Is the $60.3 billion November trade deficit
now "paid for" as recent foreign capital-inflow
numbers ($81 billion) suggest? Is the dollar's bear market
over? Are we in a gold-holding pattern again?
The Dollar: Turning on a Dime
Without any change in fundamentals or even news about exchange
rates the dollar turned on a dime as soon as the new year
hit. On Friday, December 31, the dollar still fell to an all
time low of 1.36 to the euro. On Monday, January 3, the rebound
started without any advance notice whatsoever.
What caused that?
Manipulation? Investor psychology? A technical rebound? An
"oversold condition"? Which is it?
Forex news reports cited all of the above in one instance
or another, but what was the real reason? Are there any "real
reasons" for anything anymore in financial-land?
We got a sudden repeat performance of the 2003 dollar collapse
during September last year without any fundamental change
in financial news or economic outlook from the earlier month
dollar rebound and gold stagnation period. Now we get a sudden
change back to the dollar-upside without any fundamental change
in outlook. Fed rates had been rising and had been expected
to rise further throughout the September-December dollar collapse,
but as soon as New Years Eve revelers had slept off their
hangovers, the dollar began to climb again.
Where are these things coming from? What is happening?
Who cares anymore? There's only one thing that seems to be
certain: when the dollar is falling, the Dow goes up. When
the dollar stabilizes, the Dow stagnates. When the dollar
rises, the Dow falls.
Such has been the case since September 2003 with mind-boggling
accuracy - and such is still the case now. The dollar-Dow
inversion is alive and well, and is best depicted by looking
at a chart showing the Dow and the dollar's main "foe":
Why does this happen?
The ordinary thinking goes that a low dollar is good for
US exporting companies because their products become less
expensive abroad. But the effects of this usually lag by at
least a matter of months, if not an entire year or longer.
So, how come there is this uncanny, almost instantaneous inverse
relationship? What accounts for that?
There are no textbooks on this subject. You will find nothing
online or in your local library. Ask your College economics
professor, and he will be stumped for an answer. So, what's
Since September 2003, it almost appears as if the dollar
now has the same adverse relationship to the Dow as it has
to gold itself. Why is that so? What changed from before 9/03?
If so, what does that say about the current stock rebound?
Is it just a reflection of the falling dollar, and no more?
If this is so, then investors in US stocks should take note:
if they are still skeptical of gold because the current gold-bull
is "just the shadow of the falling dollar", then
their cherished Dow Jones average has recently fared no better.
Here is another thought: what does that say about the confidence
foreign investors have in US stocks? If they only buy them
when the cheaper dollar makes them more affordable, then a
stronger dollar becomes an economic no-no for US policy makers.
If this is the perception of US markets, the US cannot afford
a strong dollar policy any longer, any comments from the administration
through it's snowy mouthpiece notwithstanding.
If this is true, then the situation we face also instructs
us that the dollar has become adverse to even the confounded,
rigged, and artificial representation of economic value we
all call "the US stock markets." In short: the dollar
is now absolutely value-adverse. An increase in the price
of anything that has any kind of value to Americans now has
to be purchased at the expense of a falling dollar!
The evidence appears striking. There seem to be no two ways
about it. It's not so much that a strong dollar is bad for
US assets, as it is that only a weak dollar can induce foreign
investment in US or dollar-denominated assets anymore.
Or, seen the other way around: if higher prices for US assets
can only be bought at the expense of a lower dollar, then
we simply have a wash. We are treading water. We are going
nowhere. The only thing we have is an illusion of an increase
in the value of US assets tailor made for the domestic US
At least one thing still remains of the old pillars of economic
reality: There is at least that one perception of "value"
left in investors' minds. At least they still do buy US assets
(or dollar-denominated assets) when the dollar tanks. If and
when that ever stops, if and when the international estimation
of the value of US assets sinks so low that they won't even
consider buying them when they are cheap, that is going to
be the day when US economic supremacy is simply over.
How does all of this jibe with today's report of the huge
November rise in net foreign investment?
It jibes perfectly.
Even if the figures are correct and not skewed at all, the
dollar-Dow scenario explains perfectly why foreign investment
has increased so much. Look how the Dow shot up after the
election. Look how the dollar dived during the same time.
If foreigners are simply scavenging for cheap US assets, then
this points to one sad but undeniable truth: they will only
continue to do so when the dollar is falling, making US assets
cheaper for them.
