Guest Post: Surprise! The Dollar Is Rallying... Or Is It?

Tyler Durden's picture

Submitted by Yves Lamoureux of Macquarie Private Wealth

If you have been wondering what is the real reason for the recent upswing in the US dollar, read on. I am very bullish on its future rise. This report follows our early December comments, which were appropriately called “The carry trade now in trouble.” You can review them at

Very clearly, we stated, “The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here and now that the carry trade ends.”

My recent enthusiasm is largely based on evidence gathered since 2007 of the loss of velocity in money aggregates. In other words, the money base is contracting or slowing down its expansion phase.

Like anything that matters in the investing world: rarity defines value. It would then be no surprise  that  the US dollar will appreciate in the medium term. This is what I call the “now mechanics.” Recent movements are still mostly defined as stocks versus bonds and anything else here has been a sideshow. I am still bullish on a number of things—namely, the hard assets category. I do think that timing is critical to temper this bullishness and money contraction will become the overriding factor.

Even when broad-based equity markets rally, I find astonishing that money is not able to gain traction. The focus on M1 is ultimately wrong, since it is not transmitted to other parts of the economy.

However, it should not be underappreciated that falling stocks will have huge repercussions on the money base and will only exacerbate ongoing volatility. The period 1930 to 1940 was a great example of how the dynamics of money velocity impact stocks and the economy.

We are great students of past eras as they provide guidance and insight into present markets.

People focus too much on the day-to-day news as it reveals very little of the markets’ often superb anticipation skills. Contracting money, to us, is now the prime driver of the greenback’s rise and its ascension could definitely surprise us .

Yves Lamoureux, Investment Advisor, Macquarie Private Wealth Inc.

The opinions contained in this report are those of the author and are not necessarily those of Macquarie Private Wealth Inc (MPW). Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor MPW makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. No entity within the Macquarie Group of companies is registered as a bank or an authorized foreign bank in Canada under the Bank Act, S.C. 1991, c. 46 and no entity within the Macquarie Group of companies is regulated in Canada as a financial institution, bank holding company or an insurance holding company. Macquarie Bank Limited ABN 46 008 583 542 (MBL) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. MBL is not authorised to conduct business in Canada. No entity within the Macquarie Group of companies other than MBL is an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia), and their obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any other Macquarie Group company. Macquarie Private Wealth Inc is a member of CIPF and IIROC.

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10044's picture

Money base is contracting?? WTF?? Has this guy ever seen the [no longer] published M3?
The dollar is up because the fed is buying , that's it

Anonymous's picture

All the estimates for M3 (Shadow Stats, etc) show that it has also decreased in the past year. The dollar is up on some fear and reverse of the carry trade.

butchee's picture

John Williams at SGS reports the M3 is contracting and accelerating in its contraction to 5.2% in Jan.

butchee's picture

John Williams at SGS reports the M3 is contracting and accelerating in its contraction to 5.2% in Jan.

CONners's picture

The banks are not lending. Velocity goes to zero. The credit crunch continues.

Anonymous's picture

And today Bernanke announces he's going to pay HIGHER interest on excess reserves to make sure banks don't make loans of any kind (he says it's to "raise the interest rate banks charge for loans" - same thing), which he says will "remove the excess credit" out there that's gonna create inflation!

There is obviously no "excess credit" happening in the form of commercial bank loans, though there's plenty of "excess credit" in the form of central bank loans, payments, and guarantees, as well as loans (bond purchases) to state and federal treasuries.

The world has gone crazy, no one fully groks the bizarre shit that's happening moment-to-moment, and I guarantee you no one knows what's coming, or when.

aswipe's picture

+1 10044 We are the lesser of currency evils. 

badtimes's picture
badtimes (not verified) Feb 10, 2010 1:03 PM

Dollar is doomed...hat tip to:

tenaciousj's picture

Gratuitous site pumping should be a bannable offense.

Astute Investor's picture

His real name is Cetin Hakimoglu and he is a serial spammer of non-sensical "investment" material and a moron to boot.

