How To Play The Coming Dollar Crash
Are funding problems in US housing bubble States such as California, Florida or
Nevada that much different from the problems in Southern Europe? Not
really. However, Sovereign bond ratings are assigned by US credit rating agencies,
which will be reluctant to downgrade US. The crash of the Euro due to PIIGS (Portugal,
Italy, Ireland, Greece, and Spain) blowing up appears to be overdone. Time for
a reversal soon?
Here is the EURUSD COT position
Speculators gambling on Euro collapse
How To Play The Coming Dollar Crash
Curtis Hesler, Professional Timing Service, 04.06.10, 07:10 PM EDT
Last December I headlined my monthly newsletter “How To Play The Dollar Rally.” The short version is that the same technical indicators that were bullish at the end of last year are beginning to transmit bearish omens. There is likely a bit more on the upside for the dollar before it turns, but this final phase of the rally will press precious metals and crude back. It will provide us with a final buying opportunity before the next leg in the commodity bull unfolds.
Here is what is developing. First is sentiment. Everyone on The Street was bearish and was selling the dollar at its late 2009 lows, but there is nothing like a good rally to bring out the bulls. I guess folks just like to buy high and sell low.
There are, of course, those dyed-in-the-wool dollar bears who refuse to recognize the cyclical aspects of the markets. Nevertheless, I am currently seeing more articles espousing a dollar recovery than talk about a return to new lows.
A good number of the dollar bulls are basing their stand on the weakness in the euro. There is some truth to this argument. The euro has been pushed from over 1.50 in early December to about 1.32 lately, and there should be good support at 1.25-1.30.
If you look at the Moving Average Convergence/Divergence (MACD) and Relative Strength Index (RSI) patterns on a chart of the CurrencyShares Euro Trust ( FXE – news – people ) you’ll note that neither the MACD nor the RSI are making new lows with the FXE. MACD is about to produce a second buy signal replete with positive divergence. The positive divergence in the RSI since it bottomed out in February is also telling us to start looking for the end of this decline in the euro.
The euro is setting up for at least a short-term trading rally. I believe fundamentals will support this. Germany is going to orchestrate assistance for Greece without getting personally committed. The Germans will use the crisis to augment their position of power in Europe — something they have not had for many years. Things will appear better in “euroland” soon, and that will give the euro support. As it finds support, dollar traders will begin selling.
The technical omens are present in the dollar also. It is not surprising that the MACD and RSI patterns that we see in the U.S. Dollar Index are the mirror image of those in the FXE chart. Beyond that, the Commodity Channel Index on the weekly dollar is hovering at +100.00, and a break below that will produce a major sell signal. Bottom line, the dollar rally looks like it has a little more life left in it, but not much. It may even venture toward 83.50, but my indicators are telling us to be ready to use a last ditch dollar bounce to our advantage.
The best way to play the next turn in the dollar is to use the last phase of the dollar rally to build positions in precious metals. You need to do this now before the dollar’s top is in. We have a little time, but not much. I expect that the dollar will find its final rally high by the end of this month.
As the precious metals markets pull back in response to a stronger dollar, we will see some magnificent buying opportunities in individual mining shares. I have reviewed the downside buy prices; and by and large, they are where they should be.
See more recommendations and the full article here.
………..
Soros: Tame Derivatives or Risk Yet Another Crash
Billionaire George Soros says the derivatives behind the Securities and Exchange
Commissions’ case against Goldman Sachs “merely cloned existing mortgage-backed
securities into imaginary units that mimicked the originals.”
“Whether or not Goldman is guilty, the transaction in question clearly had no social
benefit,” Soros writes in the Financial Times. “The primary purpose of the transaction
was to generate fees and commissions.
“This synthetic collateralized debt obligation did not finance the ownership of any
additional homes or allocate capital more efficiently; it merely swelled the volume of
mortgage-backed securities that lost value when the housing bubble burst.”
Requiring derivatives and synthetic securities to be registered would be simple and
effective, Soros says, but the legislation currently under consideration won’t
accomplish it.
