Prechter: “We Are On Schedule for a Very, Very Long Bear Market”

May 20, 2010 · Posted in Investing · 2 Comments

The global selloff in stocks accelerated Thursday, sending the Dow down 3.6% to 10,068 while the S&P 500 lost 3.9% to 1,071.59 and the Nasdaq shed 4.1% to 2,204.

All major U.S. averages are now down for the year and at least 10% below their 2010 highs, meaning the downturn has officially entered “correction” territory.

Unfortunately (for bulls), there’s much more selling ahead, according to Robert Prechter, president of Elliott Wave International and author of Conquer the Crash.

“We should be in for [another] week or two of pretty serious selling,” Prechter says. “They’ll be bounces along the way…but I think this should last a long time. We should be on schedule for a very, very long bear market period.”

In the near-term, the veteran market watcher predicts a “dramatic increase in volatility,” beyond what’s already occurred. The CBOE Volatility Index (VIX) rose another 30% today and is now up about 180% from its late April lows.

Notably, today’s selling occurred despite a rally in the euro amid reports of central bank intervention. Joe Brusuelas of Brusuelas Analytics says, “The capitulation in today’s market has more to do with the unwinding of the easy money [carry] trade on commodities,” which fell again today, with notable weakness in energy and palladium.

Meanwhile, Treasury prices continued to benefit from the “risk aversion” trade with the yield on the benchmark 10-year note falling to 3.21%.

Broken Record or Market Sage?

Other than to say “a long way down,” Prechter wouldn’t say how much further he thinks the market will fall, suggesting a repeat of the 1930-32 scenario when “extremely sharp rallies” kept investors interested and “feeling like a bottom [was] forming.”

Anyone familiar with Prechter knows he’s been predicting doom for a long time so it’s tempting to dismiss his latest warning – a veritable repeat of what he said here in February. But he’s not a perma-bear and did turn bullish ahead of the bottom in March 2009.

More dramatically, in 1978 he co-authored Elliott Wave Principle – Key To Market Behavior, which predicted a great bull market similar to the 1942-1966 rally. By his own admission, Prechter underestimated the extent of that historic rally, which ran from 1982-2000 and saw the Dow rise 1,500% from 777 to 11,723.

Prechter says the market has spent the past 10 years building a “major head and shoulders” top from those 2000 highs, even though they were exceeded in 2007. Ultimately, he expects a “corrective mode that’s going to retrace virtually the entire” 1982-2000 bull market.

“The best place for most people to be is in cash” and equivalents, he says. “You want maximum liquidity until this thing blows over.”

A long term outlook I posted a while back:

I have often compared the current situation in the US to Japan in the 90s. Indeed, a lot of the characteristics of the current contraction match what went on in Japan back then.

Since 1989, the Nikkei index has dropped from just below 40000 to now around 9000. It is conceivable that US stocks will see similar declines over the next decades, along with spectacular counter trend rallies from time to time.

Below I put together a chart that shows how the Nikkei has fared since the bust of the Japanese credit bubble in 89 vs. the development of equities in the US (S&P 500) since the bust of the US credit bubble in 2007:

As you can see, since the crash, both charts have behaved rather similar. Immediately after the crash, the Nikkei, too, staged a phenomenal 35% rally from around 20000 to around 27000. If US equities continue mimic the events two decades ago in Japan, it is indeed conceivable that we may see an S&P 500 in the 200s or 300s in ten years or so.

Obviously that bear rally went on for a lot longer than I expected in my chart above. But such differences won’t matter in the long run. What is important to grasp is that the days of long term rising stocks with the occasional and severe dips are over. We are now on the other side of the peak: A long term declining stock market, with the occasional and severe rallies in-between from time to time.

What I appreciate a lot about Prechter is his unusually long term look back and outlook on the market, and his in depth incorporation of social moods and their swings when it comes to understanding economic phenomena.

Tags: bear market, robert prechter

Market Meltdown – Deflation Trade is Back

May 6, 2010 · Posted in Investing · Comment

Many things are being said about today’s market plunge by over 1000 points at some point. I won’t delve into that, just how today’s action beautifully shows the general idea behind my long term view.

