Is value of US $ (via US $ index) getting positive spin?

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pinecarr's picture
pinecarr
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Is value of US $ (via US $ index) getting positive spin?

Hi Folks-

   I am no expert in currencies, but more like someone in a foreign country trying to learn to understand (let alone speak) the language.  In following what is going on with the US dollar right now, I am seeing a change, and am  wondering what to make of that change.  So let me throw my obeservations and (possibly ignorant) speculations out there, with the hope of getting feedback from some of you others out there who have a better understanding of currencies (and manipulations of currencies).

   Ok, so back a year or 2 ago, I figured betting against the dollar was a good investment-bet for me.  I stand to lose a big portion of my retirement savings in investments locked into $-based assets (nothing I can do about it short of quitting my job).  So I figured Investing in an inverse etf that bet against the dollar was a small way to hedge against that.

   Now here's the kicker.  Betting against the US Dollar has seemed to make sense in our current economic environment, right up until Japan also started Quantitative Easing (QE).  Jack Crooks, who specializes in currency investments, makes the point that all things in currencies are relative.  So now, with Japan also doing QE, the US $ is starting to do "better" relative to the yen.  So my question is: even though the true value of the US dollar may be continuing to go down, if the other currencies in the basket of currencies used to determine the US index also do QE, then is it possible that the US index will start looking GOOD (since all things are relative to other fiat currencies)?  If so, it seems like that may be a concern for people like me who are betting (I mean invested :) in inverse etfs against the US ; maybe time to get out.

   Overall, I'm wondering if manipulating (eg, doing QE) on indivudual currencies in that basket of currencies used to measure the US $ index is another tool in TPTB's toolbox for manipulating the appearance of economic variables, in this case, currencies?

   And yet one more speculation: Does it make any sense that the QE on the yen may be motivated by the desire to slow the fall of the US $?  If the dollar starts "looking better" vs the yen, might that not start to slow its rate of decline?  If the dollar "looks good", maybe less people panic,  slowing down the speed of the collapse? 

   Also, as the yen falls relative to the US $, is it possible that the choice of what currency to use for the carry trade might switch back over to the yen?  I admit, I don't know if that makes any sense: I know the carry trade is based on leveraging currencies with low low low rate.  So I'm not sure if the perceived loss-of-value of a currency due to QE even plays in there.  Thoughts?  My speculative thought (in terms of motive) was that if TPTB could switch the carry-trade back over to the yen, that could be advantageous in slowing down the rate of a (potential) global financial collapse. How?  By once again shifting the carry-trade off the back of the world's reserve currency to some other currency.  Again, I'm a novice in currency-land, so forgive me if my speculations are not well founded.

   Thanks in advance for humoring me!  I am interested to learn from those who understand this stuff better than I!

 

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Re: Is value of US $ (via US $ index) getting positive spin?

Hi PineCarr:

I think the answer is here, if I recall between the 7 and 14 minute point.... Take care

PS 1' of snow and 21 degrees

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Re: Is value of US $ (via US $ index) getting positive spin?

pinecarr,

Besides shorting the dollar, you're also selling yourself short!  I mean you know a lot more than you give yourself credit for IMO.

I think your concern over competitive currency devaluations is well-placed.  The Japanese are just a little ahead of us when it comes to debt (200% debt to GDP:  http://economicedge.blogspot.com/2009/12/state-of-union-in-charts.html) and have no choice but to devalue, just like we won't have any choice when our day arrives.  

The question is, what will the likely short-term behavior of the dollar be?  I don't have an answer to that that I am 100% certain of, but since nothing goes up or down in a straight line, I think the chances are high that the dollar will go into an uptrend before the final apocalyptic cliff dive.  What makes the uncertainty much more laced with danger is that if market sentiment sways towards dollar bullishness - and that won;t take too many upticks -  there will be a carry-trade unwind of unseen proportions.

The carry-trade is not just based on borrowing at low rates.  It is also based on the assumption that the currency will devalue, making pay-back cheaper.  If the dollar moves even into just a short-term uptrend, it could self-perpetuate into a sharp and longer lasting uptrend than would otherwise be unlikely due to the massive sell-offs in all asset classes that have bin bid up by those trading on dollar-carry-trade margin.

