Empire of Debt II: The Dollar

[Rajiv]

Empire of Debt II: The Dollar by Charles Hugh Smith

Frequent contributor Harun I. responded to my inquiry about the dollar's downward path with these charts and comments:

The dollar is in a do or die position. (emphasis added--CHS) A strong down bar this month will probably lead to a loss of confidence and therefore panic. Any large, disorderly breaks may force the Fed to raise rates or the market will do it for them. The technical structure as well as the COT (commitment of traders) data is strengthening suggesting a reaction but that could change on a dime. Early longs would be forced to liquidate, exacerbating the down move. The dollar may bounce at the 2 standard error channel boundary but we are in uncharted territory which may lead to some pretty irrational behavior.

Harun sent two charts plotted with channels. One displays the years 2001-2007, while the second one is long-term, covering the 40 year period 1967 - 2007.

Empire of Debt I: The Great Unraveling Begins

[metalman]

Re: Empire of Debt II: The Dollar

Empire of Debt II: The Dollar by Charles Hugh Smith



Empire of Debt I: The Great Unraveling Begins

chs is sharp. companion chart?

[jk]

Re: Empire of Debt II: The Dollar

The dollar is in a do or die position. A strong down bar this month will probably lead to a loss of confidence and therefore panic. Any large, disorderly breaks may force the Fed to raise rates or the market will do it for them.

'fraid not. the fed is more worried about a deflationary bubbble burst, and "the market [WON'T] do it for them" because there's a flight to safety in tbills for funds that are not earmarked to go into foreign currencies or pm's: witness ultra low rates on 3 month tbills - now yielding 3.27% - even as pm's go to new highs.

[metalman]

Re: Empire of Debt II: The Dollar

'fraid not. the fed is more worried about a deflationary bubbble burst, and "the market [WON'T] do it for them" because there's a flight to safety in tbills for funds that are not earmarked to go into foreign currencies or pm's: witness ultra low rates on 3 month tbills - now yielding 3.27% - even as pm's go to new highs.

you're right. normally chs is good. long rates and gold are shooting up to price in inflation, tbills falling because no one wants to hold bank credit. tbills will be the last to die.

[GRG55]

Re: Empire of Debt II: The Dollar

'fraid not. the fed is more worried about a deflationary bubbble burst, and "the market [WON'T] do it for them" because there's a flight to safety in tbills for funds that are not earmarked to go into foreign currencies or pm's: witness ultra low rates on 3 month tbills - now yielding 3.27% - even as pm's go to new highs.

You're right. The Fed won't raise rates as the market rates are already leading the Fed down. The Fed wants a steeper yield curve to save the banking system, and it's going to get it - Lower short rates and (eventually, if the "bond vigilantes" ever ride back into town) rising long rates because of future inflation.

[touchring]

Re: Empire of Debt II: The Dollar

Does this means the Feds will keep reducing rates even as Paulson keeps talking a about strong dollar policy?

You're right. The Fed won't raise rates as the market rates are already leading the Fed down. The Fed wants a steeper yield curve to save the banking system, and it's going to get it - Lower short rates and (eventually, if the "bond vigilantes" ever ride back into town) rising long rates because of future inflation.

[Tulpen]

Re: Empire of Debt II: The Dollar

You're right. The Fed won't raise rates as the market rates are already leading the Fed down. The Fed wants a steeper yield curve to save the banking system, and it's going to get it - Lower short rates and (eventually, if the "bond vigilantes" ever ride back into town) rising long rates because of future inflation.

I think that rates are going down because of the lack of trust in the US dollar. If the fed were to raise, and I agree they won't, it would send a positive message about the dollar. If the US government wants to maintain the dollar as the leading world currency, then in my opinion interest rates have to be raised.

Except for its military might the leading position of the US in the world is rapidly deteriorating at all fronts. The enronization of the US financial system is rapidly causing the rest of the world to break away from it.