Dollar

I have been writing for a while now about my expectation of mid to long term strength in the Dollar:

August 2nd 2009 – US Dollar Looks Bullish Fundamentally & Technically

August 13th 2009 – 3% Bullish Sentiment on Dollar – Indication of a Coming Dollar Rally

December 9th 2009 – Has The Dollar Rally Started?

Here is the Dollar over the past months through today:

This Dollar rally is best explicable as a symptom of global de-leveraging alongside deflation in the US. As investments the world over are being unwound, a flight into the world’s reserve currency is inevitable.

Today’s gains in the Dollar index were around 1% overall. In particular the Euro took a significant beating over the ongoing monetary insanities perpetrated by the ECB. A Dollar rally is at the same time usually a very bearish sign for stocks. Today’s moves beautifully accentuated this correlation, in particular during the intraday spikes and corrections. The fact that the Dollar has been moving up together with stocks over the past months is to me just a sign of how severe a correction stocks are going to be in for sooner or later.

Gold

Global delevaraging is also bullish for gold. As I have said many times: During deflation cash is king. And gold is the king of all cash. This is counter-intuitive to many people because they throw gold in one bucket with all other soft commodities. But gold is a categorically different commodity. It serves virtually no industrial production, except for some negligible applications. It is a money commodity. Silver has some money characters, but also has quite a lot of industrial uses.

Thus I explained in August of last year when commenting on an article by James Kostohryz at Minianville:

I agree with his bullishness on the dollar. I don’t necessarily agree with his conclusions on gold. I think gold may actually do OK during a dollar rally. Maybe it will drop a little, maybe rise a little, but it will most definitely outstrip other commodities. In fact, I think a smarter play when betting on a dollar rally would be to short any other commodity BUT gold.

And how has gold done throughout the dollar rally? Here it is:

You see? The Dollar has risen to a new 12 months high over the past 6 months, during that time gold dropped for a little while, but has gained back all those losses and is now actually up on the net as flight to safety continues. Meanwhile most other commodities are actually down on the net over that time. That’s what I meant when I said what I said above in my comment.

Today in particular gold was up around 2% while all other commodities got clobbered.

Treasurys

As a corollary of Dollar strength one can expect the prices of Treasury notes, pretty safe claims to Dollars at interest, and bonds to rise and thus their rates to fall. I have been arguing for a while that over time treasury rates will fall, but with quite some noise inbetween, sparked by false inflation fears:

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Treasury rates have been moving pretty much up and down and are actually still a bit up from when the rally started, but one thing I just wanted to point out is the strong move today in long term treasury instruments, alongside a strengthening Dollar and strong gold, see Mish:

Yield Curve as of 2010-05-06 3:15PM EST

Bullish Flattening of Yield Curve

That chart shows a bullish flattening of the yield curve as I expected. Those expecting a bearish flattening (yields rising) got their clocks cleaned today as treasury bears were slaughtered.

What’s next?

… we shall see. I certainly expect this global sovereign debt contagion to spread rapidly and exert its effects, among other things. I would be rather surprised if US equities could somehow decouple from this avalanche. Personally I still think that a healthy mix of gold, Dollars, and Treasurys is the right recipe to protect one’s wealth in these turbulent times.

One should not think that I am suggesting that the US is immune against sovereign debt problems. The public debt in this country is crushing as well, I just think that before the US defaults outright on its Treasury bonds many much more serious things would need to happen. One thing you can be sure of: The US government will continue to raise taxes should there ever be doubts about its ability in servicing the public debt, and it will probably do so quite a few more times before the people would be ready and willing to do more than hang a few teabags on their ears, grab signs, and protest before Congress to express their inconsequential anger.

Tags: dollar, gold, treasury yields

Has The Dollar Rally Started?

December 18, 2009 · Posted in Investing · Comment

The rally of the US Dollar vs. other major currencies is something that I have been expecting for a while now. The dollar made some bold moves recently. It is conceivable that this may be the kick off to that said rally. Just as an example, below see the Euro/Dollar chart:

The upward trend in the Euro since March seems to have begun reversing. Dollar perma-bears will look at this as just another temporary counter trend move. I believe that it is possible that a longer term Dollar rally is quite conceivable, for all the reasons I stated again and again and that I will not delve into here again. You can read the “Related Posts” below if you like.

