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Is the US Dollar Telling Us Deflation is Back in Town?
Stocks are
on the ledge of a cliff. The issue now is determining whether this will become
a full-scale Crisis or simply a correction that allows the “inflation” trade to
cool. The primary
means of determining this is the US Dollar. As a standalone currency, today the
US Dollar is merely a symbolic means of exchange, not an asset of any real
value.
Indeed, in
the last 100 years we’ve seen the US Dollar lose well over 95% of its
purchasing power. However, once the world collectively dropped the Gold
standard (the last hold out, Switzerland, officially went off it in 2000)
permitting the creation of endless credit and money printing, the financial
system entered a period of relative value. That is, all currencies (which are used
to denominate other asset classes) are entirely paper-based and consequently
trade relative to each other based on the money printing each central bank
engages in.
In this type
of monetary system, how the US Dollar (or any other currency) trades is all
about how it compares to the other major paper-based currencies (Japanese Yen,
the Euro, the Swiss Franc, etc).
Indeed, this
very idea is the basis of the US Dollar’s “value” today. The US Dollar index is
actually the value of the Dollar relative to a basket of other currencies. The
breakdown of this index is as follows:
1) Euro
59%
2) Japanese
Yen 12%
3) British
Pound 12%
4) Canadian
Dollar 9%
5) Swedish
Krona 4%
6) Swiss
Franc 4%
Because of
its excessive weighting, the Euro’s action has an enormous impact on the US Dollar
index. So if the Euro takes a hit, the US Dollar will rally simply due to the
correlation.
I bring all
of this up because in an objective sense, the US Dollar is ultimately doomed to
fall to zero (just as every other paper currency in history has done.) However,
its descent will feature HUGE swings in volatility as the rest of the world’s
paper currencies (the Euro, Yen, etc) collapse as well (causing the US Dollar
to rally).
In this
sense, the US Dollar, while ultimately doomed, remains a key barometer for the
world’s financial health. I’ve mentioned before that the currency markets are
the first to “get it” when a major trend changes (after currencies comes bonds
and finally stocks). And the US Dollar is the primary currency to watch for
determining the direction other asset classes (particularly stocks) will soon
take.
As the below
chart shows, during the 2008 debacle, the US Dollar (green) began to rally hard
well before the S&P 500 (black) “got it”:
We also saw
the same pattern emerge during the Euro Crisis of 2010:
Which is why
we must take note of the fact that the US Dollar may indeed be preparing to
rally now (IF a Crisis erupts in the financial system). In fact, the
longer-term chart of the US Dollar indicates we might actually be on the verge
of something MAJOR happening:
The above
pattern is a classic bullish falling wedge pattern. These patterns usually break to the upside and feature
sharp rallies. As we all know, the US Dollar is in SERIOUS trouble itself. So
the most likely catalyst that could result in the above pattern breaking to the
upside would be a Crisis, most likely in Europe (a collapse in the Euro would
push the US Dollar up).
SHOULD this
occur, we’re likely to see the US Dollar rally to test its former long-term
support line (now roughly 78). This in turn could trigger another systemic rout
that would put stocks in an absolute free-fall.
So if you’ve
not taken steps to prepare for the coming Crisis, you NEED To download my FREE
report devoted to showing in painstaking detail how to protect yourself and
your portfolio from the coming ROUND TWO of the Financial Crisis (round one
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Again, this
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Good
Investing!
Graham
Summers
PS. We also
offer a FREE Special Report on the inflation situation in the US. This other
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So what.
The dollar will be very strong in the near future. I'm all in. I'm expecting a deflationery crach in this year. After the crash I go all into gold or oil.
Good luck with that theory there, Pagan.
As for myself, I won't be holding my breath waiting to see the very first appreciating fiat currency in world history.
WOW didn't realize the Euro weighting. Where is the Aussie? and if there was asian representation? Singapore, Latam? The true value of the POS would be much lower and show true position in the world.
But Gold!
What is a bucket of c-r-a-p compared to several other buckets of c-r-a-p?
Is that a philosophical question?
LOL!
I always laugh when blinkered minions of the financial status-quo state that the solution to the problems of the US dollar in its status as the world's reserve currency is to institute a basket of (fiat) currencies as a substitute. To which I can only respond, why is having several turds in a basket preferable to having a single, larger turd in that same basket?
The beauty here is that the deflation debacle won't affect the price of this invaluable treasure vault of knowledge. You can't deflate 100% FREE.
The next time the DXY goes under 74, I am sure this author will have a completely opposite view. People who trade currencies make me laugh. If you haven't figured out that the Dollar is the Euro is the CAD is the Yen is the AUD, then you are lost. As long as the central banks are cooperating to set exchange rates, every paper currency is exactly the same. And if the Yen action after the Earthquake didnt finally convince you that is happening, oh well. The only currency trades are being long physical gold and silver.
