Dollar Gets to YE$. Fed Gets in a Box

Today the YE$ currency (Yen Euro $Dollar as the reserve basket) hit a milestone: the past three months have seen the Yen/Euro get 63% of new reserves vs the Dollar at 31%, or below even one-third among the three. The US Peso is now down to its lowest level as a reserve currency since the break with gold in 1971 at 62%. While this is not quite the fancy headline "Dollar Loses Reserve Status" it does show that pressure is building on Bernanke to raise rates to support the Dollar. 

The Fed's conundrum can be simply explained (this is a quote from John Mauldin from Mish's site today):

You cannot continue to run deficits significantly larger than nominal GDP for too long without risking the demise of the economic system. But we are in a deflationary environment, so the Fed can monetize the debt far more than any of us suppose without risking immediate and spiraling inflation.

The mistake we are running is to have huge fiscal stimulus (deficits) alongside huge monetary stimulus. 

The concept of monetary stimulus to avoid serious deflation and ease the write-down of excessive debt comes from Irving Fisher's seminal Debt-Deflation Theory of the Great Depression paper of 1933. He gave a cogent explanation of the events that led to the debacle, and discussed how Hoover almost got it right in the summer of 1932 when he began reflating the currency - we began to emerge from the Depression between May32 and Sep32 - then lost heart during the election and let it come tumbling down. At the time Fisher was the pre-eminent US economist, the Keynes of the US so to speak. 

His work is required reading, even with recent revisions. He explained as simply as I have seen why the Depressions of 1929, 1873 and 1837 were different in kind from deep Recessions in 1921, 1893, 1859 and 1820 (and 1981): the Recessions were due to over-production, while the Depressions were due to over-indebtedness. As now.

His remedy is now accepted wisdom: massive liquidity from the central bank is needed to ameliorate deflation and prevent money from being hoarded. Back in the 1930s people may have stuffed bills into mattresses, but today we stuff them into short-term Treasuries. Same effect - the money is not spent nor is it invested (which is also then spent, on new plants and new hires). Hence plopping savings in short-term low-interest notes is the same as taking it out of GDP and stuffing it in mattresses. As now.

Bernanke's Fed reacted too slowly, and drove US consumers to pay down debt and plunk their savings in safe instruments; but has heroically pumped liquidity since. The dilemma comes not from Bernanke but Obama: the massive Federal deficits to finance stimulus are creating a terribly negative dynamic. I have previously discussed the impotence of fiscal stimulus: rather than reinvigorate the private economy, it acts as short-run life-support. 

The worse position to be in is where the deficit grows faster than GDP. This creates a dynamic where the government simply digs a deeper and deeper hole. Right now economic projections even in the V-Shaped recovery have us growing the deficit faster than GDP. Only Obama's optimistic projections suggest otherwise, and they are not taken seriously. From Judy Shelton in a WSJ op-ed today: 

Even with the optimistic economic assumptions implicit in the Obama administration's budget, it's a mathematical impossibility to reduce debt if you continue to spend more than you take in. Mr. Obama promises to lower the deficit from its current 9.9% of gross domestic product to an average 4.8% of GDP for the years 2010-2014, and an average 4% of GDP for the years 2015-2019. All of this presupposes no unforeseen expenditures such as a second "stimulus" package or additional costs related to health-care reform. But even if the deficit shrinks as a percentage of GDP, it's still a deficit. ...

The U.S. is thus slated to enter the ranks of those countries—Zimbabwe, Japan, Lebanon, Singapore, Jamaica, Italy—with the highest government debt-to-GDP ratio ... .

Sadly, due to our fiscal quagmire, the Federal Reserve may be forced to raise interest rates as a sop to attract foreign capital even if it hurts our domestic economy. Unfortunately, that's the price of having already succumbed to symbiotic fiscal and monetary policy. If we could forge a genuine commitment to private-sector economic growth by reducing taxes, and at the same time significantly cut future spending, it might be possible to turn things around.

