Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Stock Market Increasing Technical Weakness - 22nd July 19
What Could The Next Gold Rally Look Like? - 22nd July 19
Stock Markets Setting Up For A Volatility Explosion – Are You Ready? - 22nd July 19
Anatomy of an Impulse Move in Gold and Silver Precious Metals - 22nd July 19
What you Really need to Know about the Stock Market - 22nd July 19
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

What Happens When a Carry Trade Blows Up?

Currencies / US Dollar Nov 23, 2009 - 03:43 PM GMT

By: Graham_Summers

Currencies

Best Financial Markets Analysis ArticleAs I’ve been pounding the table for the last several months, the markets have been operating based on an “inflation” trade mentality. By this, I mean that we’re in a “Dollar down/ everything else up” environment.

This is to be expected. Fed Chairman Ben Bernanke has been doing everything he can to re-inflate the markets, hoping he can counteract the deflationary impact of the Housing Crash/ Credit Bubble bursting.


To do this, he’s made the Dollar unattractive on a yield basis, cutting interest rates to between 0% and 0.25% (effectively making the Dollar have NO yield).   He’s also made the Dollar unattractive on a momentum basis by printing $900+ billion, expanding the Fed’s balance sheet from $800 billion to $2.2 trillion, and other anti-Dollar measures.

Consequently, the Dollar has become a MASSIVE carry trade, with virtually every bank/ financial institution in the world borrowing in Dollars and then funneling this “hot” money into the financial markets (stocks, commodities, gold, etc). Thus, we’ve seen a massive rise in stocks (blue), oil (black), and gold (gold), complimented by a disturbing drop in the US Dollar (green).

With so much of the financial markets’ action dictated by one trend (the Dollar’s collapse), the markets have begun operating on a beta rather than alpha basis. This means that picking out individual investments (individual stocks or companies) is FAR less significant than simply allocating your money into the right “sector” or “asset.”  Indeed, there have been very few times in history in which stock-picking has been LESS relevant to successful investing. After all, if the rate of return for simply investing in the NASDAQ is 70%+ since the March lows, why bother picking out an individual Tech companies to buy?

Thus, today we are in an environment in which the US Dollar is THE carry trade of the world. More than 90% of investors are bullish on stocks, more than 80% are bullish on Gold, and LESS than 3% a bullish on the Dollar.

Now, markets are a bit like boats: when everyone crowds over on one side, the likelihood of disaster increases dramatically. This is WHY you need to be paying EXTRA close attention to the US Dollar if you have any interest in preserving your gains and portfolio going forward.

Quietly, and with little fanfare, the US Dollar appears to be carving out a bottom, having bounced off a level of key support three times in the last month. With virtually the entire world betting on the Dollar dropping further, there is the potential for a MAJOR blow-up here.

Remember, it was only a little over one year ago that the Dollar began rallying kicking off a solvency crisis. The entire world had to cover their Dollar shorts, pushing the US currency higher and destroying stocks and commodities in a panic of deleveraging.

Could this happen again? ABSOLUTELY. I’ve been warning investors about the potential for this (and other black swan events) since July. In fact, the warning signs of this MAY already be showing up…

On Friday, the Intercontinental Exchange (IE) was hit with a MASSIVE short-covering on Dollar contracts. At one point there was a brief price spike of 9% (NOT A TYPO) in the Dollar’s DXY index. The IE actually SHUT TRADES DOWN and REFUSED to honor the outstanding contracts to deal with this.

Setting aside the facts that the IE clearly violated any principle of free markets (and screwed any contrarians who were smart enough to note the Dollar is due for a reversal), this episode stands as a HUGE warning signal to the world of what can happen if the Dollar carry trade blows up: a currency spike of 9% is the kind of thing that can trigger full blown systemic collapses.

Folks, we are in a very, VERY dangerous position right now. If the Dollar continues to strengthen we could have a full repeat of 2008 (last week’s plunge in the markets could be just the beginning). The Fed has done everything it can to devalue our currency (including the insanity of buying our OWN debt), but the Dollar has refused to completely tank.

If you think I’m insane for saying this, (the Dollar has lost 16% this year), remember that in 2008 the Dollar hit a 30-year low of 72. At that time, the Feds had only committed to a few bailouts (Bear Stearns, discussions of Fannie/ Freddie, etc).

In contrast, today the Feds have backstopped virtually the ENTIRE financial system AND engaged in massive Stimulus (ALL of this EXTREMELY Dollar negative) and YET the Dollar remains at 75 and change, a full 4% HIGHER than it was during the 2008 lows before the bailout insanity began.

In plain terms, it’s truly incredible that the Dollar hasn’t fallen further already. The fact that it hasn’t, combined with the numerous bounces we’ve seen in the US currency in the last month, is a SERIOUS sign of US Dollar strength. If the Dollar begins a REAL rally moving above its 50-day moving average (see the chart above) the entire inflation trade would blow up with stocks and commodities (potentially even gold) entering a free-fall.

I think the chances of this are actually pretty high. Which is why I’m already positioning readers for the coming storm with FREE Special Report detailing THREE investments that are set to explode when the next Crisis hits. I call it Financial Crisis “Round Two” Survival Kit. Not only can these investments help protect your portfolio from the coming carnage.. they can ALSO show you enormous profits: they returned 12%, 42%, and 153% last time stocks collapsed.

Swing by www.gainspainscapital.com/roundtwo.html to pick up a FREE copy today!

Good Investing!

Graham Summers

http://gainspainscapital.com

Graham Summers: Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. 

Graham also writes Private Wealth Advisory, a monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2009 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Graham Summers Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules