their retirement assets continue to increase, this provides them a wonderful incentive to fork over more of their hard-earned monthly income to feed the DARK HOLE I label the U.S. Retirement PAC-MAN Monster.
Regretably, Americans have no idea that their monthly retirement contributions are not being saved or stored in a nice gold vault, rather they are being used to pay the lucky slobs who retired before them Now, when I say SLOBS or POOR SLOBS, I am not being derogatory. However, I am using the word as a Wall Street Banker would label those they prey upon.
Regardless, as the U.S. Retirement Market continued higher over the past several years, the amount of net contributions have gone into negative territory. As I have mentioned before, this is a beginning sign of a Ponzi Scheme in its last stages. In my previous article, WARNING: U.S. Ponzi Retirement Market In Big Trouble, Protect With Precious Metals, I posted the following chart:
As we can see in the chart, the Private Defined Contribution (DC) Plans paid out $28.7 billion more than they took in in 2014…. the last year the Investment Company Institute provided data. Simply, Private DC Plans are mostly 401K’s. If we look up at the first chart with the colorful breakdown in the different U.S. Retirement Plans, DC Plans (mostly 401K’s shown in YELLOW) were valued at $7.3 trillion.
To see U.S. DC plans now paying out more than they receive is certainly bad news… but it isn’t as bad as what is taking place in the U.S. DB – Defined Benefit Plan market. A Defined Benefit
Plan is where an employer pays the employee a specific pension payment, based on the employees earning history.
If we look at the U.S. Private DC Plan chart below, we can plainly see what a serious mess it is in:
The GREEN BARS show how much is paid out to retired employees, the BLUE BARS are what is contributed into the DB Plan, and the RED BARS denote how much more is going out than coming in. It doesn’t take much of a brain surgeon to figure out this is not sustainable.
To get a better look at how much RED is going on the U.S. Private Sector DB Plan, I presented the figures in the chart below:
As of the last year the Investment Company Institute published the figures (2014), $123.7 billion more was paid out to employees in the Private Sector DB Plan then came in. While larger payouts have been going out than funds coming in for quite some time, they have also reached a new RECORD HIGH. Ain’t records great?
Okay… let’s bring back the first chart with all the wonderful colors:
The Private Sector DB Plan is shown in the nice GREEN COLOR above at $3 trillion in assets. Again, these are from the Private Sector. If we look at the Government DB Plans in PURPLE, they are valued at $5.5 trillion. Unfortunately, the Government DB Plans (State & Federal) Pension Plans are in much worse shape than the Private Sector DB Plans.
How much worse? Look at the chart below:
The Private Sector DB Plans are underfunded by $500 billion, while the Federal and State-Local DB Plans are underfunded by $3.8 trllion (adding both columns together). Even more amusing is that the Federal DB Pension Plans hold a larger underfunded liability than their total assets. While we have heard in the news that the State Pension Plans are in big trouble, we can plainly see the Federal Govt Pension Plans are in much worse shape… LOL.
That being said, the U.S. Retirement Market is filled with assets that are based on highly inflated values. I took a look at the Federal Reserve Board of Governors Q1 2017 Statistical Review and listed the top Private Sector DB Plans assets in the chart below below:
Of the $3 trillion in total Private Sector DB Plan assets, Corporate Equities (stocks) are valued at $1,085 billion ($1.08 trillion), Debt Securities are $884 billion, Misc Assets are $850 billion and Mutual Fund Shares are $444 billion. Here are my comments on the figures above:
FIRST…. If our eyes are not glued to the TV watching CNBC, we should be able to realize that stocks are highly inflated via their extremely bloated P/E – Price to Earnings ratio. So, that $1.08 trillion of Corporate Equities will most certainly collapse in value in the future. This is bad news for both the poor slobs who have been paying in for decades and those retirees who were counting on that monthly income to pay for their $250,000 RV Motor Coach.
