Sunday, December 15, 2019

Dollar Locked In Narrow Trading Range To Avoid Crisis

Currencies seem to be locked in a narrow trading range which could be another indication that Central Bank manipulation has gone nuclear. Near the end of 2015, a great deal of wealth began flowing into America seeking protection from the ravages fostered upon it. Much has happened since then. Between Trump and many others talking down the dollar, trade wars, and the introduction of several cryptocurrencies the dollar has backed off a bit. Still, the dollar remains relatively strong with any big increase in strength seen as a ticking time bomb for the global financial system.

Is The Dollar Being Held In Its Trading Range?
The dollar's strength is largely a result of  many countries having adopted even worse policies than those America's leaders have chosen to pursue. Investors across the globe are engaged in a massive game of speculation that contains a lot of risks. This is driven by the need to get reasonable yields in a challenging environment. Still, all this tends to reinforce the fact the dollar is the linchpin of global finance and has guaranteed itself a place at the head of the table until dethroned.

A strengthening dollar sends a signal that the global economy is unstable which is something central banks want to avoid at all costs. This may account for why central banks all seem to be marching in lockstep as they take turns injecting more liquidity into the system. To be perfectly blunt, none of the rapid expansion of debt and credit during the last decade could have occurred without the Fed being complicit and in agreement. It has been the Fed that decided to allow the dollar to be used as a global prop. This exploded following the 2008 financial crisis when then-Fed Chairman Ben Bernanke adopted policies of massive quantitative easing (QE) to stimulate the economy when normal monetary policy became ineffective.

Today QE has become the lifeblood of a sick financial system rather than the jolt needed to restore its health. This circles back to the little held idea the policy adjustments Fed chairman Powell has made are driven more out of fear a strengthening dollar would crash the system than the monkey hammering he received from President Trump. It also could tie into the recent "repo-liquidity" problems and questions as to where all the money has gone.

The Fed Has Allowed This To Happen
The goal of having a stable dominate currency results in other currencies being forced to toe the line or pay a stiff price. Ignoring this economic reality translates into pain for those holding the currency of any country that abuses this economic law. This plays out in the account balances of any country that watches its currency fall as it imports far more than it brings in. As a rule, wealth tends to flow towards where it will be safe and protected. This is especially true today when wealth is able to rapidly move across borders. The inflow or outflow of capital is a big deal.

Throughout history, strong currencies have attracted wealth and this means money and wealth from all over the world could be headed towards our shores. The money coming into America would flow into both bonds and stocks supporting lower interest rates and the stock market. Those of you who have read other articles I have written know I think the market is overvalued and the bond market is a "bubble ready to pop", but as long as we remain the best and safest place to hide money do not discount the dollar. If this turns into a self-feeding loop the dollar may soon get much stronger especially if I'm correct in my suspicion that the recent narrow trading range is indeed artificial.

The important part of this theory the central banks have rigged the currency markets is based on the idea several currencies have become rather fragile. With this in mind, the central banks appear to be making every effort to reinforce feelings of economic stability by keeping currencies trading in a "quiet" range. It is in their advantage that people think the global economy is on sound footing as central banks across the world continued to print and pump out money in search of the "ever-elusive growth" that never quite arrives.

Do not underestimate the power of cross-border money moving into a country as a powerful economic force. While the dollar has been described recently as the cleanest dirty shirt in the closet, or the best house in a bad neighborhood, both place it as the least worse option. The reality is other options fail to pass the smell test. This is partly because the dollar sports a huge advantage over other currencies because of its role as the world's reserve currency. This makes it the "default currency" and by the size of its market, float, and liquidity the currency by which all others are weighed, measured, and often pegged.

Very Important Chart In Understanding The Dollar
As shown in the chart to the left, four major currencies dominate the world stage, they are the pound, the euro, the yen, and of course the dollar. The remaining currencies remain small bit players in the overall scheme of things. John Maynard Keynes said, By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. As the central banks print like crazy to control interest rates on bonds they devalue the currency. While there are not many Bond Vigilantes there is a slew of  Currency Vigilantes always ready to make their presence known.

Low-interest rates coupled with easy money pouring into the economy through the expansion of credit tend to create an illusion of prosperity. A "Trojan horse method" by which countries steal wealth is by the monetization of debt. This is done through printing massive amounts of new currency or new taxes. If you look close you will see the currency markets are beginning to reflect diminished confidence in the system central banks have created. This can be seen by the renewed interest in Gold and a slew of new cryptocurrencies.

The false economy we have created can rapidly vanish. Proof of just how much this economy relies on the continued flow of cheap money was highlighted when the stock market started to wobble and President Trump to ratcheted up his attacks on Fed Chairman Jerome Powell for "ruining the party".  Trump has become the markets head cheerleader and constantly points to the soaring stock market as confirmation of his skill in growing the economy. In truth, his flawed tax reform package has mainly benefited the rich by fostering massive stock buybacks, it is only this coupled with massive deficit spending has allowed the false illusion of prosperity to continue.

The central banks' experiment in money creation has painted them in a corner. Their current policies should make us question the use of currencies as an economic tool going forward. It has also increased the risk that more currencies will fail as their capability to safely store wealth comes under scrutiny. Currencies are morphing into a tool of governments and have become weaponized which takes them further away from their original role as a medium of exchange in commerce.

Again it must be stated, the dollar's role as a reserve currency gives it oversized importance in world markets. It is without a question the benchmark by which other currencies and commodities are valued. When all things are considered, fiat currencies are in general a rather weak lot. This means it is best not to look too closely or the system glued together by faith and a prayer could come crashing down. Overall the dollar remains a far better currency to hold than its weak sisters, the euro and the yen. If indeed the central banks are behind currencies trading in their rather narrow range it must be noted such currency manipulation is a very dangerous path to start down. It is a slippery slope bringing into question the real value of a currency and further distorts true price discovery. 

As the currency games continue to ratchet ever higher it is becoming apparent that much of our financial structure is built on shifting sand. This means the schemes bankers have used for years to hide and transfer debt are coming under attack. If the current system crumbles it will climax in a reset of the economic system across the globe. If people all over the world try to get out of their home currencies a surge in the value of the dollar is logical. In the end, this would not be the salvation of America or its economy but it sure would create a lift that we would be wise to use to our advantage.

1 comment:

  1. When the "global economic reset" occurs that's exactly when the US dollar gets replaced with a global currency. It's something former IMF head Christine Legarde has said needs to happen to "ensure balanced and longterm global economic growth". Jim Rickards has also said the global currency will be apart of an IMF SDR made from a basket of currencies.