To sum up, I think being short the dollar right now is very dangerous.  As someone on this site once quipped, the market punishes the maximum number of people by the maximum amount of pain.  The dollar-short trade is more crowded than a Bombay train ride at rush hour, and it will be a very ugly mess when everyone rushes for the door at once.  

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Re: Is value of US $ (via US $ index) getting positive spin?

pinecarr,

 With regards to currencies, I think they can be a risky play for the non-professional.  As Farm Brown says, I think you know a lot more than you give yourself credit for but if you try to compete against the pros in this area, there is a high probability you will get burnt.  I agree with Farmer Brown that shorting the dollar now is very dangerous.  If you are following someone like Jack Crooks, I'd urge you to reconsider.  I just haven't been impressed with his track record.

Exactly what types of assets does your retirement account allow you to invest in? 

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Re: Is value of US $ (via US $ index) getting positive spin?

Pinecarr,

I think the one thing is severely overlooked in dollar discussions on this site and in the blogosphere: The currency markets are in fact markets

Everyone believes whole-heartedly that the central banks are in complete control, and that exogenous events are the only factors that move the currency markets. An unbiased look at history suggests otherwise.

In my opinion, there is one endogenous market force that plays the predominant role in the movement of all markets, including the currency markets: The desire to make a profit.  Time and time again, profit is achieved by exploiting the convictions of other market participants. It doesn't matter what these convictions are, or whether they are based on fact or fiction, it only matters that these convictions are held by the majority of the market players in order to create the opportunity for profit.

So the important thing to remember when you participate in any market is that your beliefs provide the profit for the big players that have the capital to move markets (and perspectives) at critical junctions. This leaves you two realistic choices in how you play the market:

  1. You can play the trend.
  2. You can oppose the trend.

You can play either one, but unless your the biggest of the players you can't realistically play both. Personally, I see a real danger in playing the trend, for the following reasons:

  • Following the trend reinforces your particular beliefs, making it highly likely that you will be blinded to the other possibilities at exactly the wrong moment.
  • If you profit from following the trend, "everybody" else is profiting it from it at the same time. Your effective purchasing power is nullified.
  • When the trend moves against you, you feel victimized and powerless. You alienate yourself by blaming everybody and everything. This mindset  invokes emotion, and emotion only perpetuates your convictions.

On the other hand, opposing the trend offers the following advantages:

  • A "crisis" invariable occurs at market turning points. If you are seeking safety during a crisis, then you want to be opposing the trend as it unfolds, not running with the herd trying to abandon the trend en-masse. 
  • At the exact time that you are profiting, everyone else will be losing money, this compounds your purchasing power.
  • Opposing the trend develops within you the three most important characteristics of a successful trader/investor: discipline, fearlessness, and most important, timing.
  • It also has the advantage of protecting you against becoming complacent. After the market turns, and more and more traders begin to crowd your trade, you will naturally seek to abandon it, protecting you from staying with a particular trade for too long and becoming a victim of it.

Sorry for the long post, but I think this is a very important topic.

All the best....Jeff

 

 

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Re: Is value of US $ (via US $ index) getting positive spin?

Here is a pie chart showing the relative weightings of the currencies used for the dollar index (DXY).  More than half of the weighting is in the Euro and if you add the Yen and GBP you have most of the index.   http://www.babypips.com/school/the_usdx_components.html

More info is available here:  https://www.theice.com/publicdocs/nybot/ICE_Dollar_Index_FAQ.pdf

So it looks like 4 guys jumped off  a 40 story building and we are arguing over who hits the ground first.   Who will deploy their parachute of higher interest rates and deficit reduction first?  Who will volunteer to lead into the resulting higher unemployment and smaller government?  I think the current regime in the US will be the last not the first.

The Europeans, Brits and Japanese face the same questions that you ask of the US.  They are confronted with currency risk as well as wealth preservation risk.  In fact, the whole world faces these questions. All four of these major currency countries are practicing QE.  The price of gold is breaking out in all four. http://jsmineset.com/wp-content/uploads/2009/12/Asorted-Gold-Charts-December-2-2009.pdf

 Most of the world understands the role of gold as money.   So China doubled their gold reserves and is rapidly expanding their gold mining.  They have encouraged their populace to buy gold also.  China is loaning and investing money in long term commodity contracts.  They have not been buying US treasuries since last spring.  http://www.treas.gov/tic/mfh.txt

 India recently bought 200 metric tonnes of gold.  Sri Lanka bought 10 tonnes and   Mauritius bought a couple of tonnes.  These are not speculative moves. Nor are they based on a carry trade.  They are diversifications by central banks out of fiat.  The Eurosystem banks have not sold significant amounts of gold in this fiscal year (began Sept 30).  Why?  The Russians are buying gold.   These are all significant re-weightings of forex reserves.    