SECOND…. I find it extremely hilarious that “Debt Securities” valued at $884 billion, can be labeled as “Assets.” Yes, I realize that U.S. Treasuries and Foreign Bonds have been assets in the past, but where we are heading… supposed assets will turn into liabilities, quite quickly.
THIRD…. $844 billion in Misc Assets are not something I would feel comfortable being invested in. Sure, I could see possibly $20-$50 billion in Misc Assets, but $884 billion? This reminds me of Misc chicken parts used to make McDonalds high quality Chicken Nuggets.
FOURTH…. Mutual Funds are worse than plain ole stocks… if you ask me. Mutual Funds are claims on claims on stocks. So, this segment of the U.S. Private Sector DB Plan is one that will turn to into vapor quicker than most when fan hits the bull excrement.
While the bloated $3 trillion Private Sector DB Plan Assets are only a small portion of the total U.S. Retirement Market, we can assume the disease has spread throughout the entire $26.1 trillion market.
Lastly, it took me a while to come to this conclusion, but I now realize why the Fed and Central Banks pushed all that PHAT QE Money into Stocks, Bonds and Real Estate. If we are already seeing many sectors of the U.S. Retirement Market paying out more funds than are coming in… what in the living HELL does the U.S. Retirement Market look like when Stock, Bond and Real Estate values plummet?
That’s right….. it’s going to be BIG, BAD & UGLY.
John Maynard Keynes once wrote what may be one of the most insightful observations on financial markets ever conceived:
We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth, and higher degrees.
Now, what exactly is he talking about?
While it sounds like Keynes may have been practicing some rare form of martial arts, or Zen meditation, he was actually talking about financial markets … in particular, how to predict them.
It’s going to be a long and busy week. From Fedlines to Durable Goods to GDP…there’s a lot going on. And Lord knows what lies ahead politically and geo-politically! Here’s just a brief summary:
The metals have begun the week just slightly to the upside and this is nice. More on this later today and as we go through the week, of course.
However, for today I’d like to simply concentrate on the two charts below. Again, the only real value in analyzing the CoT reports is in being able to reference the current positioning versus historical data and price. For me, the best way to do this is to simply lay some data onto a weekly price chart.
Let’s start with Comex Digital Gold. If you listened to last Friday’s podcast, then you know that:
- At 157,094 contracts, the Large Spec GROSS short position is the largest seen since the survey taken July 28, 2015
- At 153,064 contracts, the Gold Commercial GROSS long position is the largest since December 1, 2015
- At 73,635 contracts, the Gold Commercial NET short position is the smallest since January 26, 2016
But how does this all appear on the chart? Are these levels historically significant? Please take the time to expand (and perhaps print) this chart. Take a good, long look and decide for yourself.
Now that’s all very interesting. However, where the historical perspective really jumps out at you is when you consider the chart/data combo for Comex Digital Silver. Again, as of the report released last Friday and surveyed last Tuesday:
- At 81,400 contracts, the Large Spec GROSS short position is the largest ever reported. In fact, the size of this position is now 27% greater than the previous all-time high of 63,993 seen on July 7, 2015
- At 66,398 contracts, the Silver Commercial GROSS long position is the largest since August 25, 2015
- At 88,312 contracts, the Silver Commercial GROSS short position is the smallest seen since January 19, 2016
- At 21,914 contracts, the Silver Commercial NET short position is the smallest since September 15, 2015
As in CDG, if we plot some data and price together, the result looks like this. Again, please take some time to give this chart your full consideration.
So what does this mean? Well it certainly appears that chances are high we see some significant rallies from here. As important technical indicators such as moving averages get bullishly crossed, these massive Large Spec short positions are ripe for a squeeze. Shorts get covered (that’s one buy) and then a long may be established, too (that’s a second buy). All of this buying pressure will drive prices higher in the weeks ahead and this coincidentally falls right into line with our forecast of a failing 2017 narrative (GAN2017) and 2017 metal price highs in Q4.
Have a great day!
TF
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