Worse, the maturity of Treasury debts is decreasing, from 6 years in 2000 to 4 years today, and dropping towards 2 years. As Karl Denninger comments, this places Treasury in an untenable position: it has to roll over the whole deficit every four years PLUS tack on new debt to cover the deficit. Why would the maturities decrease? Maybe that is all our trading partners will take, since they are rolling out of the Dollar into the YE$ basket. By reducing their exposure to long-term Treasuries they better prepare to get out if the US Peso continues to fall. 

When something cannot go on, it doesn't. Expect something to break, and soon, and the USD to begin to rise again.  

Comments

[Michael]

Once again I see that all of the "P3 Cheerleaders" are out in full force. EW bloggers like Kenny, Daneric, and Binve. These guys obviously don't TRADE for a living because there's no possible way that they could actually make money being bearish and trying to pick the top in the S&P for the last 150 handles!

The E-Mini is already +8 on Intel's news today after the close and a brief check of all of the bloggers noted above shows a myriad of Elliott Wave counts that cannot possibly help anyone make money!

These guys have been WRONG for a tremendous amount of time.
The fact that they can continue to post charts and so-called ANALysis as if they actually still have some credibility left is downright funny! Are they updating their blogs in between their "paper-trades" and college classes at The U???

They better keep their day job.
They have no idea what their doing.
Buyer ( of their ANALysis ) beware.
Huge CONTRARY indicators for sure!

:)

[Michael Locker]

Michael, you may be right but this runup has been pretty extraordinary and we are surely due for a scary pullback before too long. There are quite a few coalescing problems in the world --I think Pakistan will be moving to the lead story, for example-- and one of them is bound to coalesce the random ripples of public fear into a self-reinforcing shape.

[min]

Also according to much of the financial press China is seemingly only capable of all the right moves as well.

I smell a rat there as well and I don't mean the Rats on a stick on sale on the streets of Beijing either

[min]

Everyone went home?

OK I'll turn the lights out, good night...

[Virginia Jim]

October 16, 2009 (+-1 day) might become a very important day. This is a follow up on my post dated September 25, 2009. It should be in my archive and will give closer detail on how I came up with Spiral Calendar projections I’ll discuss below. The preamble to this “follow up” condenses and says the same thing as the September 25, 2009 post.

Chris Carolan discovered a Fibonacci/lunar relation between 1929 and 1987 and documented it in his excellent book “The Spiral Calendar”. He identified 4 dates in 1929 that reappeared near exactly (within the projection measurement error of 1 day) in 1987. Forgetting about his astrological reference to the lunar months in relation to the first equinox of each year, he related 1987 to 1929 by taking the square root of the 29th (“F29”) number in the Fibonacci sequence (514229 or “F29”) and multiplying by the synodic lunar interval or 29.5306 day. So, the square root of 514229 is 717.0976 X 29.5306 = 21176.32 days. Take 4 key dates in 1929 add 21176.32 days and you get the comparable date in 1987 in relation to that crash year:

http://www.screencast.com/users/Virginia_Jim/folders/Jing/media/2ce6c5be-5a5e-4ddf-9479-60d89be7e2d1

I discovered and have not seen it written elsewhere that 2009 preliminarily appears to be reflecting the Spiral Calendar dates in 1987 and 1929. So what? It’s easy to project any of the Spiral Calendar Fibonacci computations forward…..just math. And you can take the 4 dates in 1929 and project them by every Spiral Calendar sequence you won’t get a single date in 2009. But you can with 1987. The 25th (“F25”) Fibonacci Spiral Calendar sequence gives you the four dates explained in the above Excel chart in 2009; July 11, 2009 (significant low), October 16, 2009 (final highest high in the crash year), November 23, 2009 (secondary high before a crash) and December 10, 2009 (crash).

