2017's Dollar Collapse Is The Worst Start Since 1985

Tyler Durden's picture

Authored by Steven Vannelli via Knowledge Leaders Capital blog,

The USD is off to its worst start since 1985, down about 9%. In the chart below (courtesy of Bianco Research), it appears the USD is tracing its performance in 1985 quite closely. Of course, 1985 was the worst year for the USD in almost 40 years, so if we stay on the current path, expect the USD to drop another 10% from here.

The weak USD is setting up a possibly profitable rotation out of US equities into longer dated US Treasuries. In the next chart, I take the total return of our KLSU DM Americas Index (top 85% of North American market cap) relative to the JP Morgan Government Bond 15+ Years Index. I overlay the USD, and as can be seen from the chart, the relative performance of stocks vs. bonds tracks the USD fairly closely. If the stock/bond ratio follows the USD back to its May 2016 lows, bonds could outperform stocks by about 35%.

The likely mechanism is a plunge in real rates, or TIPS. In this next chart, I overlay 10-year TIPS on the USD (inverted). The last time the USD was around this level, 10-year TIPS yields were zero.

Same idea with 30-year TIPS. Here I use 30-year TIPS and overlay on the USD. The last time the USD was at these levels, 30-year TIPS yielded about 70bps.

Even if breakeven inflation remained unchanged, there appears to be 30-50bps of downside to real rates based on the weaker USD. For a 30-year bond, with a 20-year duration, 30bps of downside would equate to about a 6% return. If the USD falls back into the 80s, shorter dated TIPS yields could easily fall back into negative territory. This could be what gold is sniffing out. Either gold should be at $1,150 or 10-year TIPS should already be around 20bps. If gold breaks above the June 7, 2017 high at $1,291, TIPS should follow.

Since 2003, gold has exhibited a -87% correlation to 10-year TIPS yields. Interesting the high print on gold was in September 2011, when 10-year TIPS yielded 5bps.

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SubjectivObject's picture

Odd, gold's not up 9%

LawsofPhysics's picture

Paper gold decoupled long ago.

gmrpeabody's picture

And my mining stocks are..., oh.., wait.

scaleindependent's picture

Shitcoin mining is easy to procure, especially when one is constipated.  

They even have a peculiar metallic sound when they hit the toilet.

malek's picture

Only Dogecoin or Sagecoin for me.

are we there yet's picture

Congress still mints those coins after a gassy congressional meal.

are we there yet's picture

Let's start a Susan B Anthony digital coin. California May buy in to that ponzie coin.

Yen Cross's picture

 Do you get free gallon of camel cum with each purchase of 100 or more?

SubjectivObject's picture

Well I'm stupid wrong here, it's up 9.6% from Jan 1

the digital AU price action does leave one punch drunk

i forgot there was the Jan-Feb rally 

yogibear's picture

Federal Reserve won't protect the US dollar, they would let it crash. Other countries would step in.

Right William Dudley?

Raffie's picture

I been waiting for China to show their true gold holdings and repeg gold higher ( and silver will follow, at least I hope so)

are we there yet's picture

China wants cheap gold as long as they can before they make a gold backed yen to coincide with the Silk Road becoming fully established.

HRClinton's picture

But Sheepcoin is doing fine.

Bah!

GlassHouse101's picture

You don't think Gold might be manipulated/rigged do you?

DocMims's picture

10 percent drop in dollar should help exports and trade deficit. no?

yogibear's picture

US can issue more treasury notes and the Federal Reserve just buys them with printed money from thin air.

What's the problem. It's why the debt doesn't matter.

Bobbyrib's picture

I think the dollar and the Yuan would need to fall in order to help "our" (China's) exports. You know since our manufacturing base is pretty gutted.

Eager Beaver's picture

Oh no, that would never happen. They can't hack gold, it's a "stable" currency.

silverer's picture

Odd indeed. The paper is still serving the masters best interest.

yogibear's picture

Paper gold contracts used by central banksters to naked short.
Can't let gold price discovery. Just like stocks. Using trillions in printed money to buy the indexes.

post turtle saver's picture

so let me get this straight...

- dollar indices are dropping

- a USD buys the same amount of oil that it did back in 2005

- with inflation adjustment, $USD/bbl is actually *cheaper* now than it was in 2005

c'mon now... you're in a classic King Dollar scenario here, short term action doesn't mean shit given the above... tell it to the day traders...

Raffie's picture

Funny how often PM are slammed no matter what.

Seen the stawk mockets red, USD index red, this and that red and yet PM RED.

I want to see my cryptos and PM's go high when it all burns down.

tion's picture

More strength is likely to flee to bitcoin than to paper or even physical gold when the meltup/meltdown intensifies. 

LawsofPhysics's picture

So, dollar going down, equities going to the moon...

