In USD: Shape of things to Come I posted the following:
At the time, I pointed out that the US Dollar has been in a raging bull market for almost two years, a belief shared by, well, no one!
Today, with the ECB rapidly bankrupting Europe and itself (remember, the private ECB is an inbred cousin of the already-inbred Federal Reserve), it is a little easier to envision what is about to happen.
Here we sit, today:
Putting 2 + 2 together... it is clear that disaster is no longer "around the next corner." It has arrived:
Yep, all of the chicken littles running around squawking about the US collapsing haven't seen anything yet. There's a flight to treasuries looming that will make what we've seen so far look like child's play. Greece is small potatoes compared to some of their EU brethren.
ReplyDeletefrom Denninger:
"Italy's is 127% (the US is running close to 100% at present), while Greece's is 161%. Spain's, on the other hand, is 171%. Germany, for all of its vaunted "strength", runs 178% of GDP, Portugal is at 214% and Ireland is running an unbelievable 1267%."
In reading many of your posts, your observations about the value of the dollar appear to be referenced to the purchasing
ReplyDeletepower of a person living in the US as opposed
to the dollar realtive to the rest of the
world or against other currencies. I am
American and live in the UK. The majority of
my assets are banked in the US. I changed
some at the end of 2008 year and the start of
last year as it was the best exchange opportunity to come along in quite a while.
My question is a matter of strategy.
Obviously I will, at some point, convert
everything to the currency where I live. I
just have no clear idea how one might plan to
do that without making a serious mistake.
Any points to ponder?
FDR can you "drop" that first chart down a tad so we can see where wave 3 might end?
ReplyDeleteJust kidding. We all need a little mystery in our lives.
Thank you for this briefing. I hope you are right. I will be able to retire.
ReplyDeleteFDR since the dollar has only appreciated against euro and not the so called emerging markets currencies , is it possible that those emerging countries may be safe havens in the coming rout? or you see emerging markets crashing big time too? Is it possible that currencies of countries like korea and other emerging markets appreciate even as the dollar strengthens and in turn not crash thier economies? Why i ask this is because i believe you are saying that the dollar will destroy the whole world .Is it possible that these countries withstand the cashzilla and continue growing irrespective of the dollar movement?
ReplyDeleteMore interested in your analysis of the Dow graph.
ReplyDeleteSounds like you are more confident that we are at the apex of Wave 2 of our bear market beginning in 2000. (Rather than an A Wave of 2)
If my very rudimentary understanding of EW is correct, that is you're anticipating our next leg down (Wave 3) over the course of years with several reversal rallies, eventually ending Wave 3 down near the previous Wave 4 up? - approximately the 1980's Dow of (ouch!) = 2000?
Sorry if I have screwed up interpretation - just learning.
"My question is a matter of strategy.
ReplyDeleteObviously I will, at some point, convert
everything to the currency where I live. I
just have no clear idea how one might plan to
do that without making a serious mistake.
Any points to ponder?"
Sure, I have a PTP or two...
You are right that I consider dollar strength to be = to dollar purchasing power. 99.9% of so-called "experts" think that is related in some way to the dollar's exchange rate. It's not.
The quantity of dollar-denominated paper (and/or electrons) sloshing around the US and the world is what defines the dollar's buying power, or dollar strength. Note, no where in that equation is another currency.
The Dollar could plunge against the Euro while surges in buying power, or, they can both quadruple in buying power while the exchange rate is frozen solid.
I outline why, in:
Deflation and Exchange Rates
(linked above)
You are in the UK, the epicenter of the global financial meltdown. Ok "Epicenter" might not be the right word; the UK is in the worst shape of major country, but not significant in the way that say, California is significant. But the UK is unique in that you have your own currency and CA has only recently starting issuing scrip. So the Pound is in a dire situation. That presents risk and opportunity:
If the UK holds on with the Pound intact, cash in the form of pounds will sky rocket in value (in buying power), so it's probably the best currency to hold in cash other than the dollar.
If the UK and Pound fail entirely (there is a very real chance), then so much for that strategy. So it comes down to risk tolerance.
