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Trading Lessons

Preparing for The Big One - U.S. Dollar Revolt

Stock-Markets / Fiat Currency Oct 12, 2013 - 02:41 AM GMT

By: DeepCaster_LLC

Stock-Markets

”Federal Reserve Chairman Ben S. Bernanke has been tap dancing on a land mine since 2008.  He has avoided detonating an intensified banking-system crisis, so far, but the cost has been that of locking the Fed into near-perpetual quantitative easing and monetization of U.S. Treasury debt, with horrendous implications for future domestic inflation and U.S. dollar debasement…. the Fed has locked itself into quantitative easing for some time to come, irrespective of any jawboning to the contrary….


“The longer-term U.S. sovereign solvency issues are the bane of the U.S. dollar and the global financial markets.  Unless these problems can be brought under credible control, those same global markets—soon and massively—will revolt against the U.S. dollar.”

“NO MORE TAP DANCING ON A LAND MINE; THE ADMINISTRATION PULLS OUT A COUPLE OF HAMMERS,” John Williams, Shadowstats.com, 10/10/2013

Indeed, global markets are already revolting against the $US. The End Game re. the $US is THE BIG ONE for which we aim to help Investors prepare.

The really BIG ONE announced October 10, 2013 was not the Republican Proposal to lift The Debt Ceiling for six weeks, though that was an important constructive step to attempt to resolve the Administration’s partial Government Shutdown.

THE BIG ONE was the European Central Bank’s agreement with the People’s Bank of China to establish bilateral Euro-Yuan Currency Swap arrangements, thus freezing the U.S. Dollar out of yet another Bilateral Sovereign Currency Swap Deal.

This will, sooner rather than later, have catastrophic impact on the International Financial System as John Williams points out.

“Beginning to play with hammers around a land mine, the President recently suggested that the financial markets should be concerned about the shutdown/debt-ceiling crisis.  Related comments from the Treasury Secretary suggest looming economic and financial Armageddon, in the event of a default on U.S. Treasury securities.  The push appears to be to frighten the markets enough, so as to pressure a resolution on the government shutdown and debt-ceiling issues, without those controlling the government having to address federal fiscal-policy issues, meaningfully. …

Instead, the increasingly clear message to the global markets is that the Administration will not take any meaningful action to address the long-term solvency issues of the United States. (emphasis added)

“Sovereign states that issue debt in the same currency they print rarely default, ….  Instead, they simply print the money needed to cover financial obligations that could not be covered otherwise with tax revenues, asset confiscations, etc.  The effect usually is full debasement of the currency, or hyperinflation.  Creditors get paid off, but with what has become a worthless currency.

“Indeed, ahead is currency debasement, eventually complete debasement of the U.S. dollar.  As the global markets increasingly absorb that reality, selling of the dollar against the currencies of major U.S. trading partners should become intense, with pressure for removal of the dollar as the global reserve currency becoming unstoppable.  Oil and other dollar-denominated commodity prices would rise sharply in dollar terms, fueling domestic U.S. inflation, despite a moribund economy.  In like manner, the dollar prices of precious metals—particularly gold and silver—would move on to ever-increasing historic highs, despite any efforts by central banks and related plunge-protection teams to contain those prices with jawboning and covert or overt physical intervention, in the markets.”

(Ibid.)

Before considering how Investors can Profit and Protect from this Impending Crisis, it is essential to consider why Fed QE/Stimulus policy (likely to continue under Chairman Yellen) not only will not cure the Economy’s ills but will only worsen Economic Prospects for the Middle Class and Working Poor around the World. It is this Majority to whom Fed Policy should (ethically and for the sake of a Healthy Economy) be directed, but it is not. It is their capacity to Work and Spend which is a Necessary Condition for Economic Health.

Consider the Wise Analysis of former Morgan Stanley Chairman, Stephen Roach

“…The Federal Reserve continues to cling to a destabilizing and ineffective strategy. By maintaining its policy of quantitative easing (QE) – which entails monthly purchases of long-term assets worth $85 billion – the Fed is courting an increasingly treacherous endgame at home and abroad….

