This page has been archived and commenting is disabled.
The Broader $ Rally Has Just Begun, In Advance Of A Repeat Of The 2008 Deleveraging
Submitted by our newest friend, Thermidor
As currency players have become more and more focused on bashing the Euro they are in danger of taking their eye off a potentially far bigger story i.e. how the FX market is as dangerously unbalanced as it was in 2008. Yet, after yesterday discount rate hike and resent FOMC comments we should be on notice that this precarious equilibrium is coming to an end and has the potential to turbo charge, as well as, significantly broaden the mild $ rally (the broad $ index is only 7% off the lows) we have seen to date. Even if you aren't a major player in the FX market this should concern you as a $ rally particularly a rapid one is potentially horribly corrosive for a whole swath of assets especially commodities that have a significant weak $ premiums already built into their price.
Those of you have been reading my comments for some time know I'm a big fan of David Roche's book New Monetarism, which help me catch the explosive 2008 $ rally. As is the case today, the foundations of 2008 imbalances in the FX markets were created by an over supply of $s relative to Euros and Yen. Back then supply imbalance had built up over years as US banks ballooned their balance sheets. While European banks didn't shy away from leverage the important difference from an FX perspective was that the US recycled their newly created cash aboard via the government and current account deficit whereas, with the Eurozone the imbalances were largely recycled internally. This equation was sustainable until the US consumer stopped spending in the face of the housing slowdown and the supply of $'s to the rest of the world started to fall. This process would has been enough on its own to gradually rally the $. Unfortunately, everything was turbo charged by the collapse of the US banking system, which virtually overnight chocked $ funding. Indeed, the $'s rally was only arrested when the Fed stepped in to offer liquidity via $ swaps.
If the Fed had merely acted to stop the collapse of the banking system, then the FX story might have stopped there. However, they went further and attempted to reflate the balance sheet of US inc. As a result the Fed massively expanded their balance sheet relative to their peers as the attached chart shows. This naturally led to massive relative $ oversupply and renewed weakness, which in turn fuelled enthusiasm for all the weak $ reflexivity trades as it did in 2007/08 and guaranteed the FX market moved once again into a position of precarious imbalance.
This is all fine as long or until something comes along as it did in 2008 to alter the supply of $'s pitching over this fragile equilibrium. That brings me back to the latest FOMC comments and in particular those that relate to shrinking the Fed's balance sheet. In an ideal world the majority view will prevail at the board and we will get nothing dramatic with only "gradual asset sales". In this scenario, as the Fed's balance sheet shrinks I would expect the $ to continue its gradual appreciation but across a broader range of currencies not just the Euro. This is a benign outcome for most assets as they should be able to look through $ strength although I would expect commodities especially, gold that have benefitted from the weak $ premium to struggle. However, just as in 2008 when the $ rally started gradually given the precariously unbalanced market the move this year could gather enormous momentum and become far more corrosive for asset prices. Strong data especially, employment (I believe we will see a mid 8% unemployment rate by June even before census hires) could easily be the trigger for such an acceleration as it makes the bond markets that will already be struggling to digest high base driven headline inflation extremely restless. In that scenario it's possible the hawks on the FOMC prevail and we "begin a program of asset sales in the near future to ensure that the Federal Reserve's balance sheet shrinks more quickly". That would catapult the $ significantly higher triggering a repeat of 2008's deleveraging.
»
- 7178 reads
- Printer-friendly version
- Send to friend
- advertisements -
"....how the FX market is as dangerously unbalanced as it was in 2008."
Just one of the many inevitable consequences of "extend and pretend" coming to the surface. Anyone who works in a garbage dump knows (particularly up north, where there is a more extreme freeze/thaw cycle) don't bother burying a car tire under dirt because it will inevitably work it's way to the surface.
Yes, as an antique bottle digger and coin shooter in New England and New York (in my youth), I relied on the "frost heave" effect. In fact, in Britain, it is rather routine to find Roman coins less than a few inches deep. Contrast that with North Carolina, where I now live---Civil War artifacts often are beyond the reach of the average metal detector. 1700's era artifacts? Start digging the top two feet off the site, then you can begin sifting.
