The Dollar appears to have had an early four year cycle low in May and has since commenced to surge much higher. It looks like the dollar wants to break out of its multi-year basing pattern since its low in 2008. The dollar could be rising because we are the best house in a bad neighborhood or because deflation is beginning to overwhelm the central banks. I believe a great deflation is commencing as the Fed withdrawals its liquidity from the markets: Commodities are collapsing to the downside, precious metals are hitting multi year lows, bonds have been ripping higher since December, emerging stock markets (EEM) are testing August lows and the Russell 2000 (IWM) peaked on July 3 and is now negative on the year.
A strong dollar is a sign of the Fed losing its battle with deflation. In my opinion it is only a matter of time before deflation overwhelms the major US stock market indices. Additionally many emerging market countries have issued much of their debt in Dollars. A strong dollar is a complete disaster for emerging markets! As the dollar appreciates it will increase the debt burden of these countries and this will cause their currencies to come under pressure. This will in turn force levered carry trade players to sell emerging market debt and thus a virtuous death spiral will have begun. As this leverage begins to unwind it will have knock on effects and we should see increased volatility in all risk on assets.
In our debt based fiat currency system it is important to remember money=debt. The Fed is withdrawing credit from the system (QE is direct money injections). Less debt/credit in the system means less dollars in the system and thus a bid for Dollars. Once the reflexivity process begins it will feed on itself. Margin calls and defaults are around the corner which will cause the dollar to rise further and in turn screw the emerging markets some more. I am predicting the Dollar (DXY) likely rises 20-40% over the next 2 years. In the very short term I am expecting the Dollar to pause and perhaps pull back before ripping higher.
Of course the Fed could announce QE 4 and try to prevent this from happening. However, they know that QE is producing diminishing returns and they need to reverse the decrease in foreign purchases of treasuries. We are currently in a financial war with Russia and China that may turn hot at some point. A strong Dollar would crush Russia and put a dent in all their de-dollarization efforts. I have no doubt that the Fed would choose funding the government over the health of the stock market all day long. The belief that the Fed has your back will soon be put to the test.
Fun Fact: we have a confirmed Hindenberg Omen signal on Friday. While not foolproof, it has historically generated a 25% chance of a correction greater than 15% between the date of signal and 4 months out.
I am still long my IWM 110 December puts that I put on at the end of August and September 4th. If you own the emerging markets or anything with exposure to emerging markets I would urge extreme caution. In my opinion the pain is just beginning there.If you enjoy the content at iBankCoin, please follow us on Twitter
Also, my dad called Friday looking for stock tips, so we are well and truly fucked.
LOL. Human nature never changes.
As I am short individual names, I give a cautious hat-tip to your thesis. While I give weight to the downside, I am aware that rippage to the upside is a potential (the only?) gambit in this market.
I have no doubt that the S&P and Dow may go to new highs but the internals are awful. I think we are very close. Small caps look awful right now. I am looking to short some individual stocks once we get going. I could be wrong but my spidey sense is tingling.
What did you use to
confirm the signal?
Bluestar, aside from TV sets & computer devices, where’s the deflation in real life for the consumer? stocks are up, real estate, food prices, service costs, insurance, education, travel expenses, restaurants, movies, raw materials … everything is up … perhaps there will be a pause in the rise but unlikely prices significantly decline aside from stock prices
for ex: even when coffee went from $3 to $1, SBUX went up, coffee in the supermarket stayed the same or even rose ….. when wheat doubled, so did bagel, but since wheat has gotten cut in 1/2, bagels are the same or higher …. etc etc
You think metals have much lower to go from here? Interesting about deflation, seemed to me like QE increasing money supply would lead to runaway inflation instead.
Blue..USD/CNY Carry Trade is a lot more detailed as you know. BUT anyway, I of all people, have seen all you describe above in your post.BUT EVERYTIME I think this is it, some Central Banker, be it RBA, ECB, BoE, BOJ, Fed, etc does something HISTORICAL and blows this Bubble even bigger. All of this is at such an amazing mess that nobody seems to care about it at all. I really thought in 2009 the global banks/governments would see what a dangerous bubble mess they were creating and would stop. But Nope. Nymph’s Prediction, SPX 577 bottom when Central Bankers finally give up..such a mess.
