The US CANNOT Afford the US Dollar at These Levels

The Powell Fed has decided to embark on an aggressive tightening schedule, with five more rates hikes while also draining an amount equal to Sweden’s GDP in liquidity over the next 18 months.

The Fed believe it can do this because the economy is strong and inflation is rising. However, it has failed to account for the impact on the financial markets/corporate sector.

Which brings us to Exhibit A:

The $USD has broken out to the upside against all major currency pairs.

Going into 2018, the $USD was collapsing. But once the Fed’s QT program increased to $30 billion per month in April 2018, we saw a sharp the $USD erupt higher against the Euro (UUP:FXE), Japanese Yen (UUP:FXY), British Pound (UUP:FXB) and Swiss Franc (UUP: FXF). This caused the $USD to break downtrends in all major currency pairs (see purple square in chart below).

This was a gamechanger. It shifted the system towards a strong $USD trajectory.

Under normal circumstances, this would be problematic in that it would put pressure on US trade as well as hurt profit margins for corporates (44% of corporate revenues come from overseas).

However, we also have to consider the US’s debt situation today.

The US has over $20 trillion in public debt, giving it a Debt to GDP ratio of 105%. And this is growing as the US deficit swells courtesy of tax cuts, combined with President Trump’s Keynesian spending (infrastructure, and other programs). Indeed, the US plans to run a $1 TRILLION deficit in 2019.

Under these circumstances, a strong $USD is a MAJOR problem. When you borrow in $USD (issue US denominated debt) you are effectively SHORTING the $USD. Which means that with every tick higher in the $USD, it is becoming more and more difficult for the US to fund its debt expenses.

Throw in the fact that the US debt markets are beginning to drop, forcing yields higher (which again means it’s becoming more expensive for the US to finance its debt loads) and you’ve got the makings of a REAL crisis.

There is only one real solution to this: a weak $USD. Every week that the Fed waits before backtracking on its current policies is another step towards a debt crisis in the US.

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Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

Comments

JBilyj Thu, 07/19/2018 - 10:20 Permalink

The dollar $DXY has gone above 100 for years at a time in the past - and the FED indicated it's doing away with the 2-10 yield spread indicator which means full steam ahead with rate hikes! 

Just Another V… Silver Savior Thu, 07/19/2018 - 14:23 Permalink

TRILLION DOLLAR DEFICITS EVERY YEAR.....and that is with the economy doing "reasonably well" at the moment.

Wait till we hit another bump, or a big bump, or China, or the banks run into problems....

At this rate, just a matter of time before the US dollar has much less value and huge price inflation hits again. 

Impossible to think we can add unlimited debt without a consequence.

 

The debt, not including SS or medicare,  doubled under Dumbya and under Obomba it doubled again.

Can we double the debt every 8 years, have unfair international trade for the US, 

have unlimited illegal immigration to the US, be the global cop around the globe, 

and then have all kinds of "free" stuff for citizens and non citizens ? 

 

 

 

In reply to by Silver Savior

silver140 Silver Savior Fri, 07/20/2018 - 01:17 Permalink

"The Fed believe it can do this because the economy is strong and inflation is rising. However, it has failed to account for the impact on the financial markets/corporate sector."

Fuck the "financial markets/corporate sector". The callous pieces of shit that control them and get rich from them should all be in prisons, let out during the day to work cleaning up all the fucking pollution they have caused, and the ones with a smidgen of conscience left put out during the day, doing social services for all the poverty they've caused. All their property, equity anything else they own should be confiscated and sold and the proceeds put in a fund to support the poor, that have been robbed by the psychopathic parasitoid corporate fascists.

I'm just wondering why some people would rather have parasitoid corporate fascists be GIVEN wealth at the expense of every citizen of the US, who have no savings left, no way of earning equity from their work, nothing but debt slavery that is forced on them.

A parasitoid is an organism that lives in close association with its host and at the host's expense, and which sooner or later kills it. Parasitoidism is one of six major evolutionary strategies within parasitism. Parasitoidism is distinguished by the fatal prognosis for the host, which makes the strategy close to predation.

In reply to by Silver Savior

Oldguy05 Jungle Jim Fri, 07/20/2018 - 02:43 Permalink

60 and change here. Seems like demographics have been against us when it comes to .gov largess....Won't see much of the SS I paid and they stole either:) I've never taken anything from .gov.....oops nope...I got $900 for Trade Readjustment Allowance back in late 70's early 80's....Can't remember exactly...happens when ya get old :)

In reply to by Jungle Jim

shizzledizzle Thu, 07/19/2018 - 10:51 Permalink

No shit, also consider that Mr. President is considering round 2 of tax cuts to keep inflating share prices. I know he only brings it up when the market is in the shitter but I could totally see it happening. That deficit could be MUCH higher. 