How crowded is the US dollar short position?   I've asked this question on several boards and no one has quantified it.   The COT report shows the short position on the NYMEX.   But that is peanuts compared to the hundreds of billions held in forex reserves around the world.  Those reserves are moving to commodities.  I'd like to see someone quantify this "crowded" dollar short trade instead of just repeating the CNBC mantra.  http://in.reuters.com/article/swissMktRpt/idINN0417680320091204   The short position reported by the IMM pales beside the huge reserves of our trading partners.

Short term speculation and occasional intervention by central banks do not affect the major trend.   They put nice dips on charts for the daytraders.   How far can the dollar bounce?   Treasury is facing a 1.5 trillion dollar deficit this year and similar deficits as far as the eye can see.  These deficits will be monetized by the Fed or by other central banks.  There is no other choice.  The size of the US deficits dwarf those  of the other countries comprising the dollar index, therefore the dollar will lead the way lower. 

Here is one target for the dollar  http://stockcharts.com/def/servlet/Favorites.CServlet?obj=ID2684038&cmd=show[s177503557]&disp=P

 

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Re: Is value of US $ (via US $ index) getting positive spin?

Darnitall if I don't love the brainy folks of this community!  I rarely have much to say in this sort of thread but I avidly read them.  I learn heaps!  Thanks!

Viva -- Sager

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Re: Is value of US $ (via US $ index) getting positive spin?
Gigem77 wrote:

How crowded is the US dollar short position?   I've asked this question on several boards and no one has quantified it.   The COT report shows the short position on the NYMEX.   But that is peanuts compared to the hundreds of billions held in forex reserves around the world.  Those reserves are moving to commodities.  I'd like to see someone quantify this "crowded" dollar short trade instead of just repeating the CNBC mantra.  http://in.reuters.com/article/swissMktRpt/idINN0417680320091204   The short position reported by the IMM pales beside the huge reserves of our trading partners.

Giggen,

I would argue that "shorting" the dollar takes other forms besides futures markets or currency ETFs.  Anyone who has borrowed dollars against their trading accounts in order to buy equities is also "shorting" the dollar.  Any borrower is a "shorter" and any lender or cash holder is basicall "long" the dollar. 

Point being that the dollar carry trade is the largest margin trading account in the history of the universe.  Like any other short-squeeze, the rise would be steep, except this one has the potential to really make history and tank all equities, including bonds and gold. 

As a side-note, I wonder how many borrowed dollars are invested in commodity ETFs, including GLD, and as an extension, how much of gold's spot price is inflated due to the paper gold market comprised by GLD and other ETFs.  While they are not worth the paper they are printed on, in my opinion, they do directly affect the gold price since, if the ETFs do what they claim, they have to purchase gold futures with their fund monies. 

 

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Re: Is value of US $ (via US $ index) getting positive spin?

I agree with Farmer Brown. There is a reason they call this the ABD trade (anything but the dollar).

Also, when is the last time that everybody and their momma saw a crisis approaching? I rest my case.

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Re: Is value of US $ (via US $ index) getting positive spin?

The carry trade as I understand it, is defined as borrowing dollars at interest rates near zero and then selling them to buy something else.  Margin accounts and other forms of loans are not "carry" trade per se because the interest rates are higher than  "near zero".  

One of the problems that I see in the punditry and in the financial press  is the lack of number sense.   For example, I ask you to rank the following markets by size and indicate their scale by order of magnitude:   forex, stocks and bonds and finally gold.   You may find the forex size a bit difficult to find because the oft quoted data comes from the BIS and they only survey every 3 yrs,  the last survey being done in 2007.   As a follow up question, how much gold exists above ground in the world?  How much would it take to buy it all at 1000 dollars per ounce?  