He was subsequently banned at Seeking Alpha and should be banned here at ZH.  He posts under a variety pseudonyms.

nedwardkelly's picture

Plus, he's not Ned, I am.

The website all the spam links to is a PoS. Not sure his angle... Does he really think it's super duper and by getting people there via spam he'll develop a following? Or is he hoping to make a few bob on the google ads?

dnarby's picture

"Or is he hoping to make a few bob on the google ads?"

Nail, meet head.  *pow!*

Anonymous's picture

Is it Cetin or CRETIN? ;)

dnarby's picture

His official title is "Cetin the Cretin".

David449420's picture

clicking on this guys name tells me that he has been a member for the last 3 hours & 52 minutes.

I don't think Cetin the Cretin is going to last too long here.

trav7777's picture

BOJ is doing QE again and the EU looks to be bailing out Greece.

The dollar is sinking less rapidly...again, the DXY is a COMPARATIVE metric, not an arbiter of real worth.  Gasoline still pushing $3/gal

A Nanny Moose's picture

In the race to the bottom, all fiats are equal...eventually.

Anonymous's picture

Based on all of the estimates, M3 is also down in the past year. Both money supply and velocity are decreasing. Inflation hype is not based on what's happening now its based on what the inflationistas and gold bugs think is going to happen in the future. But right now, the facts support deflation and a stronger dollar. However, that could change both money supply and velocity increase.

Anonymous's picture

Except the inflation that was created to begin with was never counted in the official statistics. Remember when people were observing that a few years back? The system is already inundated with inflation. Banks have been lending far beyond their means for over a decade now to allow consumers to speculate. The inflation created that allowed for consumers to purchase foreign goods at such a rate also enabled the US to run twin deficits and allowed foreigners to accumulate excess reserves in Us dollars and Treasuries. Of course even if the dollar halved overnight and oil prices doubled, and asset prices still even slightly dipped, would that be inflation or deflation? The fact of the matter is that even if their is another massive liquidity contraction, piling into US bonds and dollars would only work for so long. Eventually a creditor nation such as Japan would go bankrupt trying to prop up the US dollar as their exports collapse and they see major shortfalls in revenue. At that point they would be forced to liquidate treasuries. In the long-hall a declining dollar is the only possible outcome, especially considering the US government's extravagant spending to keep the economy from falling off a cliff. Don't ever forget debt service costs and "entitlements". Robbing social security and medicare will only go so far.

Anonymous's picture

You all don't get it!!!

All currencies are gone and not just the Euro or the Dollar..

One of this days we are going to wape-up with an huge headache and discover that all savings are gone...all pensions benefits are gone etc...

At that time you would have Mr. Volcker coming like a Terminator and saying: Let's default on everyhing as this is unsustainable

Never forget that the end of Bretton Woods was done just to leverage the debt portion of every country but who benefited the most was the US.

Now you have no way out of this as until you have 3B Chinese, Indians and Africans working for $200 per month without any social security, the problems are likely to compound.

My take is that not only currencies are already gone accross the board but that free trade is also gone

Anonymous's picture

Anon- Yep totaly get it, and Ive been saying it forever one morning we'll wake up with something that makes a 2 bottle tequila hangover look real nice, savings, pensions all gone, of course theyll say its really good for us as we're quite spoiled and should be thankful for 16 hour work days making $150 a month.

Miramanee's picture

Anyone remember the M*A*S*H episode in which Radar's pet mouse, Daisy, beats the Marine's pet mouse, Sluggo, in a race? For those of you who recall this episode, you will also remember that Major CE Winchester III doped-up Daisy with some 1950's style crystal-meth. Toward the end of the story, Radar comes running in to ask Hawkeye and B.J. to look at Daisy, whom he reports is running around-and-around on her running wheel, to the point of imminent collapse and death. Well....

...Such is the case with all of the goings-on in the greater economy. Everyone is running running running to try and squeeze the last possible profits out of a global system of irredeemable currencies that is about to collapse. And when I say 'about to collapse', I mean it could take years, even decades for the end to be realized.

But this is an unavoidable end. We have "grown" our collective economies and populations, for decades now, on one pyramid scheme after another. It's like "WEEKEND AT BERNIES" on mega-growth hormones.

Running running running....splat.

Anonymous's picture

Great analogy! Your point about imminent collapse taking years is spot on. Decline in the US is a process not a singular event.

Anonymous's picture

We are in uncharted waters historically and the obfuscation, manipulation, corruption and deceit is unparalleled.

Instant Karma's picture

I sold some gold today. Big picture, looks like Euro debt bombs will be going off for a while, driving down the Euro, commodities, and stocks. I would guess I could be buying gold back closer to $800 sooner than I'll need to chase it at $1200. Not that I sold everything, and not that I'm not continuing to collect. I'm short paper gold and have been lightening up on common (as opposed to collectable) gold bullion coins.

SWRichmond's picture

We are great students of past eras as they provide guidance and insight into present markets.

Perhaps you would care to make a case for the fiscal path that a strengthening dollar puts the US government on?  Consider in your case rising unemployment, political stability, the extent of global military reach, and the availability of the large amounts of capital needed to feed US deficits.

A Nanny Moose's picture

and as the $ strengthens, doesn't existing debt become more burdensome?

Anonymous's picture

The whore never paid the inn keeper

Anonymous's picture

this is one of Russell's paradoxes.

The whore is the innkeeper.

Anonymous's picture

I ran this chart and superimposed the dxy, there is no relation here, in fact if anything there is a more positive correlation than negative. Run the facts yourself before listening to anyone.

Anonymous's picture

One time I was in Vegas and this very young hottie walked up to me on the casino floor at Bellagio. Surprised, I asked her "what are you doing tonight?" and she answered "Whatever the f__k I want to. Why don't me and you go up to your room and party?"

The trick in the above story is the dollar.

Anonymous's picture

I bought some gold & silver today. The carry trade unwind is suppressing the price of gold and silver (along with JPM's huge naked short positions in the CRIMEX paper market). This may be one of the last opportunities we have to buy PM's at these kind of prices.

Anonymous's picture

A stronger USD due to global "margin" calls does not affect any of the US gov accounts/outlays, especially if zirp is maintained.

I too was trained in old style must get over it. Flows are the only metric, collateral be damned.

Flows are needed ONLY to extract FEES. Bonus time ensues if one can grab collateral for no cost.

Stop the flows and the fees stop. Simple, really, for those not needing another dime. Trouble is, too much of the investing world needs another dime.

40muleteam borax

Anonymous's picture

"Instant Karma wrote: I sold some gold today."

You sold AFTER a $140 point drop in price from the highs at 1220? I wouldn't hold your breath that you'll be buying again at $800. Not saying it will not happen, just that I wouldn't count on it.

In other news, the bankers are massively net short the US dollar.

hettygreen's picture

Thanks for the post Yves.

I take enormous comfort in the still very negative view many investors have of the Dollar. From a purely contrarian perspective it might seem the move has barely begun.

Instant Karma's picture

I went long USO for Iran's "stunning" surprise tomorrow. Also balances off my smallish short positions in silver and gold.

Yves Lamoureux's picture


I will post 2 or more new tools not shown yet that also agrees with this.Especially exciting is a compression event coming up.It did turn late in the year with the dollar index and has surged massively right here.It tops in March and stays elevated until May


Mr Lennon Hendrix's picture

Gold is tied not only to the DoeLarr but to all FIAT currencies.  M3s slide has me scratching my head as to how to crunch the numbers, maybe this is one reason I have not made any big stabs at the market, but for the two previous years YoY was 18% per, so there is still a lot of monies out there.  Huge military budget, huge Fed and State deficit.  Huge funding problems in the EZ.  This all not to mention Third World country's problems.  Japan is  screwed.  Do they want deflation?  No.  If they went that route, how bad would it be?  DJ 1000/Gold 1000.  What do they prefer?  Inflation big.  Long gold and silver, oil and all energies.  Just because it will be hard to get doellars (and all currencies for that matter) doesn't make them worth more when there are quadrillions of them.

