Dollar Collapse and A Hard Lesson About Currency Manipulation
While the stock market is focused on the government shutdown drama, savvy investors are also paying close attention to the trend in the U.S. dollar, which has broken to new lows in 2018. This could herald a full-blown 2018 dollar correction.
The persistence in the bearish trend in the dollar has helped to support bullish trends in crude oil prices (financial engineering) and it’s helped the stock market. On the other hand, it has driven the euro up through the roof and has made European goods extremely expensive in terms of global trade.
This is jarring teeth as the currency war/ trade war transitions into a new phase.
The U.S. dollar is quite oversold on an intermediate-term basis. Conversely, the euro is overbought on an intermediate basis and that’s the risk. This can shift on a dime and take with it the house of cards the stock market has built on soaring oil prices.
As long as the dollar continues to plunge, oil prices will continue to surge. But like a stretched rubber band, there is only so far you can take this before serious financial repercussions follow. We will soon start to see a sharp spike in gasoline prices in the springtime, giving the Fed a powerful reason to jack interest rates higher as inflation pressures build.
This is all the more reason we have to watch the yield curve closely now.
So far the yield curve seems to be holding just above .50 in the difference between the 2-year and the 10-year Treasury yields. But how much longer it holds given a 72.6% probability of another rate hike in March is the mystery.
A drop below zero and we invert the yield curve and invoke recessionary risks. So, this is also something we want to watch very closely in the first quarter.
Meanwhile, investors need to be prepared that, for the Dow 30 to even test its 200-day moving average, we are looking at a plunge of 3,600+ points where the 200-day rests at 22,394. This is nearly a 14% test. A test of the 50-day moving average would be a correction to 24,412.
This market is stretched too far to the upside — anything can happen with such unpredictable conditions.
Bitcoin continues to plunge, falling below $10,000 a coin at one point before bouncing back and was down over 47% at one point midweek. If you chased the Bitcoin chart at the December 2017 highs, you would have lost 47% of the value of your investment in a single month.
Here is the key point. If you lose 47% of your investment you have to make up 89% from those levels to get back to break even. That’s very hard to do once a bubble has been burst.
This is a prime example of chasing a speculative investment that has gone into a parabolic curve. I had warned investors that Bitcoin had become a type of currency threat to investment bankers by sucking capital away from the ordained petrodollar world currency security.
As soon as they allowed futures to be traded in December for Bitcoin it didn’t take long for the bankers to pop this bubble and spark massive selling.
“A bubble can be easily punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy. The real choice was between an immediate and deliberately engineered collapse and a more serious disaster later on.”
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Likewise, the parabolic curve in the stock market remains a very big concern, with the DJIA having spent the entire quarter outside and above its Bollinger Band. This is the first time in HISTORY it's ever done that. It is being financially engineered, but the bubble will be punctured.
Remember, mania marks market tops. The worst come last to the party and then leave first.
Conversely, in the 1930s, on the opposite extreme, markets were so depressed that it was not uncommon for stocks to sell at less than the value of their cash on hand, even after subtracting their debt.
As Benjamin Graham would later write, “This was akin to buying a home for less than the amount of money in a bedroom safe and getting to keep the safe as well!”
Such hyper-cheap investments are extremely rare due to the broader-based interest in the stock market and due to the armies of investors, armed with computer screens, perpetually looking for bargains. But it is especially true in the mania phase in the stock market.
It was Baron Rothschild who knew back in the 18th century that you “Buy when there’s blood in the streets, even if the blood is your own.” This is hardly true now at super overvalued prices. Take Amazon, whose P/E ratio is at 330 times earnings.
Lastly, the new tax laws may have a major unintended consequence for the bond markets. With the new lower corporate tax rate, many multinationals are likely to repatriate hundreds of billions of dollars back home.
For the last several years, much of this money has been parked in treasuries and other bonds that have been held overseas in cash positions. However, with the ability and likelihood of reshoring, companies are likely to pull huge amounts of capital out of bonds and put it all into buybacks and paying out dividends.
While this is a benefit for some of the tech companies, the bond market is at huge risk here and could sink as massive amounts of capital are withdrawn. I can’t stress this enough because should bonds sink, what happens to yields? They soar.
This is the rub. This is the catch. The bond market collapsing combined with the Fed looking to raise interest rates at least three more times in 2018 will most certainly puncture the stock market bubble.
To your wealth,
Dennis Slothower has been leading a small but profitable group of investors to some extraordinary profits in both good markets and bad over the course of a 38+ year investment career, starting as a stock broker in 1979. In 2011 Dennis was named the top performer by Hulbert Financial Digest for avoiding the Crash of 2008. Now, he is bringing his extensive experience to the public through Outsider Club, Stealth Stocks Daily Alert, and Wall Street's Underground Profits. For more about Dennis, check out his editor page.
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