In upstate New York we had two potato seasons---one in the Spring when we removed "new" rocks, and the other in the Fall when we harvested real potatoes. Ha ha.
By the way, I have many beautiful antique bottles, if anyone here collects and would like a nice deal. In the next few months/years I'll be unwinding in advance of my senescence.
I figured someone who was born and raised about the Mason-Dixon line would understand this phenomenon. People who have lived their entire lives in the deep south really don't understand what "frost heave" means. When I was 6 years old, I was now expected to fully participate in maintaining the family garden plot. Back then it was a full acre and a lot of work, this being pre rototiller time.
I had spent countless hours pulling rocks large and small out of the field while weeding the year before. Yet by spring time there was a brand new crop of rocks. I asked my Dad who put them in the field. Mother nature was the reply he gave, along with the understanding that this was one of the curses of being a New Englander.
CD, you bring back memories, bad ones! Raised just south of the MD line, had a half acre rock garden in potatoes. Only
thing worse than wheelbarrowing rocks out of the Garden in May, is digging potatoes in late august...
You may be happy to learn, that after 10 years or so, the rocks quit coming. We have a full foot of top soil now
in our older fields, where we bury our Gold. Ha!
Oh picking up rocks, I have not done that in 20 years. My family still has its farm (Michigan's got lots of rocks too!) and probably not in the too distant future I'll once again be picking up rocks on the farm!
"Strong data especially, employment (I believe we will see a mid 8% unemployment rate by June even before census hires) could easily be the trigger for such an acceleration as it makes the bond markets that will already be struggling to digest high base driven headline inflation extremely restless. In that scenario it's possible the hawks on the FOMC prevail and we "begin a program of asset sales in the near future to ensure that the Federal Reserve's balance sheet shrinks more quickly"."
You had me until this. It may be true that the SA (manipulated) U-3 is somehow brought down to that level, but I am very skeptical. Now it may be true that the Fed are pathological liars, but they have pretty much writ in stone that they aren't going to do a fast ramp of "asset" sales.
Thermidor,
How do you arrive at mid 8% unemployment by June?
fuzzy math?
cancel unemployement benefits for thousands of citizens. move them from u3 to u6. short term unemployment will go down, and poloticians will have something nice to tote around for a while
+1 people tend to forget that commodity and equity prices are just function of weak USD. Strong $ and good bye stock rally, commodity rally, ANY rally...
Of course. That's why gold has been hammered by the recent dollar rally . . . . Oh wait, nevermind.
>>Strong data especially, employment (I believe we will see a mid 8% unemployment rate by June even before census hires) could easily be the trigger for such an acceleration as it makes the bond markets that will already be struggling to digest high base driven headline inflation extremely restless. In that scenario it's possible the hawks on the FOMC prevail and we "begin a program of asset sales in the near future to ensure that the Federal Reserve's balance sheet shrinks more quickly". That would catapult the $ significantly higher triggering a repeat of 2008's deleveraging.<<
There is nothing is this paragraph that makes sense to me:
--Strong data especially, employment (I believe we will see a mid 8% unemployment rate by June even before census hires)--
The only way unemployment falls (factoring our census hires) is if they continue to fake the data. Weekly claims are soaring, and small business is falling apart.
--begin a program of asset sales in the near future to ensure that the Federal Reserve's balance sheet shrinks more quickly"--
Sell to whom? At what price? More likely, the Fed will need to begin buying more Treasurys to prevent long rates from blowing out given the funding crisis.
The short-dollar trade was once again crowded, and, the Euro looks like a less viable alternative (much to the chagrin of Tom Brady's wife who has insisted in being paid in Euros, if you recall).
The dollar may go up, and it may go up a lot, but it would seem we have an unservicable amount of debt, unless interest rates are held low for a long time. That's just math.
wasn't it the Brazil Real?
wasn't it the Brazilian Real she was paid with?
high base driven headline inflation
With owners equivalent rent sinking as fast as it has for the past 5 months -- I don't think so.
I believe we will see a mid 8% unemployment rate by June even before census hires
Hiring by whom? Companies squeezed by zero pricing power or destitute state and local govts currently making layoffs en masse?