Chief Joesph Thu, 07/19/2018 - 11:04 Permalink

Well, the U.S. government is in a do or die situation.  They are literally "going for broke" in hopes of pulling out of their economic situation by throwing a lot of money at it.  But, if they don't succeed, then they are trying their best to stall off the inevitable death as long as they can, as the dollar continues to devalue. 

America has really passed the point of no return long ago.  That was very evident back in 2007-2008.  We have been coasting downhill ever since.

ToSoft4Truth LawsofPhysics Thu, 07/19/2018 - 12:22 Permalink

The wheels fell off the U.S. back in 1837.  And it's the reason why Andrew Jackson will be replaced with an N-word slave on the 20 spot. 

 

According to NPR:

 

On Jan. 8, 1835, all the big political names in Washington gathered to celebrate what President Andrew Jackson had just accomplished. A senator rose to make the big announcement: "Gentlemen ... the national debt ... is PAID." That was the one time in U.S. history when the country was debt free.

In reply to by LawsofPhysics

el buitre Chief Joesph Thu, 07/19/2018 - 14:58 Permalink

As Lynette Zang has pointed out repeatedly, we have been in hyper inflation since 1913.  What our Owners though have so cleverly done is stretch out the time line axis so we don't notice it.  By FRED's own statistics, the FRN has 4% of the purchasing power that it did in 1913.  But they use the Bureau of Lying Statistics with its bizarre hedonics.  The number is actually a lot closer to 2%.  But this time line is starting to compress very rapidly.  We are going to see the remaining 2% hyperinflate conventionally very shortly.  It requires several things to come together.  The trillions pumped into the stock markets to enter the main street economy.  The rejection of the treasury bill for payment to exporting countries.  Recognition of the $23 trillion of unaccounted for money from the books of the DoD and HHS alone discovered by CA Fitts and Prof.  Mark Skidmore with the probability that it is closer to 50 Trillion when the other departments are factored in.  There is incontestable proof that PM's are being suppressed by conflating phyz with electronic PM's on the futures market and then naked shorting them.  The only question is who ultimately is behind it and why.  One theory is that it is the Rothschild cabal trying to mask the devaluation of the FRN.  Another is that it is the Chinese trying to hoover up all the PM's at bargain basement prices before the reset, perhaps in collaboration with the cabal or perhaps in competition with them.  In any event, the reset is coming very soon.  PM's will lower in price against other physical assets for a month or two as over leveraged speculators unload them as their only assets in demand, to make margin calls.  Then the moonshot will begin.

In reply to by Chief Joesph

Dragon HAwk Thu, 07/19/2018 - 11:08 Permalink

As somebody once said, the price of oil hasn't changed ( or Gold ) you just have to pay more in Shit usa Fiat to get it.

we really need a currency that is Commodity basket  based. but then the Government couldn't steal it thru Inflation, cause sugar, coffee, lead, oil and Silver don't lie.  Imagine that,  a currency that was based on things People need and Use..

JLarryL Thu, 07/19/2018 - 12:02 Permalink

The dollar index really has been going sideways for two months. It looks like it could do the same for another two months or more. Who knows which direction it will take after? There's no fire here now.

el buitre JLarryL Thu, 07/19/2018 - 15:03 Permalink

The US has weaponized the dollar for decades and the EM's had no choice.  After 2008, the dollar, with the ZIRP, became the carry trade currency of choice, to some extent replacing the yen.  The Russians and Chinese have now set up an alternative trade settlement device.  Their system will grow rapidly based on resentment alone.

In reply to by JLarryL

ToSoft4Truth Thu, 07/19/2018 - 12:17 Permalink

" The Fed believe it can do this because the economy is strong and inflation is rising. "

 

The Fed creates the inflation they say they want to protect us from. 

Synoia Thu, 07/19/2018 - 17:57 Permalink

When you borrow in $USD (issue US denominated debt) you are effectively SHORTING the $USD. Which means that with every tick higher in the $USD, it is becoming more and more difficult for the US to fund its debt expenses.

The US will just create the dollars with a few keystrokes.  The US is SOVERIGN in its FIAT currency.

Idiot.