Daily FX writes US Dollar Closer to Beginning, Rather than End, of Bull Move:

This is the same chart that was published yesterday. I wrote then that “the clearest portion of the decline is the initial decline that ends at 14670. Since then, price has stair stepped lower in what could be the beginning of a 3rd wave. Staying below 14785 keeps this extremely bearish count on track. A loose target is 14000, which is the 161.8% extension of wave 1.” This analysis remains on track. Risk can be moved to 14600 and resistance is 14420-50.

Sometimes Mish tends to have the amazing tendency to call certain trend reversals almost exactly on the day of the peak/low. This is him on Nov 27: New Record Low Yield On Two Year Treasuries; Is This The Start Of A Dollar Rally?

Given the US markets were closed yesterday, I have the same question floating in my mind as a day ago, wondering if this is another one day wonder rally in the dollar (and another one day wonder selloff in equities) or if this is the start of a long awaited correction in both the dollar and equities.

A significant Dollar rally is, at the same time, very bullish for Treasurys and and very bearish for stocks. Gold may continue to do fine. Time will tell …

Tags: dollar, dollar rally, us dollar

Confusion Over Gold and Treasury Yields

October 8, 2009 · Posted in Investing · Comment

The following article from Marketwatch is a perfect example of how confused market participants are about the recent and current action in gold and Treasury yields:

Gold and bonds do not usually go up or down together.

But try telling that to the markets over the last two months.

Since early August, in fact, gold bullion has risen by around 10% and the Treasury’s 10-year yield, which moves inversely with Treasury prices, has fallen by nearly 15%.

These moves are substantial, in other words, and more than just day-to-day noise in the data.

What’s going on?

Consider first why gold is so strong, reaching a new all-time high this week. One explanation is that this has been caused by a weaker U.S. dollar on the foreign exchange markets. This is certainly plausible, since the dollar has been very weak lately.

Another plausible explanation for gold’s strength is that it is discounting higher inflation in coming months and years. And it is indeed hard to imagine that the trillions of dollars that the world’s central banks have injected into the financial system won’t eventually have an impact on the inflation rate.

Credible as these explanations are, however, they are hard to square with strength in U.S. Treasury securities. A weaker dollar, of course, puts more pressure on the Federal Reserve to raise rates, which would in turn cause Treasury prices to fall, not rise. The same outcome would presumably result from higher inflation, too.

We reach a similar impasse when we consider why Treasury prices have been so strong. The standard explanation is that they are discounting a weaker-than-expected economy and/or deflation, which will cause rates to stay low. But those are hardly the preconditions of a gold bull market.

Either way you look at it, then, we come to the same conclusion: Recent trends are unsustainable. Something’s got to give.

Which will it be?

Several factors are pointing to the bond market as being the more vulnerable right now:

The stock market has also performed well of late, and equities would not thrive if the economy were weaker than expected or if deflation were a bigger-than-expected threat. So, in essence, the stock market is betting that gold is right and bonds are wrong.

Bond market sentiment is at near-record levels of bullishness right now, and (according to contrarians) the consensus is rarely right. ( Read my September 15 column on bond market sentiment.)

Sentiment among gold timers is remarkably restrained, if not outright gloomy, suggesting that there is a strong “wall of worry” for a bull market in gold to continue climbing. ( Read my October 6 column on gold market sentiment.)

The bottom line?

Don’t be surprised if the bond market over the next several months is markedly weaker than gold.

All this confusion regarding gold stems from one false pretense: that gold is an inflation hedge. It is not. Gold and Treasury Notes/Bonds are, as opposed to almost all other assets, up from October 07 levels for the exact opposite reason, deflation.

Read what I have written before, for example in Gold, Silver, Treasurys – A Snapshot.