Derivatives traded on exchanges should be registered as a class, Soros says. Tailor-
made derivatives would have to be registered individually, with regulators obliged to
understand the risks involved.
“Registration is laborious and time-consuming, and would discourage the use of over-
the-counter derivatives,” Soros notes. “Tailor-made products could be put together
from exchange-traded instruments,” he says.
“This would prevent a recurrence of the abuses which contributed to the 2008 crash.”
…………………………
Meltup
This video from inflation.us explains the problems US is currently facing. Is this
the beginning of US currency crisis or hyperinflation? The video is rather long,
but it is a must watch.
Flash crash on Wall Street
This article from the Huffington post blames Thursday sudden
market crash on Wall Street on High Frequency Traders. It is a must read.
Secretive Speed Traders In Spotlight After Flash Crash On Wall Street
BERNARD CONDON | 05/15/10 12:31 PM |
NEW YORK — If you saw a penny on the sidewalk, would you pick it up?
You may think it’s not worth the effort, but a breed of investors who have been in the news do. Using super-fast computers, high-frequency traders in effect bend down to pick up pennies lying about in the stock market – then do it again, sometimes thousands of times a second.
More than a week after the Dow Jones industrial average fell nearly 1,000 points, its biggest intraday drop ever, regulators are still sifting through buy and sell orders to figure out what sparked it. One big focus are orders placed by high-frequency traders, or HFTs, and for good reason. These quick-buck firms barely existed a few years ago but now account for two-thirds of all U.S. stock trading.
In other words, all those TV pictures of the stately New York Stock Exchange building on the evening news are an illusion. The real action on Wall Street is far away in Kansas City, Mo., and in New Jersey, in towns like Carteret and Red Bank, where HFTs named Tradebot and Wolverine and Tradeworx ply their trade.
High-frequency trading firms, which number over 100, use computers programmed with complex mathematical formulas to comb markets for securities priced too high or too low because traders haven’t had to time to react to the latest data. The computers then buy or sell in a split second, locking in a profit.
…………………………….
End of Fed printing and Derivative Ponzi scheme.
Recently I have become increasingly concerned about the stability of the markets,
because US Federal reserve ended their temporary liquidity measures (the “soup”
of emergency lending facilities that emerged during the financial crisis of 2008) in
late January, while the Quantitative Easing policy (lately mostly Fed purchases of
tainted MBS securities from banks using money created out of thin air, or “digitally
printed”) ended in late March 2010.
I believe the derivative Ponzi scheme grew so large, it is now entirely dependent
on newly printed money to feed it, otherwise it will collapse under it’s own huge
weight like all Ponzi schemes do. I think this is exactly what happened 2 weeks
ago, when the DOW plunged more than 1000 points intraday. News sources claimed
it was “fat finger” effect, or someone made a few orders of magnitude mistake while
placing a sell order.
Rather, I think computers that now dominate the trading volume, engaged in
indiscriminate selling and there were no bids under the market simply because
the new Fed liquidity, or printing, evaporated as of mid-April, when the last contracts
settled. Thus, the derivative bubble, which has already popped in 2008, ran completely
out of oxygen.
If this hypothesis is right and while the SEC and others try to figure out the reason
behind Thursday stock market meltdown, we may see more crashes shortly unless
Quantitative easing (money printing) resumes. Sovereign issues in Southern
Europe were blamed for the mess, and the market bounced on Monday following
the a huge European bailout. However, the bailout is a loan, not a printing effort.
Moreover, the loan money will not be injected overnight. Therefore, the danger of
more market mini-crashes or a big one due to derivatives and computers
malfunctioning from the lack of oxygen was not removed.
Stay tuned for May options expiration week, we may see a market meltdown!
See this earlier post for an explanation.
The Coming Sovereign Debt Crisis
Deterioration of sovereign debt in Southern Europe has recently become
the key concern of financial markets.
Dr. Doom Nouriel Roubini predicted that this will become a concern in 2010.