“But there is an even more insidious problem brewing on the home front. With its benchmark lending rate at the zero-bound, the Fed has embraced a fundamentally different approach in attempting to guide the US economy. It has shifted its focus from the price of credit to influencing the credit cycle’s quantity dimension through the liquidity injections that quantitative easing requires. In doing so, the Fed is relying on the “wealth effect” – brought about largely by increasing equity and home prices – as its principal transmission mechanism for stabilization policy.

“There are serious problems with this approach. First, wealth effects are statistically small; most studies show that only about 3-5 cents of every dollar of asset appreciation eventually feeds through to higher personal consumption. As a result, outsize gains in asset markets – and the related risks of new bubbles – are needed to make a meaningful difference ….

“Second, wealth effects are maximized when debt service is minimized – that is, when interest expenses do not swallow the capital gains of asset appreciation. That provides the rationale for the Fed’s zero-interest-rate policy – but at the obvious cost of discriminating against savers, who lose any semblance of interest income.

“Third, and most important, wealth effects are for the wealthy. …

Fully 90.6% of US families in the highest decile of the income distribution owned stocks – double the 45% ownership share of the other 90%....

“The wealthiest 10% of the US income distribution benefit the most from the Fed’s liquidity injections into risky asset markets. And yet, despite the significant increases in asset values traceable to QE over the past several years – residential property as well as financial assets – there has been little to show for it in terms of a wealth-generated recovery in the US economy. …

“This underscores yet another of QE’s inherent contradictions: its transmission effects are narrow, while the problems it is supposed to address are broad. Wealth effects that benefit a small but extremely affluent slice of the US population have done little to provide meaningful relief for most American families, who remain squeezed by lingering balance-sheet problems, weak labor markets, and anemic income growth. …

“Lost in the angst over inequality is the critical role that central banks have played in exacerbating the problem. Yes, asset markets were initially ecstatic over the Fed’s decision this month not to scale back QE. The thrill, however, was lost on Main Street.

“As I wrote:

“Such stealth transfer of wealth enabled and facilitated by central bank policies are not only economically unsustainable, they are reprehensively immoral.

“Occupy QE,” Stephen Roach,

Project-Syndicate.org, 09/25/2013

Chairman Roach’s Analysis underscores the point John Williams, Deepcaster and other independent commentators have been making for months. Fed Policy is aimed at helping a select cohort of the Wealthy, the Mega Banks and Wealthy Individuals, and all The Fed “communications policy” Claptrap that their QE is designed to help the Economy is just Political Cover for their aforementioned Real Aim.

The Key Point for Investors is that the Flight from the $US is already occurring (latest evidence, The ECB – PBOC currency swap Agreement).

This flight has not been widely factored in to the Markets YET but a Harbinger has appeared in the form of the $US’s recently flirting with moving under 80 basis USDX.

Since a Conclusive Close under 78 would definitely Signal the $US rout had begun in earnest, Deepcaster keenly observes and regularly reports to Subscribers on prospective Triggers for such a Move thus providing Various Opportunities to Profit and Protect.

Generally, U.S. Dollar denominated assets are most vulnerable (and non-US$ denominated Assets which we identify are Not).

And Real (as opposed to Financial) Assets in Relatively Inelastic Demand are the least vulnerable in the mid and long term.

Of several such Real Assets which we periodically identify, Gold and Silver have the Most Upside Potential for Profit and Protection.

But these Precious Metals are also subject to Price Suppression by The Cartel (Note 1) which fears them because they are Real Money as opposed to their Fiat Paper Currencies and Treasury Securities.

But – a Word to the Wise Investor – Consider that the World’s largest Gold Producer, China, is also the largest Gold Importer.

And another larger Gold Producer, Russia, imported 12.7 tonnes of Gold in its most recently Reported Month.

And China and Russia are importing Physical Metal and not mainly relying on future delivery on some paper promise from a Gold ETF.

Indeed

…(The) Gold Price Could Double Overnight in U.S. Dollar Crisis

(Rickards) “envisages a series of ‘black swan’ events that trigger a loss of confidence in the US dollar precipitating a rush to get out of the greenback.”

“Gold Price Could Double Overnight in U.S. Dollar Crisis,” Jim Rickards,

etfdailynews.com, 10/10/2013

Deepcaster shall continue to watch and report on Harbingers and signals.

Best regards,

www.deepcaster.com

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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.

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