[GRG55]

Re: Empire of Debt II: The Dollar

Does this means the Feds will keep reducing rates even as Paulson keeps talking a about strong dollar policy?

Absolutely.

Notice that in addition to "strong dollar", Paulson (and his predecessors) are fond of adding the phrase "...with a competitive marketplace setting the exchange rate...". Currencies are the most blatantly manipulated (by Central Banks) markets on earth. The only "competitive" aspect is who can devalue their fiat currency first and fastest. We don't have a Smilie that adequately represents my feelings every time I hear Paulson say the words "strong dollar" (Skype has one)...

I think that rates are going down because of the lack of trust in the US dollar. If the fed were to raise, and I agree they won't, it would send a positive message about the dollar. If the US government wants to maintain the dollar as the leading world currency, then in my opinion interest rates have to be raised.

I don't think you would get much argument that raising Fed administered rates should support the $. Certainly that's what observers like Jim Rogers have been pointing out in their criticism of the Fed's recent rate cuts. The problem in the current environment is the Fed would have to conduct substantial operations in order to bring the market rate up to the administered Fed rate (Bart and Finster may have a different view on this situation, complete with a compelling chart to "lock" the argument )

As for why market short rates are going down, there must be increasing demand for short-dated T-bills to make the short market interest rates fall. The interesting question is what is creating that demand? I don't know that we can necessarily conclude that trust in the US $ is completely absent if there are lots of buyers of T-bills. At the same time there is an argument that short rates fall as global leveraged speculations get unwound and short-term debts (like margin accounts) get repaid (market price of credit falls as demand for credit falls - metalman's point above). However, that implies the US $ was a funding currency and therefore should provide support for the currency (the way it has for the Yen recently), but we aren't seeing that. :confused: (Hand off here to The Brain for an explanation...)

Except for its military might the leading position of the US in the world is rapidly deteriorating at all fronts. The enronization of the US financial system is rapidly causing the rest of the world to break away from it.

What the Wall St. banks and financial houses have done should be an embarrassment to the nation. So far it is not.

Perhaps that is because the foreign buyers of the toxic waste are even more embarrassed, and prefer it not continue as a prominent topic? We've been treated to the spectacle of Wall St. insider Jim Cramer publicly labelling European holders of CDOs as "stupid", and lauding the marketing skills of Wall St. No doubt some of that was tongue-in-cheek, but it does the reputation of the nation abroad no good. That an inordinate number of the most influencial officials inside both political parties continue to be Wall St insiders says it all. If you let them, they will do for your country exactly what they did for their own firms, like Citi:
- destroy the balance sheet;
- wreck the talent pool with regular "palace purges" of internal competition;
- reward themselves handsomely;
- keep dancin' till the stroke of midnight, then disappear in a gilded carriage;
- sell a major part of the ownership to a foreigner.

[jk]

Re: Empire of Debt II: The Dollar

As for why market short rates are going down, there must be increasing demand for short-dated T-bills to make the short market interest rates fall. The interesting question is what is creating that demand? I don't know that we can necessarily conclude that trust in the US $ is completely absent if there are lots of buyers of T-bills. At the same time there is an argument that short rates fall as global leveraged speculations get unwound and short-term debts (like margin accounts) get repaid (market price of credit falls as demand for credit falls - metalman's point above). However, that implies the US $ was a funding currency and therefore should provide support for the currency (the way it has for the Yen recently), but we aren't seeing that. :confused: (Hand off here to The Brain for an explanation...)

you rang?

there is indeed increasing demand for short-dated tbills. this is all part of the flight to safety for u.s. dollar-based investors. [i doubt very much that it is foreign demand.] i know that for cash i was holding [in the absence of an available treasury only money fund], i got out of my "government" money market fund and bought tbills. there have been several discussions here about finding "treasury-only" money market funds. [what do you think they hold?] there have been similar recommendations from bill fleckenstein at his web site and on god-knows-how-many-other websites. the abcp market is shrinking every day. where is the money going that is no longer being rolled over into abcp? tbills. a number of commentators have noted that 3 month libor has remained at a relatively high spread - banks are afraid to lend even to other banks for more than 24 hours. the credit markets are scared. fear is the source of tbill demand.