He explains the problem in this Forbes article:
The Coming Sovereign Debt Crisis
Nouriel Roubini and Arpitha Bykere
In 2009, downgrades and debt auction failures in countries like the UK, Greece, Ireland and Spain were a stark reminder that
unless advanced economies begin to put their fiscal houses in order, investors and rating agencies will likely turn from friends to
foes. The severe recession, combined with a financial crisis during 2008-09, worsened the fiscal positions of developed
countries due to stimulus spending, lower tax revenues and support to the financial sector. The impact was greater in countries
that had a history of structural fiscal problems, maintained loose fiscal policies and ignored fiscal reforms during the boom
years. Going forward, a weak economic recovery and an aging population is likely to increase the debt burden of many
advanced economies, including the U.S., Britain, Japan and several eurozone countries.In 2008 and 2009, the decisions by these governments to do “whatever it takes” to backstop their financial systems and keep
their economies afloat soothed investor concerns. But if countries remain biased toward continuing with loose fiscal and
monetary policies to support growth, rather than focusing on fiscal consolidation, investors will become increasingly concerned
about fiscal sustainability and gradually move out of debt markets they have long considered “safe havens.”Most central banks will withdraw liquidity starting in 2010, but government financing needs will remain high thereafter.
Monetization and increased debt issuances by governments in the developed world will raise inflation expectations. These
governments will have to offer higher real yields or investors will move to more attractive emerging markets. Some countries will
continue to witness increased credit default swaps. Higher yields and interest cost on debt will also hurt economic growth—by
crowding out private consumption and investment, and reducing government’s productive spending. Several factors will likely
influence investors’ perception about sovereign risk—a country’s debt financing ability, its status as a “safe haven” relative to
other developed economies, politicians’ commitment to undertake fiscal reforms, exchange rate movements, and the debt
maturity structure.The UK, Spain, Greece and Ireland will face sovereign risk pressures, especially if their fiscal imbalances are not addressed
immediately. Some eurozone members are quickly approaching their debt sustainability limits as deleveraging through
devaluation is not an option for these countries. Countries like Germany—whose fiscal imbalances have deteriorated largely due
to the economic and financial downturn—might have a greater capacity to stabilize their debt ratio. The U.S. and Japan might
be among the last to face investor aversion—the dollar is the global reserve currency and the U.S. has the deepest and most
liquid debt markets, while Japan is a net creditor and largely finances its debt domestically. But investors will turn increasingly
cautious even about these countries if the necessary fiscal reforms are delayed. The U.S. is a net debtor with an aging
population, weaker economic growth and risks of continued monetization of the fiscal deficit. Japan’s aging population and
economic stagnation will reduce domestic savings.Developed economies will therefore need to begin fiscal consolidation as soon as 2011-12 by generating primary surpluses,
which can be accomplished through a combination of gradual tax hikes and spending cuts. However, an aging population, a
sluggish economic recovery and higher unemployment will keep governments’ entitlement spending high and revenues subdued.
These factors might also make tax hikes politically challenging. Fiscal consolidation efforts might not be strong until the bond
vigilantes signal shifting to safer assets. To achieve credibility, governments will need to pass binding legislation enforcing
tighter fiscal belts when their economies begin to recover on a sustained basis.Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics
(RGE), is a weekly columnist for Forbes. (Read all of his columns here.) Arpitha Bykere is a Senior Research Analyst at RGE.
Global stock market and sovereign default.
Sovereign defaults present serious risk for the stock market. Overall, stocks in
affected countries decline considerably, and the desease infects the rest of the
Globe. Here is a recent example, the currency crash in Iceland. While US is
much bigger, the problems in the US, the UK, and Southern Europe are all similar.
2008 proved that TBTF (too big to fail) do fail!
Be careful and prepared
China is undermining the dollar by the back-door
Over the past year since March 2009, the Federal Reserve not so quietly
engaged in a major printing effort (of 1.75 Trillion dollars), while
concealing the fact that this monetization was required to keep
US economy afloat.
They use the term of “quantitative easing” to mask the truth for the general
public. Quantitative easing is printing money out of thin air. They also
directed the printing presses toward bailing out very sick US mortgage
market (mostly MBS), although there was also explicit monetization of
treasuries.
Explicit monetization of US treasuries by the Fed is almost equivalent to
default. However, US credit rating agencies continue to rate US sovereign
debt as AAA (surprise!)