JAG, as far as sentiment as an indicator, it is unreliable unless you can genuinely measure it and then only when it exceeds 80 to 90% on one side.  Right now  "everybody"  is warning about the dollar short position and the unwinding of the carry trade.  Everybody defined as CNBC to Noriel Roubini to dozens of posters on this and other chat boards.  That's kinda funny when you think about it.  

 

partial answers and hints:  Forex is #1 in size  and is 10 times larger than the bond market and 50 times larger than the stock market.  Commodities markets are the smallest of them all.   Forex trading averages 4 trillion dollars per DAY.    Think about that when you talk about what it means  to "carry" some of it into other markets. 

There are 120,000 tonnes of gold above ground in the world.  That equals about 3.8 billion ounces which could be purchased for 3.8 trillion dollars at 1000 dollars per ounce.   That tiny market could be completely taken by 1 day of forex trading volume.  It is about a third of one year's budget for the U.S.  The combined market cap of the top 5 companies in the S&P 500 is a trillion bucks.  That's 5 out of 500.   So IF there is a carry trade of any consequence, it is not in gold or in commodities generally because the commodities markets are just too small.  A real carry trade would have to be directed to bonds and perhaps into stocks.   I suggest that  if a carry trade exists and if it unwinds,  the real pain will be in the bond market.   Do you really think that Timmy and Bernie will allow that? 

Perhaps the "dollar short" and the "carry trade unwind" stories that continue to play on all of the financial channels,  in many newsletters and across countless chat boards,  are really about jawboning the dollar higher to slow the eventual day of reckoning. 

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Re: Is value of US $ (via US $ index) getting positive spin?

Gigem,

I don't watch CNBC, so I can't comment on their content. My typical source for sentiment information comes from Jason Goepfert at www.sentimentrader.com , though I haven't been a subscriber to his service as of late. As far as your contention that the blogosphere is full of people bullish on the dollar, please point these sites out to me. This is what I see.

  • Besides an occasional article on Zerohedge, a few on Mish's blog, I don't see many that are bullish on the dollar.
  • Take a look at the Daily Digest of this site over the last few months and compare how many articles are cited that are dollar bearish versus dollar bullish. 
  • The Investors Intelligence survey from last week shows the 3rd most bullish (equity-sentiment ) sentiment since the inception of the survey.

As far as gold is concerned, and up to this point I was only speaking about the dollar, I can find only one recent article (perspective) that is not bullish: From Stoneleigh at http://theautomaticearth.blogspot.com/

December 5 2009: A Golden Double-Edged Sword

Commodity tops, like equity bottoms, are often sharp, as fear is an acute emotion. The reversal, when it comes, is also typically a sharp move. While the longer term future of fiat currencies is indeed bleak, that should be tomorrow's fear, not today's. When fear gets ahead of itself, it sets the stage for a pronged move in the opposite direction. That happened with equities in March and is what I would argue is about to happen to gold.

What begins as a speculative reversal is likely to be extended by the effects of deflation during the next stage of the decline, which in my view is rapidly approaching. Deflation knocks the price support out from under almost everything, as people sell whatever they can in order to raise scarce cash. 'Whatever they can' is the operative phrase. They won't be able to sell what they would like to, as no one will want what they would like to off-load. They will have to sell things of enduring value, such as precious metals. Those who are forced to sell at the wrong time will end up selling a valuable asset at a bargain basement price.

Buyers for most things will be few and far between, as those who still have cash will be unwilling to part with it. The vast majority of the effective money supply is credit, and credit is evaporating. As that happens, it will become increasingly apparent how little actual cash there is, and how important access to it will be. Rising unemployment and cuts in benefits will make access to cash more and more problematic. The value of cash, relative to available goods and services, will rise. While fiat currency has no long term future, cash will be king while deflation lasts. Liquidity will mean flexibility in an uncertain world, and that will translate into opportunity at the most critical time in all our lives.

Internationally, the US dollar should temporarily be the biggest beneficiary of a substantial flight to safety. The dollar should therefore rise not only in relation to goods and services domestically, but also in relation to other currencies. Those who hold dollars can therefore expect to do very well, provided, that is, that they manage not to lose them to a systemic banking crisis.

