Tuesday, May 03, 2011

Peeking Around The Corner: Is The Dollar About To Rebound?


"Crush Depth" is the depth that a submarine can no longer resist the ambient pressure and will catastrophically fail...and die.  It is the point of no return.  All airplanes eventually land (in some form or fashion), but not all submarines surface.

The USS Dollar is approaching crush depth.  Skipper Bernanke has gone guano-insane and has finger-fouled the USS Dollar into into the abyss to avoid the depth charges of deflationary reality.  The crew is seems powerless to discontinue this suicide mission.

Perhaps a mutiny is in the works.  Someone is going to grab the "Emergency Blow" handle, but will it happen in time?

Today, ladies and gentlemen, we are going to chart up a storm and see if we can peek around the corner.

First off, the USS Dead Presidents (plus Ben Franklin and Hamilton).

Dollar Index

Well...filthy lucre is looking pretty filthy.  The Yankee Lira is getting pounded on a daily basis.  Every day we wake up and it is getting smaller and smaller.  That's pretty ugly and all the arm waivers on the lobotomy box and AM radio are assuring you this trend will continue indefinitely.  The dollar (according to the 'experts' is going the way of the Weimar Deutchmark.  In fact, the only thing that will be of value (other than the gold they are selling) will be the wheelbarrows we will need to buy our new iPads.  We will need to relearn scientific notation to pay our NETFLIX subscriptions while we wolf down our CHIPOTLE burritos.

As anyone who knows anything about anything knows, all trends are permanent and you should buy now, or be priced out forever.  After all, that house you bought in 2007 should be worth another 50% by now (assuming 10-12% appreciation).

The theory goes something like this:  Bernanke is "printing" money to pay the national debt that is essential for us to stave off negative GDP growth.  We are therefore subject to the dollar getting smaller and that means we will pay more for "stuff" while our bosses don't have to pay more for our labor.  "Stagflation" is the term the "experts" like to use.  Somehow, a miracle occurs and allows "stuff" to be bid up when people are making the same money (less in inflation terms).  I guess "they" will be doing the bidding and we will just be content to getting bent over for higher prices.

Remember, this situation is more or less permanent.  The dollar is going to zero and "stuff" is a good hedge against this phenomenon.

Here is the chart for dental crowns and bling:

Gold

Straight up.  It's 1979 all over again, but without the Bee Gees.  Yes, the inflationary thingy is the real deal.  Just look at gold.  It's doing exactly what the AM radio guys have always said it would do, and it isn't going to change, ever.  $2500/toz by the end of the year, and then onward and upward from there.  Buy it now while you still can, or you will be priced out forever.  Never mind that the dollar chart and the gold chart are not rigorously correlated. 

Have you noticed that gasoline is over $4? 


Oil
Hmmm...that's an interesting chart.  Oil has been frisky lately, and why not?  The dollar sucks and all the oil seems to be under the feet of rather unstable people.  Is this a dollar story?  In part, sure.  It is also a story of speculation on future price expectations.  Is this industrial demand?  Are we "demanding" more oil to make and move more "stuff," because we have extra money to demand it?

Doubt it.

Natural Gas
It seems that not all hydrocarbons got the message.  Again, this chart is interesting.  Can anyone say "what" is interesting about these two hydrocarbon charts?  Something big is sticking right out at us.  What is it?  Why is it significant?

Moving on to the softer commodities...

Cattle
Sugar
Oats
What's up with this?  You see something interesting in most of these commodity charts.  You see that the softer commodities (stuff you need for eating purposes) are not tracking the imminent demise of our currency, like gold is.  Some of this stuff has been selling off pretty hard lately (remember, these are weekly charts).  More importantly, these charts show something facinating and telling.  Look at the summer of 2008.

We see the summer of 2008 with parabolic blowoffs in commodity prices that coincided with HEAVY manipulation by the FEDERAL RESERVE during the first half of that year.  When commods broke in July, the dollar went on a rampage through October.  The dollar went up, and went up hard.

UUP (a proxy for long US Dollar futures) shows this and is the basis for this article.

UUP (US DOLLAR) - WEEKLY
 Look at mid 2008.  See what happened to the dollar?  Now, go look back at those commodity charts, particularly oil and nat gas.  See what happened?  This occurred when the FED stopped meddling with the dollar and allowed banks to take their marks.  MER and LEH got killed during this time (BSC was already taken under in March).  Washington Mutual got the axe later that year.

There was no "printing" back in early 2008, nor is there now.  There was only the FED holding the prices of assets high so interest rates would stay low and keep the banks solvent.  That thesis has been demonstrated to death on this blog and nothing in the current landscape changes that.  As long as risk is not matched with return, the underlying currency will sell off until it does.  As long as Ben holds prices high (low return) with higher risk being manifest in the system, the dollar will sell.  This works as long as Ben can convince people to borrow dollars to buy assets.  If he can't convince you, he will force you via the government.