It appears China, the largest holder of US sovereign debt, is finally
starting to “get it”. If China is serious about De-pegging from US
dollar, as pressured by US authorities, then we may see US
dollar plunge. For now Chinese currency is pegged to US dollar,
thus, Chinese buying is determined by the peg. Read more in this article in FT.
China is undermining the dollar by the back-door
By Gerard Lyons
Published: April 27 2010 15:50 | Last updated: April 27 2010 15:50
There is a ticking time bomb under the dollar. When it explodes depends not just on the US economy
but also on policy actions in Beijing and Washington. Over the last year the Chinese have undermined
the dollar by the back-door, questioning it as a store of value and medium-of-exchange.Although the Chinese are not advocating the renminbi as the alternative to the dollar this may be only
a matter of time. One needs to focus on what the Chinese do, as well as listen to what they say. A key
development is China’s encouragement of international use of the renminbi, although they prefer to call it invoicing.This may be from a low starting point but one Chinese saying may be worth bearing in mind: “A march
of 10,000 miles begins with one small step”. Early signs are promising.China is encouraging exporters to invoice in the renminbi and is setting up systems to allow trade
payments in renminbi. This make sense. China’s trade is soaring. New trade corridors may soon
require new means of payment. When the Chinese and Brazilian Presidents met last
year they agreed to use their own currencies to settle more of their bilateral trade, rather than
invoicing in dollars. Although viewed as symbolic, it is a sign of things to come.……………..
The horrible state of US national debt
US national debt
This picture is from the Chicago tribune
US national debt is a disaster in the making. Currently the demand for treasuries
is being artificially propped by US credit rating agencies that downgrade European
countries but keep their mouth shut about the fiscal position of the United States and
the States in the United States, such as California, which are much worse off than
Greece (in the EU).
Sovereign risk and derivative domino effect.
While this web site was originally devoted to unhealthy imbalances
in the United States, these are currently present all over the globe.
As we have seen lately, as sovereign debt issues surfaced in Greece,
CDS market rapidly started pricing sovereign risk higher in other PIIGS
(Portugal, Italy, Ireland, Greece, Spain), the UK, Germany, and the US.
These imbalances in an isolated country normally occur after a financial
crisis, when the government attempts a Keynesian approach to fight
the crisis. If the fight is unsuccessful, the government assumes too
much debt, while the economy does not recover, a currency crisis
will follow (Argentina 2002, East Asia 1997, Russia 1998, Iceland 2008,
etc.,etc.).
The financial crisis of 2008 was global in nature, and the Economist
has a wonderful discussion of what might follow if the global economy
does not recover due to too much debt. I believe this is coming -
perhaps, later in 2010 or in 2011, as a consequence of the global
financial crisis of 2008.
Sovereign-debt worries – the Economist.
Domino theory
Assessing the risk that Greece’s woes herald something far worse
HOW far is it from Athens to America and which
countries lie on the way? That may sound like an esoteric geography
question, but it is being asked by investors as Greece’s debt crisis
creates global jitters about the safety of sovereign debt. So far
Portugal, Ireland and Spain, the other high-deficit countries on the
periphery of the euro zone, are thought to be next in line. In most big
rich economies, yields have been stable and well below their long-term
average (see chart).But nerves are fraying elsewhere. The cost of insuring against
sovereign default (see article) has risen in 47 of the 50 countries for
which these instruments exist. Dubai’s sovereign credit-default-swap
spreads soared to their highest level in a year this week, amid concern
about the terms of a debt restructuring by a state-owned
conglomerate. There is increasingly shrill commentary arguing that
Greece is the start of a far bigger problem. “A Greek crisis is coming to
America”, blared the headline on a recent Financial Times article by
Niall Ferguson, a financial historian.The stakes are high. A sudden loss of confidence in all sovereign debt,
and especially in American Treasuries, the world’s benchmark “risk-free”
asset, would have calamitous consequences in a still-fragile recovery.
Equally, an exaggerated fear of sovereign risk could prompt
governments into premature fiscal austerity, which might itself push
the world economy back into recession…..