Dear Tyler and Community, if you have an illusion that 1USD will purchase 200 EURO in a year period and every American schoolboy will be able to buy a German-manufactured Porsche or Mercedes on money saved from lunch you are mistaken. Please look on fundamentals long-term and do not bury EURO yet...
You're like Obama, countering arguments that were never made, and slaying preposterous, imaginary straw men.
The markets know this is pure bluff.
"We're going to destroy the US economy and send asset prices back to pre-1980 levels and send bankruptcies and foreclosures and liquidations parabolic - to save the US Dollar and keep money flowing into Treasuries"
Who's folding?
As long as everyone is so sure the $ is going to $1.20, I think this looks like a great time to short the $ via AU. Looks to me like they are almost out of "Strong Dollar" ammo. This rate increase is as hollow as a drum. The Euro beating has just about played out. And here comes inflation pressure during a debt deflation. Anyone who sees $ strength in this mess will loose his money.
I think it will be hard to get a weak doller as long as credit is not market to market and the healing can begin. The dollar strength is an insurance premium on that event.
Inflation is not limited to demand-pull. If the economy totally collapses for example and there is capital flight that would lead to hyperinflation.
As a half-blind amongst the blind the $ could well rally against other G-7 currencies, notably against the pound, the euro and the yen. Not so sure against emerging market currencies (B-real) and gold. The gold chart in euro has broken out and could well head towards EUR 1,000. So we could have a steady $-gold price and a crashing euro (and pound and yen).
Since all money is nothing but debt today, the USD actually NEEDS to rally before it finally dies. It cannot die before a significant spike up. Many people think the dollar rallying is a good thing for it, it isn't. In fact it is the worst thing that can happen to it at this stage of it's life - kinda like a heart attack.
Exactly. Just as oil in 2008, that spiked to $ 147 a barrel before collapsing.
Yup. And if you're wondering why this will be/needs to be the case, I present this as my evidence:
It is important to note that the bottom of the pyramid is PHYSICAL gold, not the paper futures gold (that most people know of as the "gold price" today). So yes, we'll see paper gold price collapse while at the same time a rising price for physical.
Would you please explain this evidence, and how it indicates that the dollar must spike before dying? Is this supposed to be a risk pyramid? Pardon my thickness, but I don't catch your point at all.
what GG is essentially saying is that reality will sink in when physical demand is high, dollar strength is high, and GLD is god knows what (prolly low).
I agree with this GG, especially your last sentence.
Finally someone who's also "in the know". Navigating the rough seas ahead will be a lot easier if you understand the real world implications of the pyramid above and know that we are at the end of the dollar's timeline. Deflationists and inflationists are BOTH wrong.
I came to this conclusion as well when I read that although the paper gold price declines physical delivery is causing a genuine shortage at the LME. It makes no sense, holding variables constant, that increasing physical scarecity leads to a decrease in prices.
I claim the gold price is not going through the roof it is going to zero, ie becoming invaluable but through the backdoor, spikes not withstanding. False gold bugs still believe in inflation and the Fed, they still believe in the value of money as created through credit expansion.
Genuine gold bugs would never claim that gold is money, because it would reduce gold to being a derivative of essentially credit creation. To genuine gold bugs the real world functions the other way around. These people are taking delivery because they are rejecting THAT particular unit of measure. Call them "strategic investors". When THAT day comes..... WOW
Gordon Gekko
Why are they both wrong? How high will USD index go? Why i GLD not safe?
I understand that our savings are debt based. Been reading ing economist Keen of Australia. Total debt now 350%, as opposed to 260% in 1929. So debt needs to be written off some way. Some think doing a controlled devaluation of the dollar by buying gold at $3000 per oz.
Clarification please
+1
I have pretty much agreed with T.D. until now. The USA is structurally in far worse shape that Europe. They are not fighting two wars with no end in sight. In my opinion, gold is still cheap
Are you shitting me? The incremental cost of fighting both wars in Afghanistan and Iraq is approximately $300 billion/year, or about $1000/citizen in the U.S. While this is not chump change and undoubtedly will prove a poor investment, it is not a "structural" cost. Moreover, the U.S. government's balance sheet was manageable until 2008. And if present political trends are indicative, it appears that Obama and his spendy minions will be heading back to the Windy City in 2012.