At this point, it's time to make a prediction: If this explanation
is correct, then the December TIC figures to be released in
February should show a far lower net increase in foreign capital
inflows. And if the dollar keeps climbing during January and
boasts a significant increase at the end of the month, then
we should see a reversal of net inflows during January when
those figures are released in March.
Now, if this scenario holds true, then how far can the dollar
Better question: how far can the dollar-faction afford to
let the Dow to fall (as a result of the rising dollar) before
foreigners will jump off the train and look elsewhere for
bargains? A rebounding dollar will act like insect-repellant
for foreign investors. They simply won't go anywhere near
US assets if a rising dollar makes these assets smell
bad' (more expensive) to them.
And that means that the trade deficit will continue to loom
large on the investment horizon, no matter what these (now
no longer so surprising) capital inflow figures showed in
November. Only a seriously falling dollar can attract enough
foreign investment to "pay" for the US trade deficit.
That means a rising dollar will simply crush the US equities
There is another possible explanation for this upward explosion
in foreign asset inflows:
I have seen people talking about covert US Fed buying of
longer term treasuries to keep long rates manageable so that
consumers won't get scared out of their pants by the two-prong
pinchers of rising US prices and the rising cost of debt-repayments.
Some astute analysts have observed that there is a lot of
activity in the bond market coming out of the Caribbean money
centers. These same traders have observed that an unidentified
but huge entity acting through the Caribbean money centers
keeps coming in to buy treasuries as soon as a sell-off begins
to develop. Could that be the Fed?
Is it possible that the Fed is making good on Bernanke's
threat and is buying long term treasuries? Are those the "foreign
investment inflows" we have been told about today so
boisterously? Here is a snippet from a Reuters article of
Michael Woolfolk, senior currency strategist at Bank of New
York, reckoned however that much of November's asset inflow
was speculative, given an increase in investments from Caribbean
money center banks. These banks are known to be financing
channels for most hedge funds, which have become major players
in the daily $1.3 trillion turnover of the global foreign
Looks like they may also be financing channels for the US
A rising dollar's seemingly inevitable negative effect on
the Dow will force US insiders to do whatever they need to
do to prop up their beloved stock-market con game. As the
Dow goes, so goes investor psychology. When the Dow finally
folds, we will get Prechter's predicted (but so far not occurring)
deflation scenario. Individuals and businesses will pull in
their horns. Credit will contract, not because rates are high
but because everybody gets scared. Then, the Fed may be forced
to reverse course and drop its interest-rate pants again,
exposing the nakedness underneath for all the world to see.
But the above still doesn't explain why the dollar turned
on a dime in the new year.
What we have witnessed so far does not appear to be a major
dollar support action by anyone - unless it's an act of covert
dollar-buying by the ECB and/or euro-zone member nations.
If I were to go way out on a limb I'd say that, just as the
US is trying to undermine the euro by dropping the dollar
too far too fast, the euro-members may have figured out they
can "mess" with the US by covert dollar-support.
In doing so, they can apply a fair amount of pressure on the
Dow, as is evident from this chart:
Funny world, isn't it, where nations and power-blocs now
appear to try and hurt each other by supporting the opponent's
But it doesn't have to be covert EU dollar-support that drove
this reversal. It may very well be that Japan is finally acquiescing
to longstanding EU demands to stop selling yen to buy dollars,
which in the past forced the euro to take the brunt of the
It is too early to tell whether this represents a definitive
policy shift by the Japanese, but it is interesting to note
that, although the dollar bounced against both the euro and
the yen in early January, its bounce against the euro has
been sustained and continues, while it fell back against the
yen to levels that are now lower than they were at the beginning
of the bounce. And that despite the lift it got from the foreign
capital inflows data.
So, is gold "on hold" again? Yes, for the time
being - but that's a good thing if you are consistently buying
and saving gold (as the Chinese and other Asians do) to align
yourself with the coming changes in the world monetary system.
Those changes are detailed only in the Euro
vs Dollar Currency War Monitor.
If you are only trading gold or gold shares for paper-profits,
your long-term priorities may be a bit off. If you end up
selling gold in the face of a sustained rise in the dollar,
you will be doing those who truly save gold a huge favor.
They'll be glad to buy it from you - for even less paper cash
than it takes to do that now!
vs DOLLAR CURRENCY WAR MONITOR
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