-- Published: Monday, 15 June 2015 | Print | Disqus
By Graham Summers
The single most important story for the investment world is the US Dollar.
The US Dollar rally took a breather starting in late February 2015. Since that time, it has corrected a total of 7.2%. Technically this isn’t even a correction (it would need to fall 10%) and it’s far from entering a bear market (it would need to fall 20%).
In spite of this… the financial media is trumpeting that the bull market in the US Dollar is over. I think they are grossly underestimating what is happening in the US Dollar.
First of all, during the last two US Dollar bull markets (the early ‘80s and the late ‘90s) the Dollar had no shortage of 5%+ corrections. Here’s the Dollar bull market of the early ‘80s.
Here’s the US Dollar bull market of the late ‘90s. Again there are five corrections of 5% or more.
My point is that 5%+ corrections are normal during US Dollar bull markets. Remember, the greenback rallied over 25% before starting this cool down period. So it was due for a pull back.
Moreover, in the BIG PICTURE, this correction has not violated the larger technical pattern we’ve been following in the US Dollar in any way:
This is the single most important chart in the investment world. It is the largest bullish falling wedge pattern in fiat money history. And we’ve broken out of it to the upside.
If you want to think of this in terms of macro-economics… think of it this way: since the US abandoned the Gold standard via Breton Woods, it has been in an ongoing process of devaluing the US Dollar while issuing paper debt/ credit.
When you borrow in US Dollars, you are effectively shorting US Dollars. So the entire Credit Super Cycle of the last forty years has seen the financial system become increasingly leveraged at the expense of the US Dollar.
I believe that the above chart is telling us that this Super Cycle of leveraging is ending. This means that we are entering a period of DE-leveraging.
This period will be marked by defaults and debt restructurings. Both of those processes reduce the number of US Dollars in circulation. This is especially true when you consider that there are over $9 trillion in the US Dollar carry trade currently (this doesn’t include US Dollar denominated bonds or credit instruments… simply US Dollars that have been borrowed and invested in other financial securities).
With that in mind, the hype surrounding the US Dollar’s recent correction is overblown. Being long the US Dollar was the most crowded trade in the world at the beginning of this correction… so it’s not surprising that the correction has been sharp.
When the next leg up begins for the US Dollar, we're going to see the REAL fireworks in the markets. What happened in Oil last year was just the first round... the next will hit emerging market stocks, bonds, and even US stocks.
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-- Published: Monday, 15 June 2015 | E-Mail | Print | Source: GoldSeek.com