The Paradox of the Dollar & the Crash
The dollar haters remain fixated on supply is supposed to determine value with a very myopic view that never considers DEMAND. They simply cannot understand why the dollar has not collapsed and in turn cling to some wild all-powerful conspiracy behind the strength of the dollar. I have stated countless times, the money center banks of New York conspire all the time to rig markets for a quick buck. They are not in the game of conspiring to control the world for power. That produces no profit for their quarterly bonuses. Nonetheless, they insist there is some group they cannot define nor demonstrate how they are in control of anything as if they were the Olympian gods of Wall Street.
Pulling back the curtain and just following the money regardless who is involved, paradoxically, reveals that the U.S. market crash of 2007 into 2009 actually further solidified the dollar’s global dominance even as gold was rising. Investors on a worldwide basis sought safety and shelter from the economic storm. There wasONLY one place to go – the U.S. government debt market.
Despite all the rhetoric, that “flight to quality” U.S. government debt for no matter what you say, the USA remains the world’s safest asset. Interest rates during the crisis indeed turned negative for brief periods of time. That demonstrated that people were willing to PAY THE U.S. government to hold their money. This has furthered the idea that NEGATIVE interest rates are possible at this time.
It is an old saying, yet true. He who has the gun makes the rule. From a geopolitical perspective, the USA cannot be invaded. It would take massive transport of troops on the high-seas and that cannot be accomplished with today’s technology undetected. However, all the studies show China could take Japan in less than 30 days and Russian tanks could be strolling down the Champs-Élysées in Paris in less than 15 days. The USA has the defenses and it is strategically extremely difficult to actually invade. Neither is possible with respect to the USA.
At the end of the day, all the yelling and screaming that the sky was falling crumbled to dust and fell to the floor. Therefore, despite tremendous massive federal borrowing, U.S. debt proved to be in short supply 2007-2009. The Fed’s quantitative easing took billions out of the market at the wrong time when DEMAND was rising further sending rates plummeting. The emerging-market governments bought dollars as a cushion against bad news and to hold their currencies (and export prices) down. The bid for dollars was rising at staggering levels on a a worldwide basis.
As a result, the global markets proved to be unduly sensitive to fluctuations — real or imagined. As always, the U.S. monetary policy failed to grasp the global role of the dollar and how increasing the money supply proved to be a stimulant for the world economy, not really domestic in some old world economic theory.
The Fed’s recent move away from quantitative easing, has signaled that this era of imaginary extraordinarily loose domestic U.S. monetary policy will come to an end. This is making investors rethink once again and the DEMAND for dollars has not subsided. This is putting pressure causing the collapse in emerging markets that is supported by two trends in China – (1) an economic slowdown and (2) flight of capital from China buying property around the world.
Critics argue that the Fed has begun to taper QE much too soon since inflation in the U.S. is still quite low and the labor market has still serious shortfalls. The pension crisis has companies and even the Post Office hiring just part-time to avoid having to pay pensions. The elderly cannot survive on interest rates anymore and are in the employment market. The age of sales staff is rising from department stores to Starbucks. The youth is losing to experience in these areas showing that without computer skills, the youth are unemployable.
There is no remedy for this global sensitivity to U.S. monetary policy as long as Europe keeps declining and China regroups. The dollar has emerged as the world currency, yet the Fed does not quite understand this burden of a dominant global currency in high demand. Eventually, other currencies, such as the euro and the renminbi, need to function alongside the dollar as reserve currencies. But the structure of Europe prevents the euro from being a reserve currency lacking a single continental national debt and while China has seen its currency surpass the Euro in international trade settlements becoming number TWO, it is still less than 9% of trade flows.
In the meantime, better U.S. fiscal policy is really unlikely. Despite this trend, the global economy is still contracting because of the hunt for taxation. The world need US stimulus right now, but the Fed does not grasp this international role behind the currency.
There remains a vast dollar short-positions as numerous emerging-market governments have issued debt denominated in dollars to save money on interest rates. They must recognize that this past week’s financial-market turmoil is the tip of this iceberg. Argentina suffered the full force of this economic storm with collapsing bond and equity prices and a deeply devalued peso due primarily to Draconian economic policies.Nothing that we are seeing is the classic textbook case in economic mismanagement.
Economic growth in China has been expected to slow for years given the share market high remains 2007: At last, the economic data is starting to imply the slowdown is underway. China’s ability to manage this economic decline will be very telling.
Electric Money will Eliminate Bank Runs
QUESTION: Mr. Armstrong; Thank you so much for what you do. My son actually introduced you to me. He works in New York at a major bank and says everyone reads you because you actually have experience. He said there is talk about electronic money, but was not entirely sure why the banks are behind that development. Can you shed some light on that subject of electronic money?
Thank you so much
GU
ANSWER: Most banks have now used the money laundering pretense to limit cash withdrawals. They will ask all sorts of questions if you even TRY to withdraw your money. They realize we are on the verge of a crisis in banking on a global scale (less so in the USA). The worst banks are in Europe and that includes those in Germany and even Britain such as HSBC. Eliminate CASH and you eliminateBANK RUNS.
