"When we are the victims of an illusion we do not feel it to be an illusion but reality. It is the same with evil. Evil when we are in its power is not felt as evil but as a necessity, or duty. Once a certain group of people has been placed outside the ranks of those whose life has value, then nothing comes more naturally than murder. As soon as men know they that they can kill without fear of punishment or blame, they kill; or encourage killers with approving smiles." Simone Weil
Gold's bull trend is intact, but it is facing formidable resistance at $1150.
Silver is in a bull trend, but the $19 level could be difficult to surmount.
The US dollar index is still in rally mode, but has backed off the key 82 resistance level. The Dollar index is a composite of other currency crosses and the recent strength has been largely due to euro weakness. If stocks retreat the dollar rally will likely continue.
The Long Bond looks range bound, and is hanging on to support.
The SP 500 is a good representation of the US equity markets. It has reached the logical conclusion of what might be termed a bear market bounce based on monetary expansion, similar to other recoveries after significant declines. If the SP 500 breaks down from here, the risk is that it might fall to retest the lows. The market rally is thin and not backed by widespread buying, and certainly not the traditional buy-and-hold investor.
To put it simply, the SP 500 and US equities in general are now 'hitting a high note' and it is a good question to wonder how long they can hold it without some backup from the chorus. The 'chorus' of course is evidence of a structural recovery that is not depending on Fed monetization, official sleight of hand, and accounting gimmickry.
Even with the 'good' employment number, the stark contrast is that the median hourly wage continued to decline. This is not deflation, as the CPI and PPI continue to advance, so much as a reflection that the jobs available are largely temporary and of an inferior quality from which to build a sustainable recovery.
As alway, keep an eye on the VIX which is one of the fear indexes along with some of the key spreads.
The theory of a short squeeze in Eurodollars which we had first put forward last year "The Dollar Rally and Deflationary Imbalances in the US Dollar Holdings of Overseas Banks" seems to be confirmed by this paper from the NY Federal Reserve bank, and the latest figures on cross border currency transactions from the BIS.
"Highlighting the international dimensions of the financial crisis that began in the fall of 2007, authors Niall Coffey, Warren B. Hrung, Hoai-Luu Nguyen and Asani Sarkar examine the difficulties international firms encountered obtaining U.S. dollars and the ensuing effects on the foreign exchange (FX) swap market. Analysis shows that as firms increasingly turned to the FX swap market to obtain funding, the dollar “basis”—the premium paid for dollar funding—became persistently large and positive, primarily as a result of higher funding costs paid by smaller firms and non-U.S. banks." The Global Financial Crisis and Offshore Dollar Markets
Further, the latest data from BIS shows that the dollar rally tracked the acquisition of eurodollars with a significant correlation. This is shown on the chart at the right.
After the Federal Reserve alleviated the short squeeze through dollar forex swaps "The Fed's Currency Swaps" with the central banks in the affected regions, the dollar squeeze dissipated and the dollar fairly quickly resumed its downward trend. There is a case to be made that some of the big US money center banks were using the dollar shortage to reap windfall profits, but this could have also been a side effect of the seizing in the short term credit markets.
But much of the European outrage, as least, was in feeling that they had been 'set up' by the very banks that had sold them the foully rated instruments in the first place. A classic face ripping, as they say at Wall and Broad. And this similar to the reason is why the Chinese government declared that its own institutions could walk away from derivatives arrangements that had been sold to them by the Wall Street wiseguys under false pretenses. US towns and states are not so fortunate it appears.
What does this mean? It implies rather strongly that those looking for a repeat of the sharp dollar rally from last year are very likely to be sadly disappointed.
This was no flight to safety; this was the consequence of a massive fraud in dollar denominated financial assets having been sold to gullible foreign investors and their banks. Note too that the eurodollar positions do NOT account for the dollar rally in 2006. This is what was expected, because there was no corresponding spike in LIBOR to indicate a squeeze. Rather, that earlier dollar rally was due to foreign investment in US equities and financial assets at the height of the post tech crash Dollar Assets Bubble.
Here is a brief piece on The Backwardation in LIBOR and Its Divergence from Effective Fed Funds which shows the signs of the 'eurodollar squeeze' as opposed to net foreign investment in financial assets.
The foreign banks have now unwound a significant amount of the dodgy US dollar financial assets that caused the short squeeze through their fraudulent valuations.
Yes, there will be more rallies in the ongoing decline in the US dollar. There always are countertrends in every long term trend. This is how traders make and lose their gains, as the market makers skin them slowly but surely. We can only wonder for now how much money has come into the US equity and bond bubble in the past six months, and how much is leveraged via the dollar carry trade.
But we ought not to see such a large rally in the dollar again unless there is a precipitous decline in stocks that forces a painful unwinding of the dollar carry trade. Foreign banks ought to be on the lookout for this development, because it is in their regions that the short squeezes have most of their effect. The Fed is awash in dollars and does own a printing press, and is not afraid to use it.
And for those desperately waiting for a free ride and easy money from a synthetic dollar short on debt, they should be reminded that the chief monetarist himself, Milton Friedman, also reminded that "There Ain't No Such Thing As a Free Lunch."
Or more civilly perhaps, "even fraud has its limits in conferring more value upon that which has less."
The weekly chart on the US Dollar Index has rather awful technicals, as it has dropped to a recent low, and set the 'iron cross' in the moving averages that is generally the hallmark of a sustained decline.
There is a massive Head & Shoulders formation that *should* preclude a rally over 81 if it is working, limiting any gains to a further 'right shoulder.'
The ultimate objective of this formation remains 66 for this leg of the large formation.
It is difficult to square this with a technical outlook that includes a major decline in the US equity indices, since the pairs have been running inversely, that is, dollar down, and stocks up.
Anything is possible, especially when the governments are actively and aggressively 'tinkering' with the markets. It is possible that the Fed monetizes sufficiently to reinflate an equity bubble, essentially whoring out the Dollar and the real economy for the sake of the financial or FIRE sector.
