It seems that the widely accepted view of global markets for many months has been conveniently compartmentalized, and neatly described as:
“Fed’s Easy Money Policies = Higher Asset Prices into Perpetuity.”
It’s this widely accepted formula that emboldens speculators to push markets higher and higher expecting a free ride. It gives asset managers an excuse to keep plowing money into markets with less and less respect for risk. And it creates self-fulfilling market responses.
But the world’s problems are complex. And complex problems don’t tend to have such neat and simple answers.
In the end, the market activity of recent months is just a lot of money leaning heavily one way, without the fundamentals to support it. And if history, especially recent history, is any indication, it all sounds like a formula for another boom and bust.
In this case, the boom was contra-dollar investments. So now we have to ask …
Is Another Bust
in the Making?
History shows us that global financial crises are typically followed by sovereign debt crises. And global recession that is synchronized with global financial crises tends to bring about a long, painful recovery littered with economic shocks. Moreover, it’s not a stretch to think that the reverberations of a near global collapse in the financial system from a massive credit bubble will probably be manifested in more booms and busts.
Yet the world seems to be more concerned about slashing deficits and hiking rates, precisely the type of mindset we might expect to see in a legitimate recovery phase, not one that remains dependent on government life support.
The more the market focuses through the lens of recovery, the more scrutiny policymakers get for not reacting to a recovery. As market prices support that scrutiny, the more convinced market participants become, and the higher prices go.
It’s this type of market that Paul Tudor Jones, the legendary hedge fund manager, describes as the “last third of a move.” And within this last third, he says there’s “no logic to it” and “irrationality reigns supreme.”
Now it appears, the “last third” of this run-up in markets could have come to an abrupt end.
Nowhere has irrationality been more evident than in silver prices …
The silver market had a parabolic move in recent months. But this past week, the CME responded to the dangerously high prices and the buildup of fearless speculators by hiking margin rates. They did so three times in five days … and brokers hiked even further, seeking to reduce their risk from a crash in silver prices.
And in the same self-fulfilling vein, a crash is what they are getting! Despite all of the talk of “real money” diversifying into silver, when the skirt was lifted, it was a market littered with speculators.
Silver fell 29 percent in five days, after testing the all-time highs when the Hunt brothers cornered the silver market back in 1979. It has a similar ring as the top in the oil market did in 2008. Then, margin rates were increased, speculators were squeezed, and oil topped out, ultimately trading down to $30 from $147.
So silver, gold and oil — the three most loved speculative “hard currency” trades — are all plunging. On the heels of those declines is the euro — the world’s favored anti-dollar trade.
All of this market action is fueling a bounce in the dollar, which, contrary to popular opinion, is in position to have a major rally ahead.
The Long-Term Cycles
of the Dollar
You can see in the table below the roughly seven-year cycles in the dollar index dating back to the failure of the Bretton Woods system. You can also see, in the “% Change” column, the broad moves in the dollar within those cycles, both in bullish and bearish cycles.
Here’s my perspective: As long as the dollar remains above the March 2008 low of 70.69 on the dollar index, it remains in a BULL cycle. So as long as the dollar holds that prior low, it has the potential for a huge run. That, of course, assumes it remains consistent with the broad moves in previous cycles.
If it breaks below the March 2008 low, that would invalidate 40 years of cycles and thus invalidate the dollar bull cycle. For now though, the cycles and the likely bust taking place in contra-dollar assets favor the greenback.
With that, while many view it as a contrarian trade, my advice is to close your eyes, pinch your nose, and buy the dollar.
Regards,
Bryan
{ 33 comments }
The only difference is that we weren’t in debt for 14 trillion dollars during those former dollar cycles!!
Travis
does that mean stay away from gold? most think it is in a long-term bull cycle.
Agreed; one more time when “everyone is looking for” is when the Market moves in the opposite direction. Thank you.
There is one thing you have omitted in your considerations re cycle history as a pointer to current dollar outlook. What is the likely Bernanke money pumping effect on this dollar cycle? Are we to see no effect and a dollar buy as a good investment? Are we to see a short-circuit as markets are subjected to a speculator ‘flushing out’ as margin calls cause a return to reality? I think a dollar buy without a risk assessment may not be smart. Comments?
