The Sword Of Damocles: The Rising Dollar Dooms Us All

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If it wasn’t clear from my latest post, or my September post titled: Just Around The River Bend: USD Bull Market Resumes, I believe we are in the early stages of the next leg higher in the US dollar bull market that will result in the breaking out of its central bank created trading range and in the end have devastating consequences for the global economy.As of this morning Yuan has fallen to a post crisis low against the dollar. That means all those QE dollars that the Fed pumped into China are going to come back with a vengeance.

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The stronger dollar combined with rising inflation should continue to push rates higher in China. Rising rates translates into less liquidity, thereby forcing a response from Beijing to keep the economy “humming”. Overnight shorter term SHIBOR continued to push the longer duration rates higher.

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Beijing may be able to flood the system with liquidity but that will only increase financial speculation and inflation as the amount of available investments and projects is limited. Look to keep a watchful eye on key commodities such as copper and coal.

Back in February, if you asked an investor what she would do if the Yuan was at a 2009 low against the dollar she’d probably tell you to sell everything, but time and narratives have changed. For now, investors do not care one bit about the Yuan. The Russel 2000 hit a new all time high this morning and major bank stocks are up over 3%. Meanwhile US bonds continue to sell off pushing rates and the dollar higher.

The spill over effects from higher rates are already starting to show in the real economy. US mortgage rates are on the rise.

Someone better step into the bond market soon, because the longer this bond sell off continues, the worse it will get.

But that doesn’t mean this is the end to the +35 year bond bull market. Rates cannot rise forever simply because the high levels of debt in the system will simply not permit it. For the global economy runs on debt, and if no one wants that debt anymore the system will collapse.

Which once again brings into sharp focus the irony of all these risk-on moves in equities and the selling of gold. These recent moves are most likely head fakes to be taken advantage of. I’m even looking at buying long term bonds here soon. But we’ll see, one has to be very very cautious around a sharp move like this. Sometimes instead of catching a fallen knife, it is better to let it hit the floor first. In the end, I look to fade the a majority of these head fakes and take advantage of the rising dollar story.

 

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