Monetary commodities, such as gold and silver should act well during a deflation. Why? Because during deflation cash is king. And gold is the king of all cash.
…

Treasury Notes and Bonds are the ultimate deflation investment. Why? Because during deflation cash is king. And Treasury securities are the safest possible claim to cash at interest. Why? Because the government can always (and will) tax and loot the people to the hill to pay off its debts if it needs to.

Read the whole article, look at the predictions I made in there and look where we are today in terms of gold, silver, and Treasury yields. Market data can only be interpreted, understood, and predicted, when you have a sound economic footing to stand on.

I would like to ask the author: What if in addition to falling yields and rising gold prices, the dollar were to start rallying? How confused would he be then?

Tags: gold, treasury yields

Corporate Bond Yields – Where to From Here?

September 11, 2009 · Posted in Investing · Comment

Mish points out accurately that corporate bond yield spreads from Treasury yields are a good indicator where stocks are headed:

Keep an Eye on Bonds!

As long as corporate bonds fetch a good bid, which in turn allows companies to raise cash at decreasing costs, the stock market is likely to be reasonably firm. Note that the pullback in junk bonds began 3 days ago on that last red candle.

I am skeptical the rally in bonds can last much longer, but until the corporate bond market starts showing increased signs of stress, equity bears expecting huge pullbacks are likely to be disappointed.

Either way, it will pay to keep one eye on the credit markets to help ascertain long-term equity direction. In August of 2007 the corporate bond market cracked wide open. Although the S&P 500 made a new high in November, the corporate bond market didn’t. It was the mother of all warning calls that most missed.

I prepared a chart that compares Treasury note prices (IEF, blue), corporate bond prices (HYG, red), and the S&P 500 (green), since October 2007:

Click on image to enlarge.

The question is where are corporate yields headed and where are Treasury yields headed. So long as the spreads remain flat or continue to narrow, stocks will probably move sideways or spike up a little more. But as we can see in the chart above, it looks like they are very slowly beginning to widen again. It’s too early though to identify a clear direction at the moment.

News like this certainly won’t bode well for the bond market and will continue to apply downward pressure to corporate bonds, and thus upward pressure on spreads:

The number of U.S. companies that have defaulted on their debt this year rose to 12.2% in August, matching a peak last touched in 1991, Moody’s Investors Service said in a report Wednesday. The default rate is expected to rise to 13.2% in the fourth quarter, then drop to 4.1% a year from now, analysts said. A key part of that forecast is that U.S. unemployment will peak at 10% in 2010, said Moody’s Kenneth Emery. On Friday, the Labor Department said the jobless rate reached 9.7% in August. “If the U.S. unemployment rate were to increase substantially above 10% in the coming year, then default rates would likely be significantly higher than indicated under the model’s baseline scenario,” Emery said.

Here is a nice straight resistance line that corporate bonds are testing right now:

HYG Chart:

The downward trend since October 2007 continues to hold up.

Meanwhile, the exact opposite holds true for Treasurys:

IEF Chart:

… bottom line: keep an eye on corporate vs. Treasury yields.

Tags: corporate binds, corporate bond spreads, treasury yields

Gold Breaking Out – Ready to Reach for New Highs?

September 2, 2009 · Posted in Investing · Comment

Action in Gold

There was some noticeable action in gold today. Some say it is just another irrelevant noise, others are calling for new highs.

I have been saying for quite a while that I think gold will do well as soon as people return to the world of reality, and deflation, deleveraging, and credit contraction show their impacts on the markets once again. Whether we are headed that way now or later is still open, but I happen to believe that we are approaching a turnaround.

The action in GLD today makes a breakout a possibility:

Click on image to enlarge.

The HUI index continues to hold the line, the upward move I expected in July did occur, and it also happens to have initiated a breakout out of a triangle now:

Click on image to enlarge.

If the stock market rally is over, and stocks and other commodities are headed for new lows, I expect gold and gold mining to do well. If it is not that time yet, then today’s action may indeed just have been irrelevant noise.

Treasurys

… and what is a well thought out deflation trade without considering Treasury Notes/Bonds. I have been following the trading range in Treasurys for quite a while now and everything has played out as expected so far.

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Today’s action in gold was beautifully complemented by corresponding action in Treasury yields which dropped by 8 basis points to close at 3.29%, a recent July low. If it breaks, the way down is more or less open:

Click on image to enlarge.