I've said before that I think holding cash in US dollars/Treasuries presents the best risk:reward ratio of any trade (not investment).
Obviously, the wealth of the world agrees with me, look at T yields. That's why news outlets are paid to trash cash--the same people want yours.
"If my very rudimentary understanding of EW is correct, that is you're anticipating our next leg down (Wave 3) over the course of years with several reversal rallies, eventually ending Wave 3 down near the previous Wave 4 up? - approximately the 1980's Dow of (ouch!) = 2000?"
ReplyDeleteClose. Here is the big picture:
http://fdralloveragain.blogspot.com/2009/11/holiday-update.html
I do think that 1932-2000 was a 5-wave, with 1966-1974 being it's sideways W4.
As a guideline (but not a rule) anytime you have a 5-wave, the ABC correction that follows often retraces back to W4, or more precisely, the W2 of the lesser degree 5th wave that followed that W4.
That's around 1983, so nice work.
The question is, is 1932-200o a 5-wave structure in isolation, or is it a 5th of something much larger. I think it's the latter.
There are a lot of reasons I think so, but just on an intuitive level, the era of public stock ownership is literally the definition of a 5th wave.
When you say the dollar is rising in purchasing power, purchasing power for what? It may buy you more house but less BIDU? It seems as though purchasing power is as finicky as exchange rates, no?
ReplyDeleteFDR,
ReplyDeleteWhy is it possible that the Pound could possibly fail, but not the dollar. I'm trying to connect the dots, but just can't see the big picture.
"It may buy you more house but less BIDU? It seems as though purchasing power is as finicky as exchange rates, no?"
ReplyDeleteExchange rates are meaningless with regard to dollar strength, since buying power can go up, down, or stay the same as exchange rates don't change, or vice versa.
Sure, BIDU can change price, but there are lots of variables at play including the exchange rate, which again, is unrelated to dollar strength.
US real estate price is a good measure of dollar strength, since its mostly stuck in the United States.
"Why is it possible that the Pound could possibly fail, but not the dollar. I'm trying to connect the dots, but just can't see the big picture."
ReplyDeleteThey both could fail, but I think the US is in much better shape than the UK and also the EU. All paper is on fire.
you've mentioned you use the 3M Tbill as a real-time indicator of credit demand. are there any other indicators you use to gauge credit demand? thanks for a great blog.
ReplyDeleteDo you think sentiment matters at all?
ReplyDeleteAlthough the S&P 500 is down less than 7.5% from its January high, bulls are heading for the hills. According to Investors Intelligence, bullish sentiment among newsletter writers is currently at 34.1%, which is the lowest level since March 2009. At the same time, bearish sentiment (26.1%) is the highest since November, while the percentage of newsletter writers in the correction camp has sky-rocketed all the way to 39.8%, which is a level that hasn't been seen since 1983.
I would include the correction camp in the bull camp. Even a partial weighting (say half) of the "correcters" to the bull side still represents a pretty good (50%+ bullish) contrarian indicator in my books.
ReplyDeleteFDR, I'm not sure I understand, you said the UK is in trouble, and I agree, but we're not much different. Why would our currency strengthen given what Congress and Obama have done to our debt/GDP ratio. It's not like we can repay our debt either. It's only a safe haven currency if there's not a threat to devaluation. As I see it, there is a legitimate threat of devaluation since we have a printing press and huge amounts of debt.
ReplyDeleteFDR- new here and currently just long stocks. I am thinking of selling some but my broker has made me good money in the last 10 years averaging about 10% a year with his allotment. He still recommends buying on this dip as earnings are coming in strong and revenues are climbing, saying that all this worry is another reason the market has a long way to go before the next top. Some things just seem different now though. I hate to break a great track record but I realize people owning index funds have made no money in 10 years. The charts look like a massive bull flag for a decade, do you really think this time is different? Ignoring the pundits has made me a lot of money but the Internet has given the pundits a louder voice and there arguments are hard to ignore. Anyways I guess I will sell a little and see what happens. He got me in BIDU the other day saying they would beat earnings. Well, they did and these are the homeruns I am afraid of missing out on if the pundits keep crying wolf.