So, you can make a 1987 projection to 2009; what makes this other than pure numerology? Nothing. Any extrapolation of history to the future is numerology absent physical or deterministic mathematical support. Gaussian statistics (bell curve) and variants, even given widely accepted causal rationalization, is numerology; it’s just very persuasive and accepted. The Spiral Calendar projection is different only in that it is not very persuasive. There isn’t a whiff of causality.

But there are two ‘conincidents’ that preliminarily support these projections. First, F29 interval between 1929 and 1987 is 21176 days or 58.0 years and the F25 interval from 1987 to 2009 is 8088 days or22.1 years. Their relation is .381, a near perfect and highly prominent Fibonacci relation. Second, July 11, 2009 is the first of four projected dates, is now behind us AND IT WORKED. July 11, 2009 should have been a prominent low next preceding the final highest high before the crash. Recall on July 11, 2009 everyone was following the unconfirmed head and shoulders top and vastly expecting a crash. It didn’t happen. Instead, July 11, 2009 was a clearly significant and widely unanticipated bottom (July 11 was actually a Saturday and July 10 was the bottom). I’ve updated a chart I posted September 25 and this is what the IMPLIED FRACTAL looks like to date:

http://www.screencast.com/users/Virginia_Jim/folders/Jing/media/69b40183-b3b1-421e-ae54-1e6a3146af65

If one had noticed this 4 date projection on July 10, 2009, you would have gone long to October 16, 2009 (not followed the H&S fiasco) and would have made, yet to be determined, but probably greater than 24% on an unlevered long trade. Then you would have gone short to sometime in early November and long into the 3rd date of November 23, 2009 (the F25 projected secondary high before the crash). Here’s an idea of the proportions of price change between the four dates (note that I’ve added a fifth date, namely the first bottom after the highest high):

http://www.screencast.com/users/Virginia_Jim/folders/Jing/media/c4a3aebd-2560-4edf-b08d-2129c103ea0f

So, IF October is a valid projection, the 1929 and 1987 models would indicate a substantial first wave decline of 10% to 17%. I think it could be greater than either because we are in the last stages of the peak crash season (as documented by Stephen Puetz, Chris Carolan and Peter Eliades). December 10 is late for a crash. And, many Ellioticians believe the projected wave commencing after October 16 is at a very high degree of Elliot Wave trend; EWI would show it as intermediate (1) of primary circle 3, of cycle c, of supercycle (a) of grand supercycle (IV).

Three notes of caution. Chris Carolan has not identified his own Spiral Calendar projection from 1987 to 2009 as significant, either by oversight or has dismissed it. I cannot confirm it either way despite efforts to contact him and his followers. Carolan’s website shows his computation based on 2007 and 2008 dates as indicating a top on October 11, which has not worked (more than one day off at this point). Second, Carolan originally noted the coincidence of 1929 versus 1987 dates in relation to the number of new moons following the spring equinox but distilled his thinking in terms of Fibonacci and synodic lunar intervals. 2009 is one moon greater than 1929 and 1987 so that gave me pause when I first considered these dates. I’ve rationalized the contradiction in noting the true computation is not relative to the equinox but it is a Fibonacci computation in lunar intervals. Third, this is the purest form of numerology; not hint of causality.

So, all we have is four dates and two “coincidents”. If I’d projected this six months ago, and said it would occur BECAUSE of a .381 relation in the years between 2009 and 1987 divided by the years between 1987 and 1929, I’d say the chances of four monument dates in 2009 being successful would be incalculable. If I’d noted that item and July 11, 2009 turned out to be a successful projection, I might say the odds of the other 3 being successful were within the realm of number system but still negligible. But, since we are narrowing in on October 16, 2009 and despite the emotions in the last months since July 11, 2009, it is still viable. I am very interested.

