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Everyone Is Probably Wrong About The US Dollar
Submitted by Lance Roberts via STA Wealth Management,
Bob Farrell once penned:
"When all the experts and forecasts agree – something else is going to happen."
This rule fits within Bob Farrell's contrarian nature. This view was also confirmed by Sam Stovall, investment strategist for Standard & Poor's, who said:
"If everybody's optimistic, who is left to buy? If everybody's pessimistic, who's left to sell?"
The point here is that as a contrarian investor, excesses are built by everyone being on the same side of the trade. Ultimately, when the shift in sentiment occurs, the reversion is exacerbated by the stampede going in the opposite direction
While this analysis is typically reserved for commentary about the stock market, it also applies to any traded commodity or asset where the price is ultimately driven by the supply and demand of buyers and sellers. In this particular case, I am specifically talking about the U.S. Dollar.
Beginning in mid-2014, fears of a "Greek" contagion spread throughout the Eurozone seinding shock waves through the financial system. The fears of instability, a run on banks, and a variety of other concerns sent foreign reserve holdings running into the perceived safety of US Treasury bonds and dollars. This can clearly be seen in the chart below.
The meteoric rise of the dollar has become singularly the biggest story in the global markets. While a strong dollar is good for importers, it is equally bad for exporters. This is particularly the case with US-based multi-national companies to do a bulk of their business overseas. Given that exports make up roughly 40% of corporate profits, it is no surprise that the surge in the dollar has become one of the biggest excuses for earnings weakness as of late.
However, as with bull markets in stocks, when a trend develops the bulk of analysts jump on the proverbial "band wagon" and begin to assume the current trend will last indefinitely. Just as the bull market will end, the rally in the dollar will end also and sooner than most expect.
Economically Speaking
From an economic standpoint, there is a difference between a rise in the dollar and a spike. As shown in the chart below, slow, steady rises in the US dollar have been coincident with economic expansions. This should not be a surprise as a stronger domestic economy attract inflows of foreign capital. However, at the point where the dollar strength sufficiently impacts exports, a recession is eventually triggered.
The problem currently is that economic growth is not sufficiently strong enough to offset the negative impact to exports of the sharp dollar spike. This suggests, as shown in the chart below of the USD and Exports (inverted scale), that the dollar impact on economic activity could trigger a much more drastic slowing of the economy than currently perceived.
When looking at a historical perspective, sharp declines in exports have been a precursor to the onset of economic recessions in the past. Given the economy is currently growing at roughly 2%, there is little ability to absorb a shock of any magnitude.
Therefore, while the majority of analysts suggests strength in the dollar will continue, a flight out of the US dollar could be easily triggered by a further unfolding of domestic economic instabilities. This is particularly the case should such economic weakness be coupled with a sharp decline in US asset prices.
Technically Speaking
Economic developments tend to be longer-term issues that are only understood in hindsight. This is always the case as we often hear the media mainstream proclaiming "how obvious such and such was" well after the fact.
However, technical analysis can provide more "real time" clues as to the state of the U.S. dollar. The chart below is a monthly chart of the US dollar going back to the 1970's.
The blue area represents 2-standard deviations (95.4% of all possibilities) above and below the 3-year moving average. The purple area represents 3-standard deviations (99.7% of all possibilities) of the same moving average. In other words, historically when the price of anything moves to these levels, above or below, it has typically marked the beginning or end of a particular move.
As you will notice, there have only been four (4) times in history where the US Dollar has traded more than 2-standard deviations above the long-term moving average. In all three previous cases, it marked the end of the bullish move.
Could the current dollar rally last a bit longer? Absolutely. However, it is unlikely to move substantially higher without a correction first.
Prices, like anything, are subject to the laws of gravity. Long-term moving averages are essentially the "gravity" to prices. A moving average can not exist without prices have traded above and below the average over time. The longer the term of the moving average, the greater the gravitational force it applies. In order for prices to move higher, prices must eventually "revert to the mean," or beyond.
From a contrarian standpoint, with everybody on the long side of the trade, it may be time to take the opposing view. There is substantial evidence of economic weakness beginning to take a firmer hold of the global economy and the damage inflicted by recent dollar strength is more pervasive that currently recognized. The problem, as always, is that most won't realize the validity of that statement until long after multiple revisions of historical data finally reveal the truth.