ReplyDelete"FDR- new here and currently just long stocks. I am thinking of selling some but my broker has made me good money in the last 10 years averaging about 10% a year."
ReplyDeleteI can't really be more clear. I think stocks are going way, way down, never to come back in our lifetimes, nor for our children.
Do you have any more questions? :)
But I am not a doom and gloom'er.
I am not of the camp that thinks global, government condoned counterfeiting machines stealing 98 cents of every dollar (since they climbed out of the swamp in 1913) and driving prices higher is good.
It isn't good. It's actually a horrible situation.
Higher prices from a MASSIVE hidden inflation tax are catastrophic for most people's wealth outlook. Nothing could be worse for 99% of the public than forever-rising prices.
Nothing.
The coming mega-deflation is the beginning of great wealth for those who live within their means--which includes very few people. Those who are in debt, to include those in conventionally-acceptable levels of mortgage debt, will get pounded.
That's all fair and good in my book.
"FDR, I'm not sure I understand, you said the UK is in trouble, and I agree, but we're not much different. Why would our currency strengthen given what Congress and Obama have done to our debt/GDP ratio."
ReplyDeleteA much better question is how could it not strengthen?
You realized that we trade private debt receipts as currency, not government credits, right?
Having someone owe you labor, forever denominated at 2007 prices (= a cash debt obtained in 2007), instead of owning assets that are priced daily is basically an invincible position when an economy pancakes.
That is why the dollar has been soaring for 2 years.
Don't think Weimar, they printed government credits.
ReplyDeleteFDR wrote: "US real estate price is a good measure of dollar strength, since its mostly stuck in the United States."
ReplyDeleteAnd that is one of the big problems with the way you're valuing the currency.
Back during the Great Depression, the vast majority of goods purchased by people here in the U.S. were manufactured here in the U.S. That meant that as the currency supply shrank, the buying power of the dollar for those goods increased. There was nothing else in the picture.
Fast forward to today. The vast majority of goods are manufactured overseas. This means the exchange rate is almost always relevant to the actual buying power of the dollar.
Therefore, how the dollar moves against those other currencies is highly relevant to the actual buying power of the dollar for nearly every good that is produced. The only real exceptions are food and ammunition (which happen to be exactly the things we very well may need most in the coming years!) and, of course, domestically-provided services.
I should note that the price of services here in the U.S. will fall only as the supply of jobs dwindles while the supply of labor remains constant, so the average person won't see any improvement -- only those people who already have cash will benefit from what's coming.
Regardless, until we begin manufacturing goods here in the U.S. again, the exchange rates between the U.S. dollar and the currencies in use by the primary goods exporters (primarily China) will remain highly relevant. It is therefore quite foolish to dismiss them out of hand as somehow being irrelevant -- they are quite the opposite.
"The vast majority of goods are manufactured overseas. This means the exchange rate is almost always relevant to the actual buying power of the dollar."
ReplyDeleteWe disagree. The only variable in the dollar's buying power, assuming the number of assets in existence are constant at that moment, is the number of US dollars in circulation.
Exchange rates obviously change as dollar strength changes, so yest they are "relevant," but correlation does not imply causation.
FDR, I understand how our money is debt-based, but I don't understand money as credit. Would an example of such a beast be a gold/silver certificate, or any bill of credit that was redeemable for something?
ReplyDeleteI thought the German central bank suspended redeemability of its notes in 1914, so I don't understand how the post-war German currency was credit based.
Thanks,
FDR wrote: "We disagree. The only variable in the dollar's buying power, assuming the number of assets in existence are constant at that moment, is the number of US dollars in circulation."
ReplyDeleteYou assume that the shrinking availability of the dollar will cause the dollar to buy more of the other currencies at a rate that outpaces the rate of any increase of prices of goods produced overseas as denominated in overseas currencies.
What is the basis for that assumption?