Again, all this ultimately depends on fundamentals. Just as gold, Treasurys will only continue to rally when stocks fall. In addition to that, the dollar rally I am expecting would need to start playing out in order to complete the deflation trade.

Tags: gld, gold, hui

Baltic Dry Shipping Index Drops to 3 Month Low

August 21, 2009 · Posted in Investing · 6 Comments

Today the Baltic Dry Shipping Index dropped to a 3 month low:

This certainly does not bode well for commodity bulls. On a related note, please consider Commodities Poised to Crash Again Soon?.

Tags: baltic dry index, baltic dry shipping index, commodities

Long Term Treasury Securities – Foreign Demand Rises

August 17, 2009 · Posted in Investing · Comment

As deflation continues to run its course, debt destruction goes on, and people seek save haven investments Foreign demand for long-term US securities rises:

Foreign demand for long-term U.S. financial assets rebounded in June even though China and Russia trimmed their holdings.

The Treasury Department said Monday that foreigners purchased $90.7 billion more in long-term U.S. securities than they sold in June. That’s a significant rebound from May when they sold $19.4 billion more than they purchased.

“There is little evidence in recent (Treasury) reports to suggest that foreign investors are growing weary of buying U.S. securities,” Jay Bryson, a global economist at Wells Fargo Securities, wrote in a note to clients. The increased appetite for Treasury securities was partly because their yields rose in early June, he added.

The Treasury is auctioning record amounts of debt to cover what it estimates will be a $1.85 trillion budget deficit this year. If overseas buyers don’t continue purchasing U.S. debt, some economists worry that would mean falling demand at Treasury debt auctions and rising interest rates.

China, the largest foreign holder of U.S. Treasury securities, trimmed its holdings, to $776.4 billion in June from $801.5 billion in May. Russia also reduced its holdings 3.7 percent to $119.9 billion in June.

China’s holdings are a direct result of the huge trade deficits the U.S. runs with the emerging Asian power. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities.

American manufacturers argue that gives China unfair trade advantages by keeping the dollar overvalued against the Chinese currency, which makes U.S. goods more expensive for Chinese consumers and Chinese products cheaper here.

Both the Bush and Obama administrations have argued that China should allow its currency to rise faster in value against the dollar, but the yuan has stopped appreciating against the dollar in recent months.

Japan, the second largest holder of U.S. Treasury securities, increased its holdings 5.1 percent to $711.8 billion in June. And the United Kingdom, the third largest holder of Treasuries, increased its holdings nearly 31 percent to $214 billion.

Foreign governments purchased $22.5 billion of Treasury bonds and notes, the department said, after selling $21.8 billion in May. Overseas governments sold $5.9 billion in bonds issued by mortgage giants Fannie Mae, Freddie Mac and other government agencies.

Private foreign investors purchased $78 billion in Treasury bonds and notes in June, the department said, up from sales of $800 million in May.

Today yields on ten year notes are currently at 3.49 percent. I am still as bullish as I have been before on Treasury Notes and Bonds:

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Just recently someone commented as a response to my post on consumer prices:

Bullish long term treasuries?

If so, I think your arguments should directly go to the trash.

Even though private lending is not increasing, it is currently being replaced by government debt or money. Yes stocks are risky, but the dollar is even riskier.

Maybe I am wrong and there is a flaw in my thinking. If so, then nobody has successfully pointed it out yet. Statements like the above reflect the commonly spread notions of the public who does not like to bother with details and easily falls for simple platitudes. This just reaffirms my beliefs. But we shall let reality be the final arbiter. I believe that Treasury yields are headed lower for the remainder of this year.

As far as my thoughts on the Yuan:

In 2005 the Chinese government ended the peg against the US dollar and switched over to a currency basket. From 2005 though June 2008, the value of one Dollar dropped from RMB 8.28 in 2005 to about RMB 6.83 by June 2008.