As such, it is likely time to remove long-dollar hedges from portfolios. The good news is that a weaker dollar will play favorably for commodity driven sectors of the market that have been beaten down over the last several months.
But, that's just my "dollar's worth."
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The dollar is a piece of shit fiat currency like the rest of them. There I said it!
:)
I'm sure Marc to Market will have some hard hitting analysis for us on the USD this weekend.
s/
My bet is Mr Yellen keeps printing more and more of them. Anybody want to take the other side?
Yep I take the other side in the form of physical gold.
Letting out slack when everyone is pulling is the easy part. Pulling on the rope without forcing people to let go is going to be the hard part. The impossible part.
This means that we agree.
My thoughts exactly. Throughout history there has always been another currency to run to when hyperinflation sets in. Today all central banks are printing like crazy. Now there is only gold (and silver), the perfect money.
Good skills, productive capacity, and a dependable tribe will be important and I would not mention any PM holdings. this time it will be global Weimar...
Once the dust has settled, then PMs will be the preferred collateral for rebuilding, again.
We still have time, but the point is that there will be no where to run to this time around.
The basics to survive. Water food shelter security.
Water - rain catchment + hand pump well
food - chicken farm + fruits and veg plants
shelter - house with no debt
security - 12 gauge Mossberg mariner pump with 00 buckshot. Like minded neighbors
I think about the banks closing ala Greece and the mortgages to those banks all become non performiing. If the entire system breaks down and no one has a job and there is a closed banking system, what will the banks do?
Greece is loaded with NPL's and they now say the residents will be evicted. Thats in Greece. In the uS which is about what, 30 times bigger, and armed, what are they going to do? There aren't enough Sheriff deputies to do the evicting. And who will pay them.
No, Im not sure about how these mortgages will be disposed of. I have friends who are told by their banks to just stay in the house. Keep the electricity on and the lawn mowed. Maintain the house until they get back. Its been 6 years for two of them. Now what? This time it is so much bigger.
I know a guy doing the same thing. Must be lots of them.
Everyone known that young piece of ass is also very desirable.
I stored a few about 20 years ago and just checked my stock today.
Talk about depreciating asset.
I don't think I could give any of them away unless to someone really desperate.
None of that addresses the "Euro-glut" problem of the German current account surplus that has to go somewhere other than negative yield bunds and a shrinking german deficit.
US$ devalue against what? The Chinese Yuan?
$3 trillion FRN's (most of which are held overseas) is a mere drop in the bucket to an $18 trillion economy.
Hell, the US government will spend more than that just this year.
When you think about it, actual printed FRN's are quite rare.
And when the great debt deflation starts there will be a 'hunt for liquidity' to pay those debts.
So, yes, I'll take the other side of that bet.
Debt is ubiquitous and nearly unserviceable...
Cash is not a bad thing to hold in a deflationary recession...
Until the presses begin ludicrous speed or they open the doors of the warehouses with the RED dollars. Then your fooked....
we've already observed that presses open at ludicrous speed a) don't create demand, and b) don't create hyperinflation...
point "a" is the real problem for every... last... one of them...
No you have not, you have seen electronic money posted to bank balances. I am talking pallets of cash ala' Iraq, then we'll see...
Please point out the deflationary periods in the historical M1 chart.
When one's only tool is a printing press, every problem is deflationary.
Reading most of your posts about the FED and the dollar I'm under the impression that you feel the FED must do something---my thoughts are the FED doesn't have to do anything--not print, not raise rates --not anything-- however if they do do something it will be for the benifit of the FED and only the FED--the FEDs middle name is dollar-- I will take the other side of the bet. Thanks for asking
'the other side of the bet'
are you for the FED, or against?
the other side is at midnight, no?
you bet
And prolly print three times that amount (Goldman bonuses etc.)
Eventually, all those paper claims are going to start seeking out real assets...
baring an event that cuts the human population back to a billion or so, that would be a trully "deflationary" event....
++
Jeezus BoP, you snatched that one right outta my head... And in honor of same, may I humbly present last weekend's tag line from said contributor:
"The demise of the dollar has been greatly exaggerated."
thank u...
u saved me from having to say the same fucking thing...