Rusty_Shackleford's picture

If left alone, the market may very well want/need to deflate.

However, when the hell have we ever left anything alone? 

We are assuming TPTB will just stand around as deflation happens.


Fat chance.


Uncle Sugar and Fedgod will be dropping FRN's from helicopters and mailing checks to everybody.  They have the infinite ability to inflate, with NO COST to them.

Whether the debt is 12 trillion or 120 trillion, they will not stop until it all blows up.

Mr Lennon Hendrix's picture

(B)arry (S)anders is running things...juke moves!  All this talk, juke moves.  Ben is looking over his "What to do once re-elected" checklist....

1) Helicopter.  Check.

b) Updated "Turbo Deluxe Printing Press".  Check.

4) Big tittied hoes.  Check.

g) PPT (He looks over his shoulder.  His team gives him a thumbs up).  Check.

4) Black cape and wizard's cap.  Check.

5) Picture of Sarah Palin in running shorts.  Check.

7) Picture of Palin naked (a la Dulles' body scanners).  Check.

J) Get out of jail free card, signed "From your bestess buddy, W."  Check.

13) 6 big phattie spliffs, and a celebration cigar.  Check and check.

Anonymous's picture

Money supply is vaporizing. The past few days have been HUGE for gold in relative terms. Nominal values are deceptive. Pay attention to stocks not flows. Dow 1000? Were headed there until the UST cries uncle and then it's Dow back to 5000 along with gold 5000. If not Dow 10k and gold 10k

Anonymous's picture

As a person who is very much concern about my gold investments, it is always important to seek updates about world's economic and gold conditions. So, thank you for letting us know about this.

Gold Bullion

Anonymous's picture

I'm a n00b, so I could be way off base here. I'm definitely going to mix my metaphors like a fish out of a blender.

Maybe the drop in M3 is because of all the "paper" wealth that has been "destroyed" by the Great Recession. A lot of that wealth had been "created" out of nothing, by massively leveraging a fractional reserve banking system with the metaphorical equivalents of steroids and crystal meth.

Steroids and meth can only carry you so far, then you crash. IF you wake up from the crash and remain a junkie, then you want more steroids and meth to get going again.

Geithner, Bernanke, Summers, et al seem intent on feeding the system all the steroids and meth it needs to get going again. It might work, but that only means the next crash will be even worse.

Those of us who see the reality of this situation know that it's unsustainable. But if this zombie economy is re-animated by these powerful and dangerous drugs, then there will be another steroid and meth pumped bull market run (otherwise known as a "bubble").

Yeah, the Emperor still has no clothes. But as long as market farces keep driving the economy, they'll still pump "money" into the fashionable investments. The way to make money in this market, is NOT to bet on sanity and rationality. The way to make money, is to figure out where the insane herd is going next and then get there ahead of the pack.

Just make sure you've got a bailout plan; so when the inevitable crash comes, you don't get crushed by the stampede.

ozziindaus's picture

or you may one day try and explain this whole market thing to your kids. It's a generational thing. Once it dies, it will be quickly forgotten.

Been to any dinner parties surrounded by douchbags talking about home prices lately?

Anonymous's picture

Prechter, Mish and Keen nailed it. It's debt deflation folks and I don't care what any Schiffhead says.

Anonymous's picture

Prechter, Mish and Keen nailed it. It's debt deflation folks and I don't care what any Schiffhead says.

ozziindaus's picture

heard ya the first time but I agree. What could possibly raise prices or give us any legitimate hint of inflation in this environment? 

Gold is not an ideal barometer here so I'll exclude that but silver is and it has not surpassed it's all time high from two years back, neither has oil or equities even despite their year long phony rallies.

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