Since then, it seems, the fall of the dollar has stopped and the Yuan/Dollar exchange rate remained suspiciously stable. This has gone on through right now. The chart below illustrates this:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Tags: long term treasury securities, treasury bonds, treasury notes, treasury rally

World Stocks Tumble; US Futures Down Over 2 Percent; Brace for a Stormy Week

August 17, 2009 · Posted in Investing · Comment

Tonight, news are coming in from across the world about collapsing stock markets:
- The Nikkei is currently down 3.1%
- The Hang Seng is down 3.6%
- The DAX is down 1.9%

US Futures are pointing down big time:
- The S&P500 Future is down 1.9%
- The Dow Jones Future is down 1.7%

Most of the fantasy news that suggested speedy recovery, stabilizing home prices, and a return to US consumer behavior as we know it have been depleted. There is, on the other hand, lots of terrible news to come. From industry data, to a potential insolvency of the FDIC and an ensuing request for another $100 billion from the taxpayer, this week will certainly be a turbulent and volatile one.

Tags: down jones futures, global stock markets, s&p 500 futures

US Dollar Looks Bullish Fundamentally & Technically

August 2, 2009 · Posted in Investing · Comment

Mish writes Ewave Count on the US Dollar Suggests Move Up is Coming:

US Dollar Weekly Chart

I have been following the above chart for some time and a few weeks ago emailed a friend “There is room for one more wave down”. And so here we are.

But hold your horses. Wave 5’s can truncate or extend. That is why I have two “?” on the chart. Either way, the count appears corrective and there should be another relatively strong wave (of some sort) back up once wave 5 down has finished.

Right now, should the weekly candle continue up and solidly break the trendline, it would be suggestive that wave 5 is over.

This is very significant given the fact that the US$ is typically inversely correlated with the S&P 500 as well as commodities. So rather than focusing on the S&P 500 “jello” counts directly, one is likely better off following the US$.

Bear in mind, the primary focus of technical analysis in general is not predictive capability, but rather to find spots where one can initiate a trade with a stop loss relatively close by. In that regard, the solid trendline above is the place to watch.

Daneric’s Elliott Waves

I am not the only one to come up with that US dollar count. Dan at Daneric’s Elliott Waves sent me the same, but far more detailed, count a few days ago (click on above link to see).

Since then I have been following his site and I can easily say he knows far more about Ewave than I do. What I really like are his “no nonsense” comments such as:

PS – I don’t really pay attention to what EWI has as a $ count. This chart I just made up tonight completely on my own. It seemed easy enough to count and the chart generally took less than 30 minutes to complete.

PSS – There is a great positive divergence on the RSI. So indeed it may turn back up hard soon enough. Its hard to say exactly how the micro waves will trace over the next month. But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume.The trouble most people get into with Ewave is coming up with a thesis, then struggling to find a count that will fit it. Given Ewave is rather subjective, that is an easy trap to fall into.

Daneric said “the chart generally took less than 30 minutes to complete”.

That is the way it should be. I do not want to spend 4 hours plotting alternatives when all they do is say where we have been, not where we are going, only to be subjected to a barrage of 200 emails all telling me why my count is wrong.

By the way, it only took me 5 minutes to do my chart but then again I only labeled a portion of the chart, a practice I do not recommend because it can cause problems.

Please note Daneric’s comment “But make no mistake, I think this chart portends the dollar will make great advances upward contrary to what most people assume.”

That is quite consistent with my long-term belief the US dollar is in a wide trading range and is not about to collapse (because it already has and every county is embarking on beggar-thy-neighbor competitive currency debasement policies).

The key is neither one of us is forcing a count to appease that belief.

I wrote about the fundamentals recently in China Pegging Yuan to US Dollar Again:

From June 1995 through the beginning of 2005, the Chinese government was pegging its Currency to the US Dollar. It was producing money (Yuans) to purchase Dollars, fostering a US current account deficit.

In 2005 the Chinese government ended the peg against the US dollar and switched over to a currency basket. From 2005 though June 2008, the value of one Dollar dropped from RMB 8.28 in 2005 to about RMB 6.83 by June 2008.

Since then, it seems, the fall of the dollar has stopped and the Yuan/Dollar exchange rate remained suspiciously stable. This has gone on through right now. The chart below illustrates this:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.