as for trust in the us dollar - i don't detect any whatsoever. the dollar held steady against the euro the last few days, and rose against the pound on friday, as the yen and swiss franc rose. the only thing holding the dollar up in this scenario is its role as intermediate to cross currency trades. here's a chart of the euro/yen cross, which is essentially a measure of what's happening in the yen carry trade. the way that the euro/yen is unwound involves, iirc, selling euros for dollars and then selling dollars for yen. this supports the dollar against the euro even as the yen rises against both the dollar and the euro. [looks like a double top, doesn't it? a triple top if you go back to july.]



oops, this is the wrong chart!?>!

go here:

http://charts3.barchart.com/chart.as...K&org=stk&fix=

[Guest]

Re: Empire of Debt II: The Dollar

For some continuing levity (as in humor, not levitation - just so we don't all turn into depressed hamsters stuck on the hamster-wheel in a financial cage, here's a nice caustic snippet from Casey Research:

<< ... Like hunters of antiquity watching large prey grazing toward a large covered pit, the bottom of which is decorated with sharpened sticks, we watched the handsomely attired and well-groomed Bernanke and friends shuffle ever closer to the edge, their attention no doubt occupied by pondering the flavor of champagne to be served with the evening’s second course. >>

<< ... One minute pondering bubbly, the very next standing, wide-eyed and hyperventilating, on thin cover with decades of fiscal abuse cracking precariously under their collective Italian leather loafers. We can’t entirely blame Bernanke for the dilemma he now finds himself in; it was more about showing up to work at the wrong place at the wrong time >>

[jk]

Re: Empire of Debt II: The Dollar

For some continuing levity (as in humor, not levitation - just so we don't all turn into depressed hamsters stuck on the hamster-wheel in a financial cage, here's a nice caustic snippet from Casey Research:

<< ... Like hunters of antiquity watching large prey grazing toward a large covered pit, the bottom of which is decorated with sharpened sticks, we watched the handsomely attired and well-groomed Bernanke and friends shuffle ever closer to the edge, their attention no doubt occupied by pondering the flavor of champagne to be served with the evening’s second course. >>

<< ... One minute pondering bubbly, the very next standing, wide-eyed and hyperventilating, on thin cover with decades of fiscal abuse cracking precariously under their collective Italian leather loafers. We can’t entirely blame Bernanke for the dilemma he now finds himself in; it was more about showing up to work at the wrong place at the wrong time >>

so much anger under the guise of humor [casey, not you, lukester]. it scares me to think that this anger is, somehow, going to play out politically over the next decade.

[metalman]

Re: Empire of Debt II: The Dollar

For some continuing levity (as in humor, not levitation - just so we don't all turn into depressed hamsters stuck on the hamster-wheel in a financial cage, here's a nice caustic snippet from Casey Research:

<< ... Like hunters of antiquity watching large prey grazing toward a large covered pit, the bottom of which is decorated with sharpened sticks, we watched the handsomely attired and well-groomed Bernanke and friends shuffle ever closer to the edge, their attention no doubt occupied by pondering the flavor of champagne to be served with the evening’s second course. >>

<< ... One minute pondering bubbly, the very next standing, wide-eyed and hyperventilating, on thin cover with decades of fiscal abuse cracking precariously under their collective Italian leather loafers. We can’t entirely blame Bernanke for the dilemma he now finds himself in; it was more about showing up to work at the wrong place at the wrong time >>

ej called bernanke's job a goat job in one of his better pieces...

"With a storm of credit collapse hitting US shores, Ben Bernanke has stepped into the biggest goat job in central banking history."