THE END.
Well the dime bank isn't much of a bargain either, so you got that goin for ya.
"Everyone"?...Maybe this clown should start reading Jim Willie, Andy Hoffman, Bill Holter, et.al....They are NOT Wall Street WHORES, so I guess that "they" are not part of "everyone".
Yes but he's right. Even some dollar bears like the usd right now.
But when is the last time since 2008 that some good ol contrarianism paid off ?
At last someone makes the point. The EURUSD basis is as normal as ever = No reason for a strong USD.
No reason for a strong USD.
You're kidding, right?
EURUSD basis swap 3month is at -19.375bps. On Bberg, check <EUBSC CMPN> You will notice that in the past, this puppy went to -160bps (Nov/11) and then to -200bps during the Lehman event. There is absolutely no better indication for correlation/volatility/liquidity run than this. At -19.375, all you see is simple noise.
How do you trade that?
Like it or not, US dollar will go higher and higher before it tanks.
Yeah, and the devaluation will come via a 30% to 40% downward move overnight.
No worries though, we always have Gartman to fall back on with some solid strategy how to position ourselves beforehand.
well, if you increase by 100% and then drop back 50%, what do you get...
Since US based stocks and the petro dollar recycling meth labs on wal st and in Califonia have pumped up the value of dollar assets, there has never been a time where the dollar has been built on this much air. One high volume bidder gone and it will crater. It is all air.
The bet made by The Fed was that other central banks would destroy their currencies faster... ..and out military would be allowed to pretty much drop bombs wherever we we wanted to...
fucking cannot believe it is working, so far...
Gotta admit, neocons are evil geniuses and leftists are simply fucking idiots...
When the SHTF, it'll be cascading globally. Internationally, money will pour into the perceived greatest shelter in the storm, which on the global scene will the USD.
In 2008 the world was screaming for short term USTs, the idea being that return of "something," even a known loss, was better than an unquantifiable loss in anything else. When the next leg down hits, the USD will rally - it's not rational, we left that shore along time ago, but its the likliest outcome. Longer term, who knows how long, the USD is toast as well.
The Fed exists first and foremost to bail out member banks which it will attempt to do, but what chairman of the Fed ever wanted to go down in history as the one who ignited a potential firestorm of hyperinflation? The Fed fears deflation even more than inflation, but the "Save the system all costs!" mantra has its limits.
At some point it's possible the Fed tells Congress, "enough is enough." Of course, only after it has thrown several tens of trillions more onto the national debt funeral pyre bailing out its cronies. Then Congress is either forced to balance the budget (the stars would burn out sooner) or revoke the Fed's charter and take over the money supply.
Congress in charge of the money supply? That'd be the day hypeinflation goes supernova.
Of course, it's all conjecture. Maybe the coming "Great Bust" will simply solve the problem outright? (Cue Wallace Shawn in Princess Bride, "Inconthievable!")
No more Fed. No more Congress.
The Enron Postulate
Repeat after me .... QE4 changes everything !
Except I remember thinking the same on the announcement of QE 4evah. That was when the dollar ramped and gold tanked. Predictions are hard, especially when they're about the future.
The dollar is backed by the largest debt that the world has ever known - only $1,720,000 per taxpayer
Kotlikoff contends, “If you take all the expenditures that the government is expected to make, as projected by the Congressional Budget Office (CBO), all the spending on defense, repairing the roads, paying for the Supreme Court Justices’ salaries, Social Security, Medicare, Medicaid, welfare, everything and take all those expenditures into the future . . . and compare that to all the taxes that are projected to come in, and the difference is $210 trillion. That’s the fiscal gap. That’s our true debt.”
http://usawatchdog.com/financial-system-will-collapse-just-a-matter-of-w...
$1,720,000 per taxpayer is very small when valued in 2019 dollars.
The USD is backed by the total productivity of the people in the United States.
In the past decades these people were indeed hard working and very productive.
Today, for a sample of productivity, visit your nearest WalMart.
"When all the experts and forecasts agree – SOMETIMES, not all the time, something else is going to happen."
Agreed, but it's the three standard deviations part that looks relevant to me.
But, that's just my "dollar's worth."
$1? I say its worth what it cost you to read...