Deflation occurs when credit contracts. Since the Fed has blown an asset bubble it means as credit contracts all financial assets will deflate. The real world price of finished goods will lag. Commodities are flashing red warning signs.
My ultimate target is $800 on gold and $14 on silver. We are due for an oversold rally.
Timing is key. I believe we are close to that time. When there is blood in the street i will get bullish. I am not a perma bear. Although I think this next bear market will be very bad.
nice call Blue, I like it. What are your thoughts on the PPP infrastructure framework announced down under? Is it government getting pension funds to do the next round of QE for them, and then we get hosed with user fees?
Thanks. We will see what happens. PPP is complete kaka and it will not find its way onto the stock market. The biggest bang for their buck was treasury purchases. its like crack cocaine for the stock market. Were you aware the Fed did this in the late 20’s? With out the crack we get withdrawal. look out below.
Blue, Not PermaBear either (cramer was my original teacher in 2007,lol), But I watch all the micro stuff, like example why global shipping is moving and where..and since 2009 it hasn’t been good. Yet, this is my first bubble I have ever watched from the start to finish so my timing is rather horrible..to say the least. I really thought so many people would see the bubble forming and try and stop it..but I was wrong..lesson learned for the next cycle.
THE HINDENTURD OMEN!
Aren’t we 0-for-the-last-4 signals in that?
You are correct sir. I view this signal as gravy. It’s just math. 25% chance of %15 or greater correction in 4 months. 75% chance it’s a dud. But I have 3 of my 5 markers for a major Top. #4 is not that far away. Then it is basically game over. I am front running the signal because of the end of QE. Stay frosty OA.
As a degenerate option trader, I like the math. I’m listening…thanks.
Bluestar, do you have any stats on your 5 markers for a major top?
Having the Russell trade under 1200 is a big warning signal in my books (approx $111 on the IWM) ..
a few to add to your list:
Researching. Will be back. When all five are present it’s 100%. Checking on likely hood of 4.
Today’s bounce do anything to your criteria? Once they trigger are they set in stone or can they be undone through subsequent price action?
They have not triggered yet. I am definatley front running. I am long puts at 115-116 IWM. Time decay is against me. Up about 50% so far. looking for 5-10 bagger if right. I am doing nothing today. still holding. Once the set up is complete there is nothing that can be done by the PTB.
Great read, I had one question. How is a stronger dollar bad for Russia? While they negotiate their contracts with Europe in Eur their pricing surely is based off USD? Or is it the import side that will kill them? I thought stronger dollar was good for commodity exporters as a generalization. Any clarification would be awesome!
Strong dollar crushes the price of oil. most people still on dollar system. hurts russia’s exports. Also I am sure they floated bonds in Dollars. that will cause pressure on there borrowing costs. furhter weakens their currency.
BlueStar, respectfully, out of all the advise you have given, none of it has come to fruition.
You had been super bearish on YELP but now I don’t hear you talk about it. You have been calling for the market to correct for months now. You are now calling for a 20-40% rally in the dollar in the next 2 years.
I hope you are right on something and soon.
Yes since May. That is five months. Topping is a process. Yelp is a POS. And I will be proven right. Apparently you have ADD and expect immediate gratification. When this turns it will completely fuck you up if you are long. You have been warned. Maybe you have not noticed but small caps have been getting destroyed. Now go buy some 1 week call options.
Bluestar, any opinion on BIDU, YY, and QIHU? Are China’s internets big enough for BABA and these three?
Someday when you get a chance, I’d love to see your analysis on RICE.
Blue, See, Our nice sweet sell off got killed with just a few words from Charlie Evans today…so not fair.
Blue Star’s vision finally begins to manifest. Indeud.
Fly, OA and Chess are more involved than me. I think china is ashit show.
Top not confirmed yet but this is a nice start.