Europe truly faces structural issues for which there is no resolution. An inverted population pyramid coupled to a welfare state inevitably results in national bankruptcy. It's no coincidence that the PIGS (Ireland excepted) are dying first--they have had the lowest birth rates in Europe for 30+ years. But demographics and bad banking will catch up to the rest of Europe in time.
Also, America always has the option of redirecting our $600B of military spending. Europe has already redirected their military spending to social programs.
The entirety of Western Civilization has Hell to pay, but Europe will get hit much, much harder than the U.S. If worse comes to worse, we can always send in a few Navy Seals with pea shooters and slingshots to overthrow Canada.
Do you believe that the incremental cost of both wars is less then the incremental cost of oil, and middle east stability, and dollar hegemony if we hadn't been proactive?
It must be. Otherwise, we wouldn't be there.
To whom will the fed sell toxic assets? Nobody wants the GSE debt. Who will buy trillions in US bonds? Bond auctions are nearing failure now. Next week another 126 billion hit the market and more are coming every two weeks for years.
Market rockets higher again! Nothing can stop it!
A final running of the stops by DaBoyz before the collapse.
How many - millions? - would have to simply stop looking for work 'cause there ain't none and thus not be counted in order for U3 to print 8% ?
Just curious, what happens to exports with his crazy Dollar ramp when oBamaLamaJama wants to goose what we ship overseas?
Are these mutually exclusive so that can co-exist? Or is it an either/or scenario...pick your poison kind of deal?
Perhaps there is a simpler explanation as to the trigger for dollar strength. The world is in the midst of de-leveraging. Since US is the reserve currency, many loans were written in dollars. As asset prices fall and borrowers scramble in dollars to repay the loans there is a dollar shortage. This is not a sign of economic health but rather of economic contraction, thus auguring poorly for commodities, equities and bonds. These will be sold to repay loans. Note, even in the 2008 crisis gold and gold mining stocks went down. The need for dollar liquidity becomes the driving force.
Agreed, the need for dollar liquidity will also provide the Fed with future opportunities for QE. The game is to continue to feed fresh dollars into the economy to prevent deflation. The deleveraging process has only just begun.
Corect. The destruction of credit continues relentlessly. Makes the dollar appear to increase in value except the reality is debt is simply being transferred from private debt to public debt. All the while, the Treasury is currently in bunkruptcy court refinancing their debts at 3.8% as this is all the interest the poor American people can afford to pay. Pity them.
show of hands ... how many folks think benny wanted to kill the dollar rally, esp after the swiss intervention yesterday, and did so by gunning the USD higher and creating a shorting opportunity? no, no ... no tinfoil hats here. just a thought.
Hey Marla, this post is poorly written, even for the patois we've come to expect from frenzied financial junkies.
If this guy is going to post here regularly, could you clue him in?
"resent" is not the same as "recent".
"Those of you have been reading" is missing an object, "who".
"which help me catch" Sounds like 3rd world speak.
"chocked" is not the same as "choked"
Thanks!
yeah, the main ideas were really hard to understand...i mean wow no object...
The current 2010 situation is a bigger difference than the 2008 one. Therefore, the argument here does not compute.
Dollar rally? Not today.
Gordon-Gekko...would you please elaborate a little more on your views ?I am a dummie.Thank you.
The impending dollar rally that I warned about from mid 2009 onwards, has only just started.
USD Index daily and weekly charts remain bullish.
Vice versa for the EURO and DOW/SP00.
http://www.zerohedge.com/forum/market-outlook-0
ucvhost is a leading web site hosting service provider that is known to provide reliable and affordable hosting packages to customers. The company believes in providing absolute and superior control to the customer as well as complete security and flexibility through its many packages. cheap vps Moreover, the company provides technical support as well as customer service 24x7, in order to enable its customers to easily upgrade their software, install it or even solve their problems. ucvhost offers the following different packages to its customers