If October 16, 2009 prints a new recover high (or October 15 or 19), I will be giving far greater weight to the implications of this model. I’ll be expecting an Elliot Wave primary 3 of cycle c to begin very soon thereafter. Granted it’s only an intermediate 1 of primary 3, but it can be crashworthy IMO. Remember the character a c wave is that it is not expected by anyone; certainly, with a blowoff top in the making today, October 14, 2009 on top of INTC and JPM earnings, who expects a crash?

But who expected, on July 11, 2009, that the market would not have fulfilled the great head and shoulders top de jour of that date much less been 24% higher three months later?

Good luck,

Jim

[Michael]

Jim - Actually, if you simply traded every energy and natural resource stock since early July OFF THE DOLLAR you would have made gains that were even larger than a mere 24%. I wonder what your "numerology" would indicate had it been applied to the US Dollar. To me, that's the REAL $64,000 question!

[Free]

Once again I see that all of the "P3 Cheerleaders" are out in full force. EW bloggers like Kenny, Daneric, and Binve. These guys obviously don't TRADE for a living because there's no possible way that they could actually make money being bearish and trying to pick the top in the S&P for the last 150 handles!

These guys have been WRONG for a tremendous amount of time.
The fact that they can continue to post charts and so-called ANALysis as if they actually still have some credibility left is downright funny! Are they updating their blogs in between their "paper-trades" and college classes at The U???

They better keep their day job.
They have no idea what their doing.
Buyer ( of their ANALysis ) beware.
Huge CONTRARY indicators for sure!

:)

----------------------------------

I used to read the analysis of the EWers.. but they have been wrong most of the time. Calling the top since May till now. Still calling.. while the market continues upwards..

:(

[Free]

Let me say that I respect Precther's work, but his call that the market peaked in Sept is obviously wrong.

http://www.bloomberg.com/apps/news?pid=20601103&sid=azTL.7ZtDots

Same with his calls in the 1990s, 200s, 2003..

[Michael]

Free - These guys are total "charlatans" for sure.

I have noticed that people like Daneric and Binve and Kenny are full of ego and appear to actually believe that they are doing John Q. Public a favor in WARNING them of the upcoming P3 wave.

Yet, what these amateurs fail to realize is that John Q. Public has been buying mutual funds via their dedicated retirement plan ever since the lows which are now OVER 400 POINTS ago in the SPX!

Daneric, Binve, and Kenny have changed their counts from P2 to P3 and back to P2 on so many occasions that it makes anyone that has tried following them... Dizzy!

Moreover, they run around on each other's blogs patting each other on the back for presenting the latest BEAR CASE and pretty chart. Lots of pretty charts, but ZERO money-making substance. Even more bizarre is the fact that I came across one of the above bloggers who actually posts under an ALIAS on his own blog in order to further "cheerlead" his opinions and cause... Just outrageous!

And yet these guys refuse to admit that they have been wrong for the last 150 SPX points, or that they were part of the huge "head and shoulders" crowd back in early July. They obviously don't put their money where their mouth's are.
If they did, they'd be BANKRUPT!

[dt]

Michael,

I have thoroughly enjoyed reading so many of your various comments on this blog that i actually spent 15 minutes trying to recall where i had read this yesterday:
"Moreover, they run around on each other's blogs patting each other on the back..."

Although these guys aren't in the league of Kenny & Daneric it is a perfect example of bloggers puffery:

"We're excited to announce that tomorrow we will be participating in a live chat with the esteemed Charles Kirk over at The Kirk Report. Charles has been nice enough to ask us to participate in the chat..."
http://bespokeinvest.typepad.com/bespoke/2009/10/live-chat-between-bespoke-and-the-kirk-report-tomorrow-at-11-am-et.html

[Michael]

dt - Last night Daneric went on one of his typical elitist and "holier than thou" RANTS that was so toxic and full of discrimination and elitism that he actually pulled the thread and deleted it.

The guy is so full of himself that he's a danger to anyone that reads him. Kind of like Prechter.

:)