It's The Dollar, Stupid!

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,


Wyland Stanley Studebaker motor car in repair shop, San Francisco 1919

There are substantial and profound changes developing in the global economy, and in my view we should all pay attention, because everyone will be greatly affected. Some more than others, but still.

‘Metal markets’, be they gold, silver, copper or iron, exhibit distress and uncertainty, prices are falling, or at least seem to be. Partly, that is because of the apparently still ongoing investigation in the Chinese port of Qingdao, through which a $10 billion ‘currency fraud’ is reported today, ostensibly related to the double/triple borrowing that has been exposed, in which the same iron ore and copper shipments were used as collateral multiple times.

This could soon bring such shipments to the market and add to the oversupply already in place. Combined with ever more evidence of a slowdown in Chinese growth numbers, this doesn’t look good for iron, copper, aluminum.

But the Slow Boat To – or from – China is by no means the only reason metal prices are dropping. The main one is, plain and simple, the US dollar. Gold, for instance, hasn’t changed much at all when compared to a year ago, against the euro. Whereas it’s lost 8-9% against the dollar over the last 2-3 months, about the same percentage as that same euro. The movement is not – so much – in gold, it’s in the dollar.

To claim that this is the market at work makes no sense anymore. Today central banks, for all intents and purposes, are the market. As Tyler Durden makes clear once again for those who still hadn’t clued in:

Bank Of Japan Buys A Record Amount Of Equities In August

Having totally killed the Japanese government bond market, Shinzo Abe has – unlike the much less transparent Federal Reserve, who allegedly use their proxy Citadel – gone full tilt into buying Japanese stocks (via ETFs). In May, we noted the BoJ’s aggressive buying as the Nikkei dropped, and in June we pointed out the BoJ’s plan to buy Nikkei-400 ETFs and so, as Nikkei news reports, it is hardly surprising that the Bank of Japan bought a record JPY 123.6 billion worth of ETFs in August.

 

The market ‘knows’ that the BoJ tends to buy JPY 10-20 billion ETFs when stock prices fall in the morning. The BoJ now holds 1.5% of the entire Japanese equity market cap (or roughly JPY 480 trillion worth) and is set to surpass Nippon Life as the largest individual holder of Japanese stocks. And, since even record BoJ buying was not enough to do the job, Abe has now placed GPIF reform (i.e. legislating that Japan’s pension fund buys stocks in much greater size) as a primary goal for his administration. The farce is almost complete as the Japanese ponzi teeters on the brink.

Shinzo Abe wants the yen to fall, and he gets his (death)wish, because the Japanese economy and the financial situation of its government are in such bad shape, there’s nowhere else to go for the yen. That doesn’t spell nice things for the Japanese people, who will see prices for imported items (energy!) rise, but for all we know Abe sees that as a way to push up inflation. That’s not going to work, what we will push up instead is hardship. And that plan to force pension funds into stocks is just plain insane, an idea he got from US pension funds which are 50% in stocks – which is just as crazy.

Draghi talks down the euro, says a headline today, but I don’t see it; I wonder why that would be supposed to work now, and not in the preceding years, when it was just as obvious how poorly Europe was doing. Sure, there’s a new ‘threat’ in the AfD (Alternative for Germany), a right wing anti-euro party, but that’s not – for now – enough to cause the euro slide we’re seeing. The movement is not – so much – in the euro, it’s in the dollar.

Why the Fed moves the way it does, the moment it does, in its three pronged combo of fully tapering QE, hiking rates (or at least threatening to) and pushing up the greenback, is not immediately clear, but a few suggestions come to mind, some of which I mentioned earlier this month in The Fed Has A Big Surprise Waiting For You and in What Game Is Being Played With the US Dollar?.

My overall impression is that the Fed has given up on the US economy, in the sense that it realizes – and mind you, this may go back quite a while – that without constant and ongoing life-support, the economy is down for the count. And eternal life-support is not an option, even Keynesian economists understand that. Add to this that the -real – economy was never a Fed priority in the first place, but a side-issue, and it becomes easier to understand why Yellen et al choose to do what they do, and when.

When the full taper is finalized next month, and without rate rises and a higher dollar, the real US economy would start shining through, and what’s more important – for the Fed, Washington and Wall Street -, the big banks would start ‘suffering’ again. Just about all bets are on the same side of the trade today, and that’s bad news for Wall Street banks’ profits.

The higher dollar will bring some temporary relief for Americans, in lower prices at the pump, and for imported products in stores, for example. Higher rates, however, will put a ton and a half of pressure bearing down on everyone who’s in debt, and that’s most Americans. The idea is probably that by the time this becomes obvious and gets noticed, we’re far enough down the line that there’s no going back. Besides, we could be in full-scale war by then. One or two IS attacks in the west would do.

The higher dollar – certainly in combination with higher rates – will also mean a very precarious situation for the US government, which will have to pay a lot more in borrowing costs, but our leadership seems to think that at least in the short term, they can keep that under control. And then after that, the flood. Maybe the US can start borrowing in yuan, like the UK wants to do?

To reiterate: there is no accident or coincidence here, and neither is it the market reacting to anything. That’s not an option in this multiple choice, since there is no market left. It’s all central banks all the way (like the universe made up of turtles). It’s faith hope and charity, and the greatest of these is the Federal Reserve. Is they didn’t want a higher dollar, there would not be one. Ergo: they’re pushing it higher.

The Bank of England will follow in goose lockstep, while the ECB and Bank of Japan can’t. That’s earthquake and tsunami material. The biggest richest guys and galls will do fine wherever they live. The rest, not so much. Wherever they live . At the Automatic Earth, we’ve been telling you to get out of debt for years, and we reiterate that call today with more urgency. Other than that, it’s wait and see how many export-oriented US jobs will be lost to the surging buckaroo. And how a choice few nations in the northern hemisphere will make through the cold days of winter.

Whatever you do, don’t take this lightly. A major move is afoot.