Thank you, Brian, for the very interesting chart. But your advice contradicts your own chart, unless you’re thinking of a short run bounce in the dollar. This 7 year cycle has about 4 more years to go! And we’re in the middle of a bear cycle, not a bull. If the pattern you’ve shown is to be consistent, we can expect the dollar index to break well below 70 before this is over.
Oops! I read it wrong. Guess you were right all along.
Bryan,
What do you recommend as the best way to play the Dollar, go long with the ETF UUP (looks to have just had a selling climax early this week, followed with heavy volume to the upside), or go short the Euro with EUO? Next hurdle for both will be at the 50DMA, which look’s like they will both test this week.
Are do you suggest ZSL? it’s already made a huge move down is it too late?
I have a problem with Brian’s pure technical look at the dollar. The fundamentals of deficits, ZIRP, QE and monetization of the debt have not changed. The dollar was over-due for a short-term bounce, and the unwinding of leverage in the commodities market was the catalyst.
Gold will rise so long as there are net negative real rates of interest. The recent drop in gold and silver were a gift. Take the gift if you think that there is no chance in hell of Congress resolving the deficit problem. Otherwise “buy dollars” if you think a decline in purchasing power and zero interest rates are good for your portfolio.
Bryan,
Back in Jan of this year, you were bearish on the Euro and bullish on US $. Since then, Euro has strengthened against the US $. Are you still optimistic that the US$ will recover the lost ground against the Euro to at least the level it was back then?
Hey Brian:
As someone who traded billions in currencies, why are you now just an editor of a newsletter & not jet-setting around the world? Isn’t trading just a mug’s game?
You have to have a lot of confidence in America and it’s people to be bullish on the Dollar,long term.When I see Asians getting better educations and becoming more qualified for jobs than Americans,how are Americans,being less qualified,going to earn more?What is going to happen is Asia gets richer and Americans get poorer.That should happen with Asian currencies appreciating against the Dollar.You can see what’s happening,with American citizens,getting poorer, selling their gold and Chinese buying it.China may be in some kind of bubble,short term,but longer term they are going to pass the U.S.,to become the world’s leading economy.When a nation is in decline,like the U.S. is(since about 1970 by my observations),it’s common stock,the Dollar,will decline.So,maybe you are correct,short term,but I wouldn’t invest in Dollars for the long term.
Great info.Agreed,something had to be done to stop the speculators in their tracks.The big boys,Soros,Sims,etc.are selling,follow the money,they see the easy money stopping,for now.
You are right on target Brian. We are moving into a strong deflation cycle which will soon cause the commoditiy bubbles to break and the US Dollar to rise sharply. I fully expect by late summer to see a complete reversal of last years manipulated bull markets in stocks and commodities. We are locked into a downward winter cycle for those who follow the K-Wave theory. Look for commodities to crash, real estate to double dip, and the US Dollar to soar!
Hi Kevin………. with one notable exception. Iron ore is not a commodity that will respond to the same degree as the rest of the class! Demand for it is so high Globally that there is little room for speculation in it’s current run up.
well Ben just said he will stop printing money by June….so the dollar plunging got a break.
Down at the Minneapolis grain exchange everyone used to say, “when the shoe salesmen start to buy pork bellies, it’s time to sell,”
Bryan is right once again, just like last week. It’s easy to understand why everyone else thinks the dollar is being trashed. If they were right, it would already have happened.
If we weren’t the reserve currency and the mighty USA with more gold than anyone else, we probably would have defaulted. But it ain’t going to happen that way.
To understand why, it helped me to check out Modern Monetary Theory at http://pragcap.com/resources/understanding-modern-monetary-system.
We really are doing long term damage to our growth prospects due to our foolish entitlement spending, our undermining of business productivity and our failure to regulate financial markets (derivatives).
None of our leaders get it. It’s going to be a long slog out.
We need to here more from you Bryan!!!
entitlement spending is the culprit …yeah.
we are spending 10x that amount on defense. killing people is more expensive than keeping people alive really….
