The Dollar Runs Into the Triffin Dilemma

Ever since the Fed pre-announced QE2 (and QE Lite) at the end of August, the Dollar has fallen sharply, and other asset classes (stocks, bonds, commodities) have risen in Dollar terms. There is nothing in the economic fundamentals that should drive those assets to rise, as economic news in the US is ambiguous at best if not worsening. Indeed, the continuing 'recoveryless recovery' is the prime reason for the Fed to consider QE2. 

The Fed is running into the endgame of the Triffin Dilemma, an eventual day of reckoning of the reserve currency that was noted in 1960 and reiterated in 2008: the nation that runs the reserve currency gets a seemingly free benefit of being able to consume more than it produces since it gets to (indeed has to) run budget deficits along with trade deficits to create enough global currency liquidity; but inevitably the value of the reserve currency falls as foreign accounts hold more Dollar claims than the US GDP can support. 

The good news for the Fed is that a near-term bottom for the Dollar may be in reach. The Dollar is rapidly approaching a support level in the Dollar Index represnted by the lower trendline off the two recent bottoms (chart from PragCap):

The Dollar Dive is also running in a channel, which is expected with a zigzag style correction, and the lower trendline of that channel hits the rising trendline of the first chart at the same area, DX76:

You might wonder how the Dollar could bottom when QE2 has not even been launched. Why wouldn't it continue to dive as the Fed proceeds to execute on QE2? Markets may have already anticipated the impact of QE2 and reacted. Goldman Sachs believes QE2 is largely priced in, estimating that $1T of QE is priced into bonds (see chart) and stock traders have taken positions expecting $500B of QE:

Goldman may be too conservative with respect to stocks - the Wilshire5000 has already gained $1.3T of market value since QE2 was announced. This continues a trend since 2000, where the drop in the Dollar (from 120 to under 80 in the Dollar Index) has kept stocks afloat in nominal terms even as they have plummeted in real terms.  This chart from The Big Picture shows the S&P in gold (blue line) vs the S&P in Dollars (red line). One looks good, the other is bad.

Econbrowser agrees with Goldman with respect to bonds, then raises the question of why commodities have risen when inflation expectations (as reflected by lower long term bond rates) are absent? This may be one of those cases where economists are still fighting the last war (the '70s) and not looking at the current fight (the credit bubble), where commodities are up in Dollar terms because the Dollar is down, not because of a rise in inflationary expectations. We saw this in 2008, with oil running parabolic well after stocks had turned down and deflationary fears ran rampant. 

Bullish optimists point out that if the market has already priced in QE, maybe the Fed can skip it altogether? The mere "Bernanke Put" to prevent deflation at all costs may be enough.

This brings us back to the Triffin Dilemma. I have discussed previously how the apparent free lunch of endless budget & trade deficits, which enable the welfare state as well as cheap goods from China, has a terrible cost, but one that only becomes apparent after years of living high. That cost is the eventual erosion of the currency. 

The Triffin Dilemma can be managed by increasing interest rates at about the same rate of foreign clams, which should maintain the foreign exchange value of the Dollar, but that option seems unavailable to the Fed which is trying to restart commercial lending against deflationary headwinds with ZIRP (the Zero Interest Rate Policy). Or, the Fed can try to manage the decline of the currency via inflation at a pace somewhat in balance with the increase in foreign claims (in effect debasing the currency as fast as foreign claims increase, keeping real debt even), but it is having a devil of time trying to reflate. 

In 1933 the US could reflate by going off gold, and had the benefit of doing so after a huge debt-deflation spiral that rid the wold of excessive Dollar indebtedness. This time we went off gold 39 years ago, and cannot pull that trick again; and have kicked the can down the road on deleveraging at scale, and thus have been unable to restart lending, which is how money is "printed" in the fiat currency regime. 

I see bloggers opining that since QE1 failed, so will QE2. The comparison is inapt as QE1 sprung from a different purpose, to essentially back the failing interbank lending markets, as I describe in the post Peak Debt. The Fed has been calmly trying to explain this and apparently falling on the deaf ears of noisy bloggers. Still, there is a big lesson to be learned. During QE1, commercial credit fell, which in effect sterilized the impact of higher reserves. 

John Mauldin has a good discussion of why QE2 may fail. One issue is that the banking system has not been fixed, and so QE2 may not spur any increase in lending; if anything, with the foreclosure mess brewing, more rapid debt deleveraging seems to be ahead. That is deflationary, and the size of potential debt destruction dwarfs the scale of QE2. Also, QE2 has already spurred competitive devaluations from countries such as Japan, and if a general Currency War erupts, as predicted by the head of Brazil, we might see most major currencies race for the bottom, and ironically the Dollar might rise based on falling less fast! At the moment, however, there is no general debasement of currencies. 