Those who buy gold now will be paying a premium price for it compared to what they might pay once deflation has exerted its effects. They might be buying at such a premium only to have to turn around and sell at a loss if they have not addressed their situation from a big-picture perspective. Holding debt, or not having sufficient liquidity in reserve, are the main reasons one could be forced to sell at a bad time. People need to deal with those circumstances before they consider buying gold. Some will be able to deal with the higher priority factors and still buy gold as an insurance policy, but others will not. The fewer one's resources, the harder the choices one will have to make, as it simply will not be possible to do everything. (Pooling resources with others will get you further down the list of possible preparations.)

Disclosure by Allocation size: Currently invested but fully hedged, cash, long gold.

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Re: Is value of US $ (via US $ index) getting positive spin?

Gigem,

I think JAG already answered for me with regards to $ sentiment.  I too do not see sentiment on the side of bullishness.  Quite the opposite, I find myself almost alonein my position that it will go up, significantly, before it goes down further. 

As for the carry trade, I call it a margin account in a metaphorical sense.  People borrowing dollars to buy equities, other currencies, or bonds (in any currency) usually borrow them against some sort of collateral, with the usual being stocks and bonds.  That is in every way a margin trade as the traditional margin account you can get through your broker. 

That the forex markets dwarf everything else (and you won't get any argument on that from me) only makes the carry-unwind all the more helpless once it is triggered by a $ rise in the forex markets. 

Anyway, what are we arguing about again?  I can't even tell anymore!  Back to Pinecarr:  I think shorting the dollar is a very dangerous move at this point in time. 

By the way, are you an Aggie, "Gigem"?

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Re: Is value of US $ (via US $ index) getting positive spin?

Thanks, all, for the great, informative responses!  I've already read through them all once, but will need to go back through again more slowly to digest!

Davos, I LOVE that segment with John Williams of shadowstats.com.  Has that been highlighted on the Daily Digest or its own thread yet?  I think it warrants it.  BTW, you have us beat in snow so far!  But the winter's just begun!:)

Farmer Brown, thanks for the kind words!  I feel like I'm learning a lot all the time, but there's so much to know about the workings of currencies, and the workings of the global economy in general, that I am left unsure of whether I know what I'm talking about yet or not!  I am getting to the point where I can more or less understand the "foreign language" of currencies and economics.  But "speaking it" takes even a higher level of understanding, and I am still unsure of myself there!

I think I do agree with.you, FB, that the short-term move of the dollar could be up, temporarily defying what I believe will be its long-term trend down.  I don't care about short-term losses if they get recouped later on.  I'm just trying to maintain overall as best I can.  But I am starting to feel like I'm in a game I don't feel comfortable playing anymore.  So I'll probably try to figure something else to put the $ in (can't get to physical PMs from this -yet another- retirement savings , so will have to be some mutual fund or etf).

Gigem77, I liked your analogy about the 4 guys jumping off the 40 story building, and found your discussion on "The Europeans, Brits and Japanese" all facing the same questions I asked of the US to be enlightening.  I think I was kind of following that idea, but not with that clarity; thanks!

Sager wrote:

"Darnitall if I don't love the brainy folks of this community!  I rarely have much to say in this sort of thread but I avidly read them.  I learn heaps!  Thanks!"

I second that, Sager!!

Others, forgive me for not writing back individually; I have to spend some time with my little guy, and get the just-baked Christmas cookies wrapped to send!  Thanks for sharing your insights with me!

PS Davos, what happened to your nice, smiling face avatar?!  I knew you were feeling down on the situation lately by your posts, but the grim reaper?  Eeks!

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Re: Is value of US $ (via US $ index) getting positive spin?

Yes, A&M class of '77.   Whoop!

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Dollar Fear Trumps Greed in Guarding Against Rebound (Update2)

Dollar Fear Trumps Greed in Guarding Against Rebound (Update2)

http://www.bloomberg.com/apps/news?pid=20601087&sid=aZuUmlXtfpcU&pos=4

excerpt:

Dec. 7 (Bloomberg) -- Traders in the $3.2-trillion-a-day foreign-exchange market are paying the highest prices in more than a year to protect against a sudden rebound in the dollar after its worst annual performance since 2003.