By the way folks, it’s “Bryan” not Brian.
There is so much bad information floating around out there, I appreciate this realistic historical look compared with current state of affairs. Certainly is in agreement with previous great depression where they also did “print or borrow” and wasted a lot of money on stimulus. Like then most of it went to banksters to cover bad debt never getting out to cause inflation. This time the banksters decided to use it to run up the stock and commodities markets through proxy hedge funds since they are hopelessly broke losing more dough than the whole world has in their mortgage derivative schemes. When the clowns in congress stop allowing our future to be mortgaged for the sake of banksters having a last hurrah hay day in the markets to pocket what they can while they can, along with a few major speculators and the tag alongs. Assets should fall and the dollar will have more buying power as a result, just like in the previous Depression. Bryan’s research seems to be another angle which doesn’t disagree with a repeat of history when the banksters are halted from stealing our money for their own speculative use… whenever that will be.
There is only one, BUT IMPRTANT parameter to put in this standard cycle:
the GLOBALIZATION process.
When China (and others) buys US bonds the GOLD that covers the value of dollard IS GONE
The game is not for the banknotes, for the dollar paper, but for the GOLD
and economic/politic control in US.
Counties like BRAZIL, RUSSIA and TURKEY are for
another world currency than dollar.
Changing times.
lol….Brazil, Russia …ok but ..Turkey…that made me laugh. Who the hell cares about turkey.
You might be right Bryan but to me buying the US Dollar is a speculative trade. At this point there is just no logic in buying the buck. Yes, it is possible that the US Dollar could have a massive trend change and start appreciating in value, but it is my perception that Geitner and Bernanke, despite what they profess – a hard Dollar policy – are actually commited to a weak dollar. A weak dollar at this stage is the only policy option available (at this point) that will enable America to become stronger economically. Certainly the pathelogically childish and behaviour of Congress not to behave in a responsible manner has the world deeply worried about how America will solve its problems with real solutions. America needs to be completely restructured. Democrats need to acknowledge that cuts in social programs need to be made, by the same token, the rich (and Republicans) need to acknowledge that taxes must be raised. Its just common sense. Except in America.
A better and more logical trade would be to go long the Yuan by buying good quality Chinese companies. If the Yuan is revalued – which will eventually happen in my opinion the investor will get a double lift. Appreciation due to exchange rate revaluation, and appreciation by investing in good quality companies. Of course, the caveat is that you have to be careful what you invest in. There are many Chinese companies that are just plain garbage. Even worse, many are fraudulent.
Sounds like solid advice.
Bryan is consistently at odds with the other analysts at Weiss. He loves US dollars and hate precious metals. So this article he uses the “crash” in silver and gold to build his case for the US dollars. His analysis on the 7.2 year cycle of alternating boom and bust of the US dollars is a very weak argument.
I am not convinced.
Thank you Bryan
Several plays are at stake with the dollar. What Mr. Bernanke is doing is to provide liquidity to the major U.S. banks to prevent them from collapsing in the malaise of their own real estate debt. The book value of these losses is being hidden by the banks.
Here is the question to auther:
Is this just another cycle for the $ or are we against a structural change?
The US econmy is not producing wealth for American Business it is producing wealth for global business. The value of the $ has to corrospond to the ability of world market to have purchaing power in $$, so, it is the issue of weather the $ continues to be trusted and held in bank reserves. all evidence show that the $ holders are slowly but steadily easing out….
Can the auther illuminate these issues?
This all would be humorous if it did not involve our taking a big hit with the latest tanking of commodities. The “experts” lead us one way and then another. They predict this and they predict that. Larry is predicting a huge rise in the stock market. He predicted the bust in silver, but he is buying in slowly. Sean Brodrick is still nuts over silver and will buy it under any circumstances, believing it is destined to skyrocket much higher. Martin is saying the end is near, but he is encouraging us to buy “quality” stocks (those tanked recently as well by the way). Brian is one day doubting the dollar, the next day predicting a rise. Tony is ever hot on Chinese stocks, and we have to wait to see what happens there, but the ones I hold tanked with the rest of the market last week.