Comments

[Neo Tzu]

I'm gona try to short this bearish divergence on the SPX this morning.

If this really is a NEowave "I", the bear raid should be a quick headspinning drop below wave "H"

Lets see what happens. We've got the Hurst 6/7 day low due Wednesday.

[Neo Tzu]

I'm gona try to short

Meant to say "add to shorts" already have a few short positions from Friday.

Here is interesting tidbit I also found about this weekend:

(On this 10/10/10 weekend) we...have major long term F27 and F26 spiral calendar alignments with the 12/9/1974 low (the bottom of the 1973-1974 bear market) and the 8/9/1982 low. Chart here:

http://spiraldates.com/2010/charts/djia_100810A.png

[Account Deleted]

Dow Jones Futures beforew opening bell

[POOZI]

what number is wave H

[Neo Tzu]

what number is wave H

Here are the charts here...

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=55363927

In Orthodox Elliott terms this wave H should be a "b" of 5th wave ending diagonal.

[POOZI]

thanks !!

[Wave Rust]

another roger-esque top picker

heaven knows, we bulls need top pickers to keep the obvious working

it's always the same.

wave rust

[Neo Tzu]

another roger-esque top picker

I pick bottoms too...while everyone was bearish at SPX 1132 I was adding longs and caught the rally...

http://yelnick.typepad.com/yelnick/2010/10/ipos-in-the-fourth-quarter.html?cid=6a00d8341c563953ef0133f4d5fbb0970b#comment-6a00d8341c563953ef0133f4d5fbb0970b

[Wave Rust]

yel,
I've said it before, usd goes much lower without the disasters so eagerly forecast so often from the disasteristas.

I never get enough of the wrong way corrigans ,,,, the top pickers, the next flash crash crashistas, the perma bears,

look at the frikkin vix
remember a few weeks ago here when vix spiked a low?

like i said when that vix spiked to a low, it was a bogus call. that spike low was pointing to lower vix.

nobody really wants to study or do their homework. basic TA would have told even a newby that vix was heading lower.

duh

just like the decision point usd charts- valid trendlines but do they mean anything, like a cataclysmic economic puke?

Nope, but it might just be the hint that a cataclysm for the bears is just around the corner.

when every 1/2% to 1% move lower gets the bear stinkum juices flowing, top picking with its requisite disaster calls gushes forth, like some Hungarian toxic flood, a soothing sauce for the bearish experts.

it's always like this.

wave rust

[Wave Rust]

"while everyone was bearish at SPX 1132"

everybody? who?

wave rust

[Neo Tzu]

wave rust, you heavily long here?

because you sound nervous

[Wave Rust]

been riding the bull so long, i had to buy a new one.

i wore out the old one.

i'm a trader. i use stops. nervous is not a part of a trader's vocabulary.

trading is about making money, not about making top calls or bottom calls.

wave rust

[Molecool]

Neo - do you know what tool was used to draw them so nicely? On mybend it's very time intensive...

[Mamma Boom Boom]

>"We are now approaching the end of the powerful September 4-October 8 time band of eleven important geocosmic signatures. The most important were the Jupiter-Uranus conjunction of September 18, Sun-Jupiter opposition of September 21, and the Venus retrograde of October 8. All of these are Level One signatures, as discussed in the studies of “The Ultimate Book on Stock Market Timing, Volume 3: Geocosmic Correlations to Trading Cycles.” A Level One signature has an historical correlation of at least 67% to primary or greater cycles in stocks, within an orb of 12 trading days (usually much less). As noted in the introductory comments, several stock markets in Europe made their cycle highs on September 21, which was the midpoint of this time band. Others were making new highs at the end of last week, as the Libra New Moon and Venus retrograde signatures unfolded (October 7-8). On Monday, the two-day Sagittarius Factor unfolds, which can result in a spillover of the trend from the end of last week. But it is a powerful mutable lunar cycle, so reversals can also commence then.

For Financial Astrologers, however, the most important factor happening right now is Venus turning retrograde in Scorpio, and its conjunction to Mars, also in Scorpio. Venus pertains to currency and assets of value. It rules Taurus, the sign of money and wealth. But Scorpio is its opposite sign, which means it is in its “fall” here. It is weaker. The desire to appreciate one’s net worth is Venus and Taurus. But Scorpio and its ruler Mars pertain to the accumulation of debt. For some reason, the USA Dollar has a tendency to go down when Mars is in Scorpio, and precious metals tend to rise sharply. It is happening again."<

[Wave Rust]

yel
imo, a monthly chart of usd, back to at least the 90's is a better look for what it might do after it breaks 71.

the yen is so strong, that the Japanese govt is complaining.

so the US is complaining about yuan weakness, while japan is complaining about usd weakness.

maybe the US should tell japan to talk to china and complete the currency circular whinning. but china doesnt care at all.

rhetorical currency gumming ,,,, jawboning never works, especially when it comes from a US admin. that has lost credibility domestically and abroad. (maybe oblahblah should send china and japan a picture of his nobel prize!)

wave rust

[Neo Tzu]

Neo - do you know what tool was used to draw them so nicely?