/looks at how much people care about Bruce Jenner
I think ZH is wrong. On average, the crowd is completely rational and not retarded.
I don't disagree with the general premises of the article; however, the US is still the best house in a shitty neighborhood.
But therein lies the irony Bob - it isn't... But still gets to swagger the globe with 'exorbitant privilege' nonetheless...
I'll wager Jim Rogers is/will be short.
I'll wage that Jim Rogers IS (a) SHORT (dick man)
https://www.youtube.com/watch?v=0wNx1CBym7s
Clearly Lance Roberts is in agreement with Ketchup Man (or is it Catsup?). It still strikes me as bizarre to hear a senior U.S. official, the Sec of State no less, discussing the demise of the dollar as a global currency. Then China devalues the next day. There's some weird brinksmanship going on here. Is China firing a shot across the U.S. bow, as in, "Mention reserve currency status again, Mr. Ketchup Man, and we blow the whole freaking system."
Fun times.
"Are you here to help me with my catsup problem?"
http://i.imgur.com/aO2gXim.png
this is the underlying reason the fed wants to raise rates. raising rates will cause a dollar selloff and the consequent devaluation making all the usa multinationals reap record profits albeit on a lot less business.
Huh?
From a technical perspective, I do expect to see further correction in the dollar over the next several months (give or take). During the same time, I do expect we'll see commodities rally, especially precious metals. However, the question in my mind is around equities. They have been correcting a while, but the rubber band is pretty tight, as the dollar and equities had been in a long up trend and something has to give. I think if we haven't seen the end of the equities bull in the US, it's pretty close to it. Perhaps we see a brief spike to new highs and a fall, even while commodities continue to rally. Even in 2007/2008, we saw commodities rally even after stocks headed south.
"When all the people who play experts on TV for the sheeple and their forecasts agree – something else is going to happen."
FIFY. They don't all agree, and some of the ones that very influential people listen to do think differently.
Really? Very influential people take their advise from the TV?
I re-read what I wrote and stand by it, perhaps you should reread it too...
OK I reread it. To be honest your response could be interpreted many different ways however the original quote referred to advice from the TV so that is the context. IMHO
This might shed some light on my original point- that the people whose opinions matter don't get their advice from TV, and they aren't necessarily long USD, or even care what any TA voodoo shaman prognosticates.
Interesting
What part of all fiat will go to zero don't people understand?
Artificially inflating the USD has caused the Titanic to list precariously.
Deflating the USD will cause the Titanic to roll, and sink.
Way to go, Goldman.
The dollar is up on "exit."
The connected and "chosen" that are exiting will benefit further when the FedRes raises rates this Fall or Winter.
Liberty is a demand. Tyranny is submission.
The majority of the debts are written in USD, when you have debt you are short that currency. We have a lot of USD debt and a lot of overpriced assets backing that debt. When those assets start going down in value those short the dollar clambor to get some to service their debt and the currency rises. Thus it always has been, and thus shall ever be.
Being contrarian is not enough, you have to be correct and contrarian.
Nice charts though.
The USD will crash less than the others. Who can argue with that?
With the cleansing that is coming, all current fiat will cease to exist. Enter the IMF, the new world order and their spanking new notes.
That M1 chart for the last 5 years is pretty amazing.....not that we use it anymore, but I have to wonder what M2 would look like???
Who cares? We still ain't got no flow, don't ya know.
Euro's screwed.
US$ is screwed too, but that'll come later.
I always read these geniuses talking about "a strong dollar is bad" but nobody says "bad for who"? Bad for people in the USA, or bad for Wall Street vig skimmers?
What country in the world, has a very weak currency, but the people in that country are doing very well?
+1000 no one
Thank you for pointing this out. Prosperity by devaluation is a complete illusion. As Mises wrote:
"The much talked about advantages which devaluation secures in foreign trade and tourism, are entirely due to the fact that the adjustment of domestic prices and wage rates to the state of affairs created by devaluation requires some time. As long as this adjustment process is not yet completed, exporting is encouraged and importing is discouraged. However, this merely means that in this interval the citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption. This effect may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation's welfare. In plain language it is to be described in this way: The British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods."
the USD is going to be the best fuck that anyone ever had