That possibility may be less remote, according to Bill Gross, manager of the world’s biggest bond fund, who says a prolonged period of record-low interest rates may foster the “systemic risk” of new asset bubbles. Dubai’s effort to delay debt repayments reminded traders how the U.S. Dollar Index surged 16 percent in the two months after the September 2008 collapse of Lehman Brothers Holdings Inc. when investors sought a haven from the turmoil and poured money into U.S. assets.

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Re: Is value of US $ (via US $ index) getting positive spin?

FB,

Looking at that article, it does seem like the dollar has some more downside ahead. i stand corrected. Thanks FB and Gigem.

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There are better hedges than foreign currencies for most of us

Beginning in late 2002 I began moving money into foreign currencies and, for a year or so, I looked like a genius in pretty much all of these plays....   So I kept my money in things like Euros, NZ Kiwis, Aussies, Canadian Loonies, Polish Zlotys, etc., earning not only good interest vs. dollars, but also capturing major relative appreciation.

A little while later, pretty much every penny I'd "made" got taken from me as the Central Banksters in these various areas, in turn, manipulated their rules, interest rates, and publicity to wipe out their countries'  wealth in the name of  more exports. 

And when I brought back whatever profits I DID still have, I found that the US taxes ALL repatriated currency "gains" at the most onerous rates -- always short term rates no matter how many years you have the money out of the country (this is one of many tricks countries play on their own citizens in order to shear them and beat them into submitting to neverending currency debasement).

Even in business it almost never is in a business' best interest to go after volume at the expense of margin.   But in the case of countries, I think it is safe to say it is NEVER a good idea -- because whereas a shrewd business which gains dominance through a low price strategy can later on make it up by raising prices, gaining market efficiencies, etc., countries' currencies NEVER go back up and the destruction of wealth in the savings of that country is, also, never regained.  Still, it is a pretty valid generalization that the biggest crooks and fools are the people who generally "run" countries... 

Anyway, what I learned the hard way is that putting money into foreign currencies is NOT a good idea for almost anyone -- unless they have a business or purchasing interest in the foreign country.  The relative debasement goes on without end and there is NEVER real, lasting currency appreciation.

To hedge against US dollar debasement/ inflation you should always and everywhere buy real THINGS -- which the crooks and ninnies who run countries have a much harder time manipulating, tracking, and confiscating.

BTW, I want to close by making a response to a mistaken, unsupported BELIEF of Chris Martinson that, in some way, the world's Ponzi finance system of arbitraged fiat currencies has been, net, a good for the world over the last hundred years. 

I would suggest he, and everyone, take some time to really study the enormous economic growth rates of the US in the decades prior to the establishment of the US Fed versus the performance after.  And, in addition, they should consider that the twentieth century saw completely uncomparable major breakthroughs in major technologies.  The US was destined to perform economic "miracles" regardless.  There is NO evidence the Fed CONTRIBUTED a whit to this growth -- and there is massive evidence it actually dampered the economic growth through its never ending debasement and transfer schemes from the productive to the leeches.

And, if pondering of the historical facts and isn't enough (e.g., the Fed almost certainly CREATED the Great Depression...as much as they have created our new, Greater Depression) then I refer Chris and other thinkers to actually STUDY Ricardo's Theory of Comparative Advantage (although probably not originated by Ricardo it is nevertheless attributed to him by most). 

Comparative Advantage is the logical/algebraic framework which is used to "prove" that "free trade" is a win-win for all participating groups.  The only problem is that Ricardo specified a whole bunch of required premises for his "theory" to be valid.  He PRESUMED that governments and other bodies would NOT manipulate markets and currencies. He presumed that "factors of production" were relatively fixed; that factories could NOT be moved with comparative ease to another country but were bound to the regions they were in by capital availability, culture, education/skills, and geographic barriers such as waterways and mine proximity.   The socialist government explosion over the last hundred years and, most of all, the contagion of fiat money and ponzi finance, has completely violated the premises which underlay Comparative Advantage.   With its premises effectively perverted the outcome of Comparative Advantage is proving to be something very much different than "win win".  When playing poker with people who cheat and who have unlimited access to monopoly money, those who have something to lose WILL lose to those who have nothing to lose.  It's just basic math and common sense.  The collapse of our industrial capacity, as it has been transferred to China, etc., is the flip side of Comparative Advantage: Comparative Advantage perverted; Comparative Advantage with fangs.  There can be no "free trade" with bogus currencies and socialist/fascist governments.