This is the reason Behind the Curtain they are pushing this and it was Larry Summers, their boy, who flew that balloon I believe at the instigation of the banks. He was behind getting rid of Glass Steagall also for the banks and this is why he had to decline being appointed as Fed Chairman. Can you imagine any interrogation of who pulls Larry’s strings would expose far too much of what is going on behind the scenes.
US Share Market Rout
The rout in the US share market has many talking heads patting themselves on the back. But this is by no means a major high. The Cash SP500 had finally broken out above the Breakout Channel. It is typical to come back and retest it before advancing. The cash closed at 179029 and the channel top resides at 179012. We have NOT elected any Weekly Bearish Reversals as of yet and our first one lies at 176040. A weekly closing beneath that level should cause a move into the mid-point of the channel in the 16800 zone. We still see the weeks of Feb 10th and 24th as the nearby targets for turning points.
As we have warned, a near-term correction was due with the first opportunity for a low in February. January did just barely exceed the December high intraday, but not on a closing basis on the Dow and SP500, This raises some concern technically. Exceeding the December high even by a fraction intraday warns we do have a serious outside-reversal to the downside potential if the SP500 closes below 176799 at month end 15665.08 on the Dow. This would warn that a sharp drop is likely into February where we could see a retest of the 1680.00 level on the Cash SP500 15365.00 on the Dow.
The same construction of the Breakout Channel on the Dow Jones Industrials gives a different perspective. Here the market has still not broken out. It remains contained within the channel and this illustrates the difference between the HOT MONEY and the BIG MONEY. The Dow is still the leader to watch. Here, the turning point is the next week so caution is required. Again, no Weekly Bearish Reversals have been elected, but a weekly closing BELOW the December low will warn of a technical sell-off ahead.
The Emerging Market Crisis
The fourth quarter real estate in Singapore turned down showing that the whole Emerging Markets did tend to peak out with the ECM last August. This has led to a flight of investors from the once-booming emerging markets sector that is similar to the shift in what we began to see in 1994 that manifested into the 1997 Asian Currency Crisis. Previously, international investors poured in some $7 trillion-worth of capital inflows into these emerging markets. This shift in capital outflows for emerging markets has only just begun. The details of the capital flows for 2013 have shown that so far it is retail rather than institutional. The outflows amounted to just over $50 billion. This is also how things started in 1994. Eventually, institutional capital left violently in 1997 to get ready for the birth of the Euro in 1998.
In this case, the leader of the trend has not been institutions, but the retail market investors. It has mainly been this group that has packed their bags and moved back to the USA and European share markets. When the big institutional firms join in, reducing their asset allocation models, then we run the risk of a serious wholesale capital flight as we saw in 1997.
China is starting to slow down and the share markets have established their major high back in 2007 and penetrating the 2013 low in 2014, will warn that China could decline all the way into 2020. The global impact of a wind-down in U.S. monetary stimulus has been greatly exaggerated. Nevertheless, this has fueled the image of a bearish trend for China and the emerging markets in general. We are seeing this manifest also in the currency markets with record lows unfolding in Argentina, Turkey, and Russia. The alternative shift has been into the Swiss, Japanese yen, and US Treasuries. This is a shift in capital flows that is what many see as a sign of global contagion. The bottom-line, they are selling even high-yielding emerging market debt.
Because looking ahead, we see the dollar rally on the horizon and this will accelerate losses in emerging markets for foreign investors. That will cause fears to surface and force the big institutional investors to cut their losses and run as the impact of a rising dollar is mirrored into a collapse in these currency values. International investment is always first-and-foremost a currency crisis. This is true if it is the foreign capital investing in the USA, as in 1987, or Japan back in 1989, Southeast Asia in 1997 and Russia in 1998 just for examples.
The capital flows have clearly shifted out of the emerging market economies and this will force institutions to lower their asset allocation models for this type of investment. This is both a cyclical but also a structural problem for we have serious economic issues in Europe and rising taxation that is simultaneously impacting international investment. Many of the emerging markets in domestic terms appear flat, but in currency terms they appear to be a disaster. The US dollar has risen almost 2% in the last quarter against a basket of these currencies and this sparks the decline in assets and the shift in capital flows. These have been 13 consecutive weeks of capital outflows so far similar to the 1990s.
The key is always currency and what we haven’t seen in emerging markets is major currency devaluation just yet. The serious outflows hitting Argentina can spread as investors often sell everything as groups. We are likely to see continued capital outflows going into September 2014. With the rising civil unrest, this trend is likely to extend into the bottom of the ECM in January 2020.
World Bank has even warned of the risk of a sudden stop in capital flows for emerging markets, a point which was discussed by the International Monetary Fund as well. Clearly, long-term interest rates are subject to a sudden rise of as much as 200 basis points as civil unrest rises. We are likely to see a collapse in capital inflows for this sector by at least 70%. The rise in civil unrest is likely to inspire a contagion to sell everything in the years ahead. When US long-term rates 4%, up from the 2.7% current levels, emerging markets will move into a serious decline.