"Full FAITH and Credit"

Same as it ever was...

yogibear's picture

Yes, DOW 50,000 soon enough.

Dirtnapper's picture

Webbot does reflect about "talk of" DOW 125,000.  If the upper Mid Western farmers get hammered with a early blizzard (Sept-Oct) that cuts crop yield, we should be off to the hyperinflation races starting with food prices. 

HRClinton's picture

The less Value you have, the most Faith & Credit (((they))) promote.

All backed by full faith in "Support our Mercs".

It's for the (((children)))... of Abra'm.

Son of Captain Nemo's picture

What I wouldn't give to "crash and burn likes it's 1985" or for that matter 1999

post turtle saver's picture

give me the buying opportunity we got in 1987 and you won't hear a peep of complaint from me...

Son of Captain Nemo's picture

And this ain't 1987 my friend.

This time is definitely different!

GlassHouse101's picture

wake me up when something actually 'breaks' (petrodollar, chinese peg, PM manipulation Etc.) . . until something breaks, it will just be more of the same.

LawsofPhysics's picture

I agree. TPTB have decided that they must maintain power and control at any cost so the "let the majority eat cake" monetary experiment will continue. Nothing changes now until there is a major disruption in an essential supply chain.

Juggernaut x2's picture

The majority is not eating cake- higher taxes, healthcare costs, housing costs, rent, food price inflation, etc

donefuhkingaround's picture

the MAJORITY is so FUCKING MIND-NUMB THAT IT DOESN'T MATTER

you could shove a HOT POKER UP THEIR ASS and they would just LAY THERE AND TAKE IT

yogibear's picture

The twits will just take out a 3 year loan to buy an IPhone 8.
Same useful debt slave that lease a car for 3 years and will end up dying still paying on their student loans.

Useful debt slaves for the elite.

ReturnOfDaMac's picture

Cake is a luxury.  More like majority eating catfood and crumbs...

SDShack's picture

Yep, real change will not happen until the masses are literally starving in the streets. That's why the Deep State continues doling out just enough bread to keep the sheeple from getting restless. Then add circuses to keep them distracted. And if all this fails, increase the Security State to trample any uprising before it can spread to revolution. The template goes back and has been repeated over and over for thousands of years. The USA Republic became a Feudal Empire over a century ago, and like all empires before it, rose to dominance, and will eventially fall, only to be replaced by yet an even bigger empire I call the New Feudal World Order.  

Haus-Targaryen's picture

Correct.  This continues as is (light volume, no big ups and no big downs) until:

i) A political crisis blows a hole in their system, which they believe is either immaterial, or contained, when in fact it is much more material than originally anticipated and it spreads faster than they can control;

ii) A financial crisis erupts and blows a hole in their system, which they believe is either immaterial or contained, when it it is much more material than originally anticipated and spreads throughout the system faster than they can control; or 

iii) They intentionally blow the thing up for their own purposes. 

Either way, the system's ultimate failure is contingent upon their hubris, which luckily for us is in almost infinite supply. 

Jim in MN's picture

Convenient also that the falling dollar props up the (apparent) price of oil.

If the USD reverses it'll be carnage in the energy sector.

But it can't reverse, unless the Fed becomes somehow less evil.  If they'd fully normalize interest rates it would strongly support the USD.

GlassHouse101's picture

We will never see deflation again, as that will cause a default of our debt.

HRClinton's picture

Seriously disrupt the Supply Chain?  Right now (((they))) are looking to seriously disrupt the Natgas supply to Europe with LNG from the US, and a pipeline from the Leviathan fields in the Eastern Mediterranean, courtesy of ISISrael. 

In the mealtime, Qatar is being punished for working with Iran on their common Natgas field.

(((They))) will not allow Silk Road South or North to connect to Europe. Hence the assault on Afghanistan, Iran, Russia, and the attempted coup on Erdogan.

(((Imperialists))) never back down. They simply regroup and double down until they succeed, or are put down.  People need to learn that much from history.

Son of Captain Nemo's picture

It's been breaking all around you since the bailouts... Oh and 7 Middle East countries in 5 (https://www.youtube.com/watch?v=9RC1Mepk_Sw)... no 16 (and counting till it can't) years... but the computer screens and the algos that run behind them are quite durable and made to withstand the impact of falling roofs, trees and I've even heard a thermonuclear hit!

coast1's picture

yeah...the dollar was the same last year at this time, and the year before...

wtf with gold last night?  did u see the pump and dump?

coast1's picture

agree.....this time is different (not being sarcastic), i

HRClinton's picture

Isn't it obvious? (((They))) are driving down the $, to make our overpriced LNG more attractive to EU currencies.

The descendants of (((Bolsheviks))) have Russia and its resources in their covetous cross-hairs. Always have. If Russia buckles, by denying Putin a victory in 2018, then China will be easy pickings.