The Financial World has entered a period that is strikingly similar to that of 2008, at least regarding three key issues. They are:
1) The Oil/ USD correlation (as noted recently on ZeroHedge)
2) Bearish bets against the US Dollar
3) “In the Know” investors getting out of the market
We covered #1 in Part 1 of this series of articles. This article is focused on #2: investor bearishness regarding the US Dollar.
As you know, I’m a huge Dollar bear. As noted in Monday’s Free Market Forecast last week on Gains Pains & Capital, not only has the US Dollar broken down through multi-year support, but it has even taken out its 2010 lows:
Long-term, I fully believe we will be seeing an 50% devaluation in the US currency in the coming years as predicted by the massive Head and Shoulders pattern in the greenback:
However, right now US Dollar bearishness has gotten to a point that we should at least get some kind of short-covering bounce. Last week, the Commodity Futures Trading Commission reported the largest net short dollar position in three years last week. They are even more bearish than they were in 2010 or 2009.
Now, they have a very good reason to do this. The US deficit in February was the LARGEST in history. And with the US’s public debt at $14 trillion we’ve got a debt-to-GDP ratio of 100%. Throw in unfunded liabilities like Social Security and Medicare and the REAL debt-to-GDP ratio is north of 400%.
On top of this, our entire debt issuance system has become a giant Ponzi scheme in which the Treasury issues new debt to Wall Street banks, which then flip the debt over to the US Federal Reserve a few weeks later. Indeed, yesterday’s Fed QE 2 action saw the Fed buying 53% of the new debt issued a mere 13 days ago.
Thus, to say that the US Dollar and debt system are broken would be the understatement of the century… However, the US Dollar has become a massively lopsided trade with investors betting heavily on its demise. When you consider its position relative to the Euro (another doomed currency), it is clear that the US Dollar could bounce just based on the lopsidedness of this situation.
In this sense we are in a state of “do or die” for the Greenback. From a “do” perspective we could see a small bounce, possibly to 77 or 78 just based on how lopsided the US Dollar trade has become.
In contrast, from a “die” perspective, the greenback has taken out its multi-year trendline:
If we don’t get a bounce in the Greenback soon, we will be heading for something far worse than 2008: a CURRENCY crisis. Sure seeing the stock market collapse was bad. But what about the US Dollar, the world’s reserve currency collapsing?
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More to come…
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