What does all this prove? It proves the markets are totally manipulated externally, and in the end, they are structured to make huge amounts of wealth for the “elite” insiders and leave the commoners destitute.
The power structure in place does not want a huge and thriving middle class. It wants a huge and subservient underclass. That means every time you think you have figured it all out and are making big profits, they will find some way to take those away from you.
And, remember, the media, the investments services, the analysts—-all these can play into the manipulations of the “elite,” and it all trends in one direction—-to keep you subservient and impoverished.
If hyperinflation hits big will that mean your $100,000 home will soon be worth $300,000? If so, then is real estate really the worst investment? Would banks begin lending out huge home equity loans if such property inflation occurred? Would that return us to square one in real estate (2006) before the bust?
The truth is, no one knows the answers to these perplexing questions except the “elite” who manipulate the financial world and create bust or boom wherever and whenever they so choose. Anyone else is just blowing hot air.
ABE
I think that what Brian means is that the $ is the best of the bad, the least ugly.
I have been trading the Foreign Exchange markets for over 25 years and recall when it was done with briefcases and walking bank to bank to make a trade! As such, I typically do not get involved with commenting on market events and conditions that brought us to “where we areâ€â€¦ Mostly because the markets are so multifaceted that no single explanation can be correct. Nor can one point of view be all encompassing. I will however make this exception to “Break Cover†and offer a few points from a seasoned trader, for the “new blood†to ponder.
While not everyone will see it this way, there are three “tradable” facets to trading the currency markets. Those three are defining a currency pair as; “Safe Harborâ€, “Commodity Currency†or a “Carry Tradeâ€. While the USD is no longer a “Safe Harborâ€, nor has it ever been a “Commodity Currency†it has been a fantastic “Carry Trade†during this low, to no interest rate period. So, quit whining about how low the USD is and get a grip on “How†to make it work for you… But be careful, the events of the past week and what is to come in the next few months are “Game Changers†and will likely impact the market’s sentiment. I won’t be so bold as to call the bottom, but the EUR is not worth much over par, much less the 1.40 to 1.60 range if the sentiment changes and Greece gets loose… I think you better take the ride on the short side.
Without going into too much detail consider the USD as a replacement for the Yen, which has been effectively at zero interest rate for the last two decades. Barring all the outlying issues that assume this US is doomed… The Yen “Carry Traders†simply made a killing while their currency was in that condition. I don’t know how much longer it will last for the USD, but it has been a good ride!
I would like to address Brian’s observations and applaud his research. The chart he elucidated on the USD was, and is precisely where the “Pros†make their long term evaluations. I would like to add my own personal observation, and that is to watch closely what the economies do at and around the magic number on the USD (index) of “88â€. Do your own homework, but be prepared when and if we return to that area!
The way I see things is quite simply (some may say simplistically), that the paramount long-term driver (above commodities) of the dollar against the Euro and GBP is the recession. The dollar basically strengthens with uncertainty or pessimism and weakens with optimism. On this basis the dollar is gradually weakening, back to it’s position in early 2008 and only more pessimism or uncertainty is likely to impact this trend significantly. Of course there will be ups and downs along the way short term, but that appears to me to be the long-term scenario.
vaag has a point about the old saying about the shoe salesman starting to buy pork bellies, then it is time to sell. Four weeks ago, I was in my favorite coin shop looking at some things the owner had come across. In walks a hick with his six year old kid who wanted to rifle through the owner’s boxes of coins for customers to look at and maybe purchase. Hick asked, “How do you buy silver-I want to buy some. Moe, who works on the oil change rack at the garage, said to buy some!” I kid you not, he said this while in a coin shop.
OK…yes and what about the money supply? You cannot be serious to just look at charts without taking in factors like that. Bottom line is we will print ourselves out of debt. What will happen to gold and silver? well you just wait and see.
Your suggestion would have been good a week ago when silver was at 50USD. Today it’s a tad late.
This is a major buying opportunity for silver.
why may i ask is soros dumping billions in silver ..his old trick is to dump his holdings in that product to lower it on the market. when it reaches its low point by his recononing he will jump back in and buy tons thus making a killing. he has wrecked currencies around the globe with this tacktic