"You assume that the shrinking availability of the dollar will cause the dollar to buy more of the other currencies"
ReplyDeleteNo I don't, kcb, that is the exchange rate. Exchange rates are unrelated to dollar strength. For example, when the dollar gets stronger, the Dollar:Euro exchange rate can go up, down, or stay the same.
FDR wrote: "No I don't, kcb, that is the exchange rate. Exchange rates are unrelated to dollar strength. For example, when the dollar gets stronger, the Dollar:Euro exchange rate can go up, down, or stay the same."
ReplyDeleteYes, and that's my entire point.
Because the cost of a good manufactured overseas has to go through the transformation function of the exchange rate, you cannot ignore the exchange rate when assessing the purchasing power of the dollar with respect to goods purchased in the modern U.S., because almost all of those goods are manufactured overseas. You can only do so when there is no foreign currency involved, such as when purchasing real estate here in the U.S.
If the exchange rate remains constant and the price of the good as denominated in the foreign currency remains constant, then the dollar price remains constant, despite the fact that the dollar is gaining domestic strength. And if the exchange rate changes so that the dollar weakens against the foreign currency then the price of the good actually goes up, again despite the fact that the U.S. dollar is strengthening domestically.
So yes, you're exactly right with that last comment, and you confirm precisely what I was saying: you cannot ignore the exchange rate when evaluating the purchasing power of the dollar in the modern world, because the U.S. doesn't make anything anymore and therefore the U.S. dollar is no longer purchasing goods directly -- it has to go through a currency exchange first.
Now consider what that means when it comes to the purchase of the vast majority of goods made today. Those goods are sourced from China. The yuan:dollar exchange rate had been constant prior to 2005, then dropped (meaning, the dollar weakened against the yuan) through 2008, and has been constant since then.
That means that for your "strengthening" dollar to buy more Chinese goods, the price of those goods in yuans must drop. Now how do you think that's going to happen if the size of the Chinese currency base isn't shrinking at the same rate ours is?
Dear FDRalloveragain, thankyou for a fascinating blog!,
ReplyDeleteI am intrigued by your comment "Don't think Weimar, they printed government credits" in relation to inflation vs deflation. Could you please explain how that is different from trading private debt reciepts as currency
"That means that for your "strengthening" dollar to buy more Chinese goods, the price of those goods in yuans must drop. Now how do you think that's going to happen if the size of the Chinese currency base isn't shrinking at the same rate ours is?"
ReplyDeleteIf you look down to the exchange rate charts, I have had a comment there since I started the blog, "All major currencies are strengthening in unison."
Yes, I think all major paper is deflating together. The fact that all paper can strengthen in buying power is my point, one currency's loss is NOT another currency's gain, as most people seem to think.
Much more likely, currencies weaken and strengthen together as inflationary booms and deflationary busts are global phenomena.
The metaphor for today is a global bonfire, where banks and govs gather up as much paper cash as they can muster and set it a blaze, in all corners of the Earth.
All cash is simply disappearing, because we have a debt based monetary system, it's easy to extinguish or nullify debt.
That's the fundamental purpose of the Federal Reserve Corporation (and their central bank kissing cousins), to inflate and deflate the currency supply in a way advantageous to only them.
"Dear FDRalloveragain, thankyou for a fascinating blog!,
ReplyDeleteI am intrigued by your comment "Don't think Weimar, they printed government credits" in relation to inflation vs deflation. Could you please explain how that is different from trading private debt reciepts as currency."
Thanks. The Weimar government directly and indirectly backed their own hyper-inflationary printing press.
Our currency is created and printed strictly for profit, by a non-government private corporation.
No profit; no currency.
= Deflation.
FDR wrote: "Yes, I think all major paper is deflating together. The fact that all paper can strengthen in buying power is my point, one currency's loss is NOT another currency's gain, as most people seem to think."
ReplyDeleteOh, I'm in complete agreement with that.
The question is whether or not the Chinese yuan specifically is deflating in unison with the dollar. Can you provide some evidence that it is?
If it is, then the cost of goods and services in China must be dropping when denominated in yuans. But is that what's really happening over there?