The spiral dates you mean? In a comment section on spiraldates.com the Admin says he programmed a proprietary spiral script with Amibroker.com software.

I was able to find someone tinkering with amibroker spiral code here...

http://www.mail-archive.com/[email protected]/msg35744.html

[Neo Tzu]

Triangle moment of truth...I think the downmove will be somewhat fast...

[Sobranie]

Neo, I agree with you. Utilities look very bearish.

[Wave Rust]

neo sue
suggest drawing your trendlines backward

wave rust

[Wave Rust]

neo sue
its a channel, not a contracting tri

wave rust

[Neo Tzu]

its a channel

Not for long

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=55399818

[Account Deleted]

Hello DG !!

Can u please give me your views on this chart of a stock.One picture is Weekly Chart of the stock right from its inception and other one is a daily chart.

http://yfrog.com/3tlo0p
http://yfrog.com/5nzq7p

Thanx in advance
Regards
VB

[Mamma Boom Boom]

>Here's a possible scenario:
Monday we get a strong pop. Mid to late day it reverses. Next 2 weeks is down hard.

Posted by: Mamma Boom Boom | Friday, October 08, 2010 at 01:19 PM<

Yip, ...pretty much!

[Sobranie]

I love you, momma.

[tk]

Hi Yelnick

I really enjoy and appreciate your site. You had an interesting set of articles awhile back on EW vs. fractal and how fractal was winning. You also addressed what I believe was Neely's call vs. fractal finance and whether we were headed higher or lower. Where are you with regards to direction of the market?

Thanks again.

[Bird]

As for me, I'm withholding my affection until we see if the latter part comes true.

[Mamma Boom Boom]

Sobranie, you have excellent taste.

Bird, keeping me at that high standard, right?

[Bird]

Someone has to do it Mamma

[Dsquare]

Based on Neowave rules, if a zigzag, c is likely done (b was 5 weeks and wave a was longer, so c should be shorter in time, have had 4 weekly red candles prior to this week, so need a positive candle this week, so far so good).

"Commodity Futures Trading Commission data show hedge funds and other large speculators are more bearish on the dollar than at any time in history, with bets on a decline exceeding those on a rise by 341,683 contracts as of Oct. 5.

The last two times sentiment was close to this level, in early 2008 and late 2009, the dollar rallied. The Dollar Index surged as much as 24 percent in the second half of 2008 and 19.6 percent between November 2009 and June 2010."

http://www.bloomberg.com/news/2010-10-11/dollar-trades-near-8-month-low-on-prospects-of-more-federal-reserve-easing.html

[Wave Rust]

neosue
you conclude too much from too little information.

it's a channel
take a broader view.

if you are waiting 4 hours for a 4 handle move, you should state it. that isn't day trading imo.

it's similar to swing trading ,,,, if you exited at the very low.

suggest you look at 30 min & hourly, etc. charts for better signals.
the pits know everybody is trading 2, 3, and 5 minute charts.
they can't hide as easily, what they are going to do, on the longer timeframes.
then enter with your strategy on a specific 2 or 3 minute bar action. maybe you'll get more handles in less time.

spx has been in a channel with several shifts, at the top mostly, since just after the spike from end of August low.

since sep 3rd, you can see the 3 or 4 shifts in slope along the top and bottom. the rightward shift of slope is sometimes a loss of momentum but also often serves as a corrective function to foster the next move up.
this happens in all timeframes and fools many traders and investors into becoming bearish. then a 1-2 day slide assures them that it's bearish, which they pounce on. Only to reverse higher slowly and steadily, trapping them again.

today with interest rates and banks closed, isn't a great day to trade.

the broader channel offers much more trading range than these daily 5-10 range days that are characteristic in recent months. and, i dont think it's going to change much as long as it's so mega-bullish for the foreseeable future.

but that's my biased view and has been for a long time.

wave rust

[Dsquare]

Ask not how low the USD can go, but how low can the US go?
ACLU Argues President Does Not Have Unchecked Authority to Kill You
http://www.aclu.org/blog/national-security/aclu-argues-president-does-not-have-unchecked-authority-kill-you

[Nick]

Neo
Interesting stuff.
thanks

http://themacronavigator.blogspot.com

[Account Deleted]

S&P 500 analysis after closing bell

[DG]

VB,

The Weekly looks like it could be a Contracting Triangle, but I would be wary of any wave analysis of an individual stock. It could get bought out tomorrow and the stock price go through the roof or the CEO could announce that the accounting has been falsified for the last 10 years and it goes through the floor.