Yeah, but the whole point is his charts show the US dollar losing value except in the last two weeks. All the US dollar rises that preceded any equity drops lasted for over 2 months! Two weeks does not make a trend.
This is just wishful extrapolation of a two week trend. Wake me up in 2 months and I will listen. In the mean time, I will keep buying gold and silver.
It's good to remember that the silver price made a double bottom in 2001 and 2002 over a one year timeline; In 2002 at a certain time you could buy silver for the same price you could in 2001. And yet we know that the hadwritting was already on the wall, and we know what happened next. The future price of these metals is already pre-determined by the people and the policys that are in place; the dollar meisters and the Euro meisters are going to inflate until they choke on it; and more and more people are becoming aware of this every week. The ECB has lost most of its credibility; it doesn't follow rules; it "prints to order"; the Pound is crumbling, Inflation is very much with us and the "authorities" have no idea what to do except to create more monetary units to try to make more bad loans look "acceptable".
Excellent point. Just as the upcoming/ongoing plunge in the value of the fiat dollar is already predetermined as well.
"Already baked into the cake" is another common and useful metaphor.
No no no what youre forgetting is now this time its DIFFERENT! And any problems just receive a bailout. Nevermind this has never worked at any time in history, and in fact always has resulted in terrible disaster, this time its different....this time its different...
Stay away from the drugs.....There too strong for you.
For the first time you (Graham) don't posting something completely worthless.
And it’s all 100% FREE.
Slow motion train wreck. I'm sure TPTB are thrilled most sheeple can't think past their next paycheck.
You're stupid. Your questions are stupid. The answers to your stupid questions are overly stupid because you're pointed in the wrong direction. We all know what the USD is because we clicked on the KITCO sidebar and got the ICE definition, what's the surprise?
If you really had any fucking clue to what you were saying, it would be, "HEY! In £ DOW has made a new high for the year!" yeah, 3 days ago, douchebag.
Yoda asks, responding to whom are you?
The Universe, our little ball of water and land is going to stop spinning fast enough to keep it from sailing blithely off beyond the Milky Way.
Monogamy is going to one day found to be an unnatural state.
And Kim Kardashian will one day have udders for breasts.
What we need to know is not the inevitable, but WHEN precisely--- within a few hours preferably minutes and only to a few of us--- will the inevitable occur.
You got all this from the chart? Shit, I guess I should take another look at it. Ha!
..and when you do, it helps to use funhouse mirrors.
I can't comment on the quality of this analysis because I know almost nothing, although I don't know if he knows what he means when he uses the term deflation. Plus, the coincidences in the charts may be just that, coincidences.
But it is interesting to see the makeup of the dollar index laid out like that. How did they decide Euro would get 59%, China nothing...and why Sweden? WTF??? Also, why only measure it against other fiats anyway? Why not add Energy or some commodities to the weighting. I would think it should be measured against our largest trading partners currencies, in order of trade value, plus some mix of commodities, metals, energy, food, something of REAL VALUE. Just telling us it buys fewer Euros today doesn't tell us what REAL goods it will buy today. Just my two cents...
No, he does not know what the definition of deflation is. The incorrect, or false, use of this term is very common now. As Milon Friedman said, "Inflation is always and everywhere, a monetary event". Therefore, of course, the inverse; deflation, is always and everywhere a monetary event. The lowering of the average house price for instance is not a deflationary event; a "rise" in the dollar in the dollar "index" will not be a deflationary event. note; it could be; but we are specifying a cause for this rise; distress in the markets' appreciation of the value of the Euro; only an actual reduction in the number of US dollar monetary units is a deflationary event. This is not an opinion; this is an extended definition; this is what the word means.
There may be plenty of frns but if they are being hoarded by the corps and banks, is it a reduction of the frns in circulation and is it deflationary?
The composition of the index has been around since the 1970s, before the Eurozone was around. When those countries merged into a common currency, the Euro became very overweight in the index.
There's also the trade weighted dollar index (http://www.babypips.com/school/trade-weighted-dollar-index.html), but the dollar index as described in this post is the one traded on the exchanges and you're correct in that it has no bearing on purchasing power.
EXACTLY my point above, Pupton.
This bullshit US Dollar Index is NOTHING, or at least USED to be nothing, but a very short-term currency daytrader's tool, with no significance outside that limited arena. It only started being trotted out on a regular and widespread basis by the corporate-controlled media and their parrots after this financial crisis began four years ago, as a way I have no doubt of distracting the average naive saver and investor from the REAL and ongoing fall in the value of the US dollar, which once again is NOT and can NOT be measured by the highly artificial and arbitrary US Dollar Index.