 

 

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Re: Is value of US $ (via US $ index) getting positive spin?

Gigem, Yves Lamoureux, begs to differ on the carry-trade phenomenom:  (via Nate's Economic Edge):

PS:  I'm a once-removed Aggie.  My brother is class of  '89, and since I went to a pathetic school for football, I became an Aggie fan dy default.  He's the only person I know that records games so he can watch them again during the off-season.  Now that's a fan!

http://economicedge.blogspot.com/2009/12/yves-lamoureux-carry-trade-is-now-in.html

Wednesday, December 9, 2009

Yves is calling it - the carry trade is officially in trouble. Of course my readers know that I have seen and reported the same with the dollar breaking up and out of its descending wedge formation:

This move up in the dollar was first precipitated by action versus the Yen as Yves points out, but is now being fed also by action in the Euro. This is an important point as it is more than one region that is contributing. The following chart is quite telling, it shows the EUR/USD cross that has clearly broken its uptrend with an ascending wedge formation. That type of formation when it breaks generally targets the base, or the beginning point of the formation. This is the same formation that exists and has also already broken in our stock indices:

The carry trade is now in trouble…

I don’t share the recent stock optimism as the tail is wagging the dog. The higher the stock index goes the greater the number of bulls and the greater the amount of decimated bears. Those burned bears will not be adding to the buy side at lower prices to cover shorts. See chart courtesy Market Harmonics). Good news about this will also turn out to be bad when the party is up.

The party by the way is almost up. The not-so-smart money of 2008 might be getting its mojo back. If the commercials are getting it right in the futures market then they might as well be calling the top of many markets.

One huge problem is that the bulk of the long side is now carried by speculators with cheap money. A simple rule of Wall Street where bulls die from their own weight may apply right here. Its all about mechanics rather than economics and becomes self-reinforcing. That’s been my point throughout 2007. Perhaps an early call but the right one nevertheless. We have come full circle once again. Leverage has been put back on as if nothing ever happened. I have underestimated the great desire of participants for suicidal tendencies. The cracks start to appear in select markets first. We have observed a number of those already. We did fire our first gold warning recently even though we have been long term bulls.

The second warning concerns the Japanese currency. I show a timing model based on expansion/contraction of the Japanese monetary aggregates. The recent stimulus from Tokyo is too small to make a large contribution to things. However it is relevant to us because money is already expanding and just might act to depreciate the yen at a faster rate.

You can see here another version of the same timing model showing the recent bump up in monetary aggregates. I have been a very long-term bull on the yen. If relative money expands in Japan while American money contracts then you have us bullish on the USD to come.

I have studied the behavior of commercials in the futures market for a long time. They usually have a success rate of over 8/10. The year of 2008 was not so gracious to the not looking so smart anymore crowd. The commercials would appear to have gotten their mojo back. They are relatively short in big ways in too many markets. For that reason alone it bears watching as this is a significant development.

The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here & now that the carry trade ends.

Yves Lamoureux, Investment Advisor, Blackmont Capital, Inc.

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Uncle Buck and One Lonely Bull

Uncle Buck and One Lonely Bull (by Gary)

Pssst... come 'ere. Did you hear the one about the guy who's still bullish the US dollar? Yes, he actually exists. No no, I am not including the perpetually dollar bullish Prechter and Hochberg. They are a given.

But aside from them, I heard a rumor that this other guy actually exists. Fear not however Hope '09 participants; what are the odds that this lone guy would be right against an entire financial world on the other side of that trade?

Everybody from government to monetary officials are stacked against the USD. Wall Street and the financial establishment remain on the other side of this lucrative trade as they pitch their wares to the traumatized public. The gold bugs who think rising copper and oil is good for the gold sector? They're on board and indeed, leading the charge. So why worry about a dollar rebound? 

 

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Is value of US $ (via US $ index) getting positive spin?

GS is BULLISH on USD certainly through 2010 and I skimmed the 0Hedge post perhaps it was even later. 

Just for the record: While another de-leveraging bout like in '08 or another perceived flight to safety could short term increase Uncle Buck and take him off life support, I think the old geezer is a goner. 

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