That's why I don't touch individual stocks.

[Hockthefarm]

It is getting clearer and clearer that the government and banks are colluding to falsify the housing market. They have absolutely no interest in free markets, markets that keep the trash at bay. Obama can't wait for the trash to emerge again and deliver us from evil.

My hope is that times get tough enough that it forces us to rethink gubmint at all levels. We have very poor government in this country and have for a long long time.

Hock

[Account Deleted]

Thanx DG !!

I understand your point of view and it very logical as well.But I am convinced about the stocks fundamentals and have checked it thoroughly.All I want is a technical confirmation of the whole thing.Becos i always use a techno-fundamental approach to investing.I feel when both the views are in unison the success ratio becomes very high in investing.

By the way this stock is listed in INDIA on BSE.

Regards
VB

[Account Deleted]

Just one more thing DG.Is this a Bullish pattern or a bearish pattern.MY view has it in a Neutral Triangle right from its fall in year 1999 and could potential go through the roof.Could u just elaborate a little on your Count.

[KRG]

VB : Just curious..Is this Coy. still in software? and/or does it have plans to diversify? There must be some serious reason for a software company trading below BV...

Cheers

[Account Deleted]

Yes KRG !!

This company is still into software.The Buzz is that this company will be bought over by ESRI(Environmental Systems Research Institute) an 800 Million Dollar Redlands CA ,USA based company which is the Word Leader in GIS.

Recenttly ESRI bought a 15 % stake in it in March 2010.

Regards
VB

[DG]

VB,

Bullish, with the drop from the all-time high being wave-A of the Contracting Triangle.

[bob m]

Hey Neo Tzu

I am glad to see the CCI on this board. It is a GREAT tool. Regarding the downward sloping line... yes it portends decline, but wouldn't you also say that once the line is BROKEN to the upside, we have strong indication of a potential rally in THAT time frame.

Do you use multiple time frame analysis with CCI. For example on the 4 hr chart CCI 6 is at 56 and declining, but the CCI 34 is at 147 and declining. It would seem that we could sill have some up and down before the 4 hr gets under 100 or tests the zero line.

The daily looks more ready to decline with the CCI 6 at 92 and the CCI34 at 106. The 34 has been barely holding the 100 line since Sept. So - yeah a tumble could take this down and that would be pointing to a couple weeks worth of decline.

any thoughts? any good CCI resource suggestions?

[KRG]

VB : Sounds interesting

regards

[Account Deleted]

S&P 500 Futures before opening bell

[Neo Tzu]

Wave H should now break fairly quickly here...

[yelnick]

tk, in the FF vs EWI/Neely battle, all three have come up short. EWI had to switch to 1174-1181 as their target, and since the fourth-of-the-third is a common retracement, they should have had it from the beginning, FF had to switch to bullish once the break above 1130 sustained as a real break. Neely expected a 'deep drop' after the Sep30 highs but instead has had to change his count to more bullishness. Of the three, Neely at least has been more useful for traders.

Right now FF has a bifurcation turn date this week, calculated this way: go back to the Jan top and the April top and count from the bifurcation point (the break down in both cases) after the top. The April top bifurcated a week later in May. You end up with a period of 15 weeks. 1.6x that is 24 weeks, which makes the turn window next week.

[Neo Tzu]

bob m wrote: I am glad to see the CCI on this board. It is a GREAT tool.

CCI is the best tool one can use. Its the decoder ring that uncovers what the smart money is doing. Yes, I use all time frames bull and bear.

any good CCI resource suggestions?

I think everyone should take the FREE Ken Woods CCI course at least once...(sit in the chatroom for one week)
http://www.woodiescciclub.com/start.htm

Woodie is a controversial character...just get the CCI tech nuts and bolts then leave.

[Whitebear]

So much for the top callers. Where is the drop?

[Neo Tzu]

bob m wrote: I am glad to see the CCI

RSI comes in second....

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=55398556

[bob m]

yes I did partake learned a lot thanks

[Neo Tzu]

So much for the top callers. Where is the drop?

The range is expanding now, once wave H breaks, trend change is confirmed...

http://investorshub.advfn.com/boards/read_msg.aspx?message_id=55430765