You have to
read between the lines on this one.
commentators realize what the BIG story is for the financial markets today. The
BIG story is not the mortgage fraud, the corruption, or the computerized
trading (although the last one dominates US stock markets’ daily action).
No, the big
story is the monetary actions of the massively indebted US vs. the credit
while Bailout Ben Bernanke and several his cronies at the Federal Reserve have
been braying for additional QE and currency weakness, China has been
aggressively restricting credit lending, raising interest rates, and generally
making moves to cool its overheated system.
terms, this is a conflict between the world’s old superpower (its largest
debtor nation) and its rising new superpower (its largest creditor nation). It
represents the largest conflict in global financial markets as well as THE most
significant development to watch for those looking to successfully trade the
forget, this was ALSO the big story dominating the financial markets in 2008 as
well. I know, the banking Crisis took the headlines. But it was China’s
stockpiling of commodities that created the massive “inflation trade” imbalance
which saw oil at $150 a barrel, commodities across the board exploding higher,
and the US Dollar hitting a 20 year low.
that played out when the trend reversed? Commodities and equities collapsed
across the board as the US Dollar exploded higher. This, in turn, kicked off
the Dollar short-covering explosire, which began the chain of events leading
into the Autumn of 2008.
consider that we are in precisely the same environment today. Once again, talk
of the US Dollar collapsing is everywhere. The whole world is piling into commodities, especially Gold.
And US traders are actually MORE bearish on the US Dollar today than they were
The reason I
bring all of this up is that I am beginning to pick up on signs that the US and
China may in fact be trying to reach some kind of backroom deal on the
“currency” issue. Given the current lopsided balance of the financial markets,
you can imagine the impact this deal would have if my suspicions prove correct.
As you no
doubt are aware, over the last six months, the US has routinely vilified China
as been a currency manipulator and the source of our financial and economic
woes. China, in turn, has responded to these claims by pointing out that the US
Federal Reserve is damaging the world financial balance… while also making
veiled threats of the dreaded “nuclear” option (China actively dumping US
essentially is an oversimplified version of the dialogue occurring between the
two countries for most of 2010. Then, suddenly, the US does a 180 with Treasury
Secretary Tim Geithner stating that the world currencies are “roughly in
alignment” and that there is no need to “devalue the Dollar” but to maintain a
“strong Dollar” policy.
these comments are coming from one of the biggest stooges in history. But they
DO represent a sudden dramatic change in Geithner’s rhetoric. And given their
close proximity in timing to China’s first interest rate hike in three years, I
can’t help but wonder if something is going on “behind the scenes” between the
US and China which most analysts (AND the markets) are not discounting.
US Dollar is giving hints of this,
putting in what could be a potential bottom and reversal. Of course, it
could be a GIANT head-fake, but the bounce from the multi-year trend line is
something we need to take seriously in the context of Geithner’s and China’s
recent statements/ moves.
and the US struck a “backroom” deal in which the US will drop the anti-China
rhetoric and make moves to potentially halt a collapse in the US currency in
order to calm its largest creditor (and THE one player whose moves ALL US bond
holders are watching closely)?
If so, then
the lopsided inflation trade could be in for a SEVERE reversal which would see
commodities and stocks collapsing as the US Dollar rallied a la 2008. Could
Gold and Copper be telling us this is the case? Both commodities are seen as
terrific discounters of future inflation. And both have reversed as of late and
look to be potentially correcting.
all of the above is mere conjecture based on me noting a sudden change in the
mood between China and the US. We’ll only know for sure on November 3 when the
US Federal Reserve announces whether it will be implementing a MASSIVELY
anti-Dollar QE 2 program or something smaller and less destructive.
If it’s the
latter, then you can bet that the US financial markets will undergo a SEVERE
mood change and reversal. Remember, ALL of the actions since mid-August has
been fueled by speculation that the Fed is going to issue a HUGE QE 2 program
on November 3. If traders are
disappointed and the Fed announces something small or doesn’t announce anything
at all, then my theory of a China/ US deal gains a lot of weight… and the
markets are in for a rude surprise.
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