Some thoughts for the USD bears.

Discussion in 'Economics' started by FCCT, Sep 14, 2009.

  1. FCCT


    Some thoughts for the USD bears.

    I was previously very bearish on the USD, as you constantly hear about the printing press, inflation, and random fear mongering about the dollars demise.

    I started searching thru all these long term charts (fx, equities, bonds), and have come to the conclusion for the near future everything is a trade on the USD.

    SPY and USD have been trading inversely for some time now. If SPY sells most likely USD will rally.

    SPY and every other stock market in the world have been trading in tandem for some time. If you’re not comfortable holding SPY, then be cautious holding foreign market. Also note commodities are highly correlated with markets as well.

    A credit bubble means a debt bubble. USD debt means you are short USD and have to pay back USD in the future, either in cash or thru services valued in USD. This is very bullish for the price of USD. The buying pressure created by these shorts can be huge.
    USD is still the world’s reserve currency and a lot of accounts and debts are settled and valued in USD no matter what. If USD rises causing an increasingly bigger debt burden it could create a snowball effect.

    M1 has been skyrocketing, yet M3 has been decelerating yet still positive. (according to shadow stats). If M3 goes negative then there is no new credit expansion and no inflation.

    Long term bonds have been stable. With all the rampant inflation expected in the future you would expect to see yields rise.

    USD may become a carry type trade adding to the reversal spike.

    It seems to be a very one sided view currently. Too many dollar bears. I can see gold breaking out and some negative pressure on USD, but I cant see USD in freefall. Seems to mean it will either drift down or go vertical. The risk reward isn’t good on the short side.

    Technically it would be very hard to imagine SPY trading much higher and especially not near highs. Inversely if the dollar relation holds, it will look like a major bottom on the USD.

    Of course things could change. Im waiting to see what kind of drastic steps the govt makes before reversing this opinion.
  2. Mvic


    I agree completely, the biggest risk to the rally right now is dollar strength and it could manifest quickly as so many are short the USD. However no sign of it yet and with the current administration's spendthrift policies I don't see the catalyst for USD strength other than flight to safety returning for some other reason.
  3. Its only the worlds reserve currency because it got that way back when the dollar was backed by gold. people are buying gold now because they dont trust the dollar.

    You can reach a logical conclusion that people want money backed by gold again which is why gold is going up.
  4. If the dollar keeps going down I would look for this relationship to flip.
  5. FCCT


    What the hyper-inflationists are missing.

    The entire financial system is based upon faith of credit. The Govt and FR have worked very hard over the last century to build this faith. This is their greatest accomplishment and they wont destroy it by printing trillions of dollars.

    They have done an excellent job as well, to the point where the average citizen believes credit balances in bank accounts are equal to physical currency.

    When here is the reality. Total credit outstanding is close to 50 trillion dollars and total physical money is just under 1 trillion dollars.

    Just imagine that, 50 banking clients with equivalent balances think they have unique claim when in reality they are sharing one balance. Imagine the magnitude of bank runs. Especially with zero percent interest rates, there is no incentive to leave your capital in a bank, and at that leverage all it takes is a small run to break the system.

    And if you talk about this the media calls you a kook. You are a kook if you have physical cash and hide it under your mattress.

    It is mind boggling the amount of debt and by extension the amount of optimism people have. They also have tremendous faith in their Govt incase something goes wrong. They believe the Govt will be there for unemployment and healthcare and retirement. Citizens will be getting a healthy dose of reality soon.

    The Federal Reserve’s first duty is to maintain and build faith of the credit system. If they push too hard they will implode the credit system. So far their stimulus programs have been relatively small compared to the size of the credit market. It’s hard to fathom the Govt sending every household a cheque for $50,000, but that would be the necessary magnitude. Even then, you might get into a scenario where physical money is worth more than credit money.

    Ultimately I think Government’s want control and complacency from their citizens. A cashless society is a nice way to accomplish both. The last thing they want are individuals bartering with non trackable means.
  6. First off...forget M1/M3. You cant trust any of those stats. The fed is the one that gives us this information and we all know how far we can trust the fed, right?

    Also remember there were a ton of real estate professionals out there in 2005-06 telling everyone that said housing was going to collapse that "they couldnt see it in a freefall" either, or that housing never loses value. Also how many bankers lost billions? You have to be pretty smart to run a bank. They dont just give these jobs to high school drop outs and now almost 100 banks have failed this year. How can you NOT see a USD freefall when some of the smartest people in the world didnt see this coming? I remember hearing in 2006 about some report from some guys at harvard who said real estate will keep going up until 2020. HARVARD! Arent those guys supposed to be smart?

    Confidence is lost in the USD. Everyone is just trying to figure out how to get rid of the most of it without losing everything.

  7. I think it is rather that everthing is correlated to the SPX, since the USD is currently funding the carry trades that end up buying and holding equities.

    But yeah, in general you are spot on.

    The fact that almost everything is correlating should give you an idea that liquidity NOT fundamentals are running the show.