Let's drill into that UUP chart.  Here is the daily action.

UUP - DAILY
There are two trends in this chart that are coming to a decision point.  The weekly chart showed a long-term channel (down) and the price is now exactly on the lower trendline.  The minor trend is a steeper decline from the beginning of 2011.  That trend intersects the lower trendline on the larger trend over the next two weeks.  Pay attention; this is important.

UUP - DAILY (Close up)
The past two days have seen UUP hit and bounce off the lower trendline.  If this signals reversal, we should see a small bounce that may turn back down and retest the lower trendline by the May OPEX.  If it blows through to the north, we are looking at a 5 month rally in the dollar, which means a 5 month clubbing in asset prices (commodities, other currencies, equities, and debt).  Even with Bin Laden being killed and dumped at sea, the market rallied in the morning and then sold off.  The dollar did exactly what it should by dipping in the AM and then rallying to finish positive.  It is the inverse of the assets being played with borrowed dollars.  One would think the market would have been up 500 points on OBL being killed, but I guess there wasn't enough dollars to short to accomplish it.

What does the bond market say about this?  I'm glad you asked.

10 Yr US Treasury (Price)
That's the 10 year US Treasury as seen from a price perspective.  Price is the opposite of yield, so if you want to see what interest rates look like, just turn the chart upside down.

That was a monster drop from Thanksgiving and it has now formed a bearish flag.  That flag is due to hit the upper trendline in its channel over the next 7 trading days.  If it hits and turns south, rates will be going up and the dollar with it.  After all, if return closes the gap with risk, the currency will rise.  The downside target on this move, presuming it breaks out of the channel and completes the bear flag drop, is in the 108 area, which should be somewhere in the mid-4% range on yield.

I doubt the FED can stay liquid at those prices.  What happens then?  I have no idea, but whatever it is, it isn't good.

Oh yeah, one more thing...

Today, Turbo-Tax Timmy, our tax dodger in chief, said that he can pay the interest on the national debt without Congress raising the debt ceiling until at least August.  Even so, the Treasury can pay the debt service out of tax receipts, but other expenditures such as the defense of the nation, and paying 1/3 Americans not to work could be put on ice in order to free up the money for the bond holders.  That's an interesting scenario and one where a "dash for cash" could hit at the same time bond holders look at the future and wonder how much longer the government will pay them and allow the elderly, infirm, and meth-heads to wonder if the next check will clear.  They will get nervous and start slacking on bidding for new debt, in addition to the $3.5 trillion (that's with a "T") in short-term debt that has to be rolled in the near term.

That's a long way of saying that if Speaker Boehner grows a pair and he and Timmy get into a Richard-waving contest over the debt ceiling and $1.6T worth of new debt, the bond market is going to leave an upper-decker in every asset class in the world.

There are lots of things happening in the next 6 months.  If the dollar turns now, the asset markets are going to feel like a princess in a room full of poo flinging monkeys.  If the dollar continues to slide, there won't be much of an economy left.  Either way, it looks like the QE/recovery fantasy has about run its course.

There is no way to know for certain what will happen with the dollar.  All we can do is look for correlations and link weakness in manipulated asset classes with an imminent rise of the dollar.  It's a low probability event to call the corner.  Never confuse luck with skill.

Position:  Long UUP calls.

3 comments:

DigiKelly said...

Astute commentary. You need to do this on a weekly basis.

What's interesting is the chart posted on Mish today showing manufacturing in the US rising since 2009 (ie, the dollar getting clubbed like a baby-seal). This makes sense since a weak dollar supports exports and manufacturing, which has led to, and is an integral part of any meaningful 'recovery'.

I don't think the dollar can endure much more punishment, since capital flight is a significant risk at these dollar levels and bond prices. Too many factors in my estimation lead to dollar strength: technical support = rally, eurozone bank insolvency, geopolitical risk (Al Qaeda reprisal), market sell-off, political pressure.

Those who go "long" any asset here, and "short" the dollar are either gluttons for punishment, or the sheeple who get what they deserve.

Eleua said...

Yes. Bernanke is in a box. There is more to this than just higher input prices to Americans. The weaker the USD is to the Japanese Yen, the greater chance the JPY-carry trade can unwind and ignite another 2008. A stronger Euro (compared to the USD) will also make papering over the various welfare states (P-I-I-G-S) much more difficult.

If the dollar strengthens, you see US based assets get killed, which leads to the deflationary scenario we have spent trillions to put off.

If the USD is held static, the banks can't keep lending short to cover bets, as the interest eventually gets them.

Sucks to be them.

QUALITY STOCKS UNDER FIVE DOLLARS said...

The dollar is in a long term decline the QE's by the federal reserve will destroy the dollar and cause social unrest. Printing money in an attempt to improve things will only makes things a lot worse than they already are. If inflation gets really out of hand the ball game is over' just think what will happen to those in the working class that are considered working poor a revolution is most certainly possible under the right conditions.