I've been looking for a good dollar index. Is there one around that measures the FRN against all the currrencies weighted by GDP or trade or something? It would be great to see the dollars performance against the BRICs for example.
The price of gold and silver are a dollar index. don't be so lazy; look up the exchange rates and make your own comparisons; but why you would care I can't imagine.
akak, so when TSHTF and all fiats go to zero, the USD Index may very well skyrocket because it will be the fiat of last resort (or best defended), even while simultaneously dropping like a stone in REAL terms. So while the USD Index goes to 90, 100, 200 we still may see our purchasing power at the supermarket and gas station dropping by 10% a day or more...
So it sounds like it is by definition useless as a measure of purchasing power, unless you happen to want to purchase its weighted component currencies with your FRNs.
I'm a silver bug with a decent bet on TBT. Trying to figure out how else to protect myself from dollar collapse, or even get rich from it.
I"m a silver bug"---you already have the correct answer. You are not a "bug"; you are participating in an historical inevitability; there are massive forces and huge amounts of wealth at your side; you will not be disappointed. None of this material on Zero Hedge is correct, or even nearly so; it's a fairly complex subject; I have no idea what TBT is; but I would encourage you to hold silver bullion in a responsible despository outside the US; such as, the Perth Minth, in Australia, The Canadian Central Fund, or(whatever it's actually called, you can find out in five minutes), and/or Bullion Vault.com, which google will find for you instantly; this last has many advantages, read the entire business description which is on the website; and don't listen to anyone on any blogs. good luck; but as I say, basically you have the right idea.
Sorry, TBT is a leveraged short of the 20 year+ US treasury debt.
You understand it perfectly, Pupton -- I couldn't have said it better myself.
It galls me every time this overhyped and misleading US Dollar Index is trotted out as some kind of implied measure of the actual value of the US Dollar itself, when it is patently not. That is why you will see it so often mentioned by establishment media parrots and shills such as on CNBC --- because it serves as a useful smokescreen to mask the real moves in the dollar, which are always and inevitably down.
A fiat currency deflation is a contradiction in terms.
What so many fail to recognize is that the contrived and artificial daytraders' tool of the US Dollar Index is NOT the US dollar itself, nor is it in any way a measure of the actual, absolute value (in REAL terms, say purchasing power) of the US dollar. That index is merely a relative measure of one sinking fiat currency against other, variably sinking fiat currencies. As such, watching its gyrations is fundamentally meaningless in the midst of the ongoing depreciation of ALL fiat currencies worldwide.
No fiat currency in the history of the world has ever GAINED in value or purchasing power, only fallen (if not eventually collapsed) --- keep that always in mind. If any significant fraction of Americans, even financially astute Americans, had studied or would bother to study history, particularly monetary history, this fact would be axiomatic and hardly worth repeating. But given the almost ubiquitous contempt and ignorance of history of virtually every American, such information, and the sordid history of governmentally-controlled fiat currency and its inevitable manipulations, depreciations and devaluations by the power elite at the expense of the average citizen, sadly needs to be reemphasized again and again.
Sigh. It has nothing to do with fiat.
It is credit expansion and contraction; Fractional Reserve Banking, which can apply just as easily to gold.
The fact that Fractional Banking can be applied to gold is irrelevant to the discussion. Akak's post is good. The floating currency "system", which is imploding, is the direct result of Nixon deciding not to pay the legitimate debts of the US in Gold, as required at that time, and whcih requirement caused all the trading currencies to be locked to gether, and not float; and this uni-lateral abrogation of this particular "gold control", if you don wish to call it a gold standard, was the direct cause of the wild and fantastic events of the 1970's, and the inspiration for the creation of the Euro, and etc, etc.
How does fractional reserve banking apply to gold?
==>>> More credit, more (fiat) money, prices of everything (including gold) go up. Credit contraction => every price (including gold) goes down. In the last 100 years the USD lost 95% of its value, since in this period there were almost no periods of credit contraction.... Even though consumers are reducing credit (mostly by shrinking mortgage credit), this is more than compensated by the Government which is borrowing money at unprecedented rates. As soon as this stops (and it will since rates will skyrocket if Obama goes on wasting borrowed money like a mad men), credit will contract. USD up, everything USD-denominated down...
Au is the denominator. Every other commodity, including the paper / cipheric currency of your choice is the numerator.
Unless you took the other pill. Then you just reverse the equation.
Well seeing it was invented using gold, I am sure they will find a way again..
Notice gold going up neck and neck with the USD.. and sidekick silver is along for the ride... imo in a BIG way.
Why? Because money is more valuable in deflation. Gold is performing as if it were money.