The Almighty Dollar
The US Dollar Index hit a 20-year high this week, crossing the 108 level on Monday, testing below support Tuesday morning, and rebounding back above that watershed level at Tuesday’s close.
Zooming out to look at monthly bars, we see the tremendous bull run in the dollar that began in June of 2021. Don’t be fooled by the apparent sideways movement in the first chart… those are 60-minute bars, and reflect the inevitable noise that arises in markets in the short run.
What we’re seeing with this remarkable dollar strength is having a profound impact on economies around the world. For products priced in dollars, the cost in local currencies is at record highs, making it very difficult if not impossible to conduct business. These producers raise prices in turn, leading to inflation as a global phenomenon.
Take Argentina for example.
BUENOS AIRES, July 9 (Reuters) – Argentine President Alberto Fernandez called for unity on Saturday as protesters marched in the capital to the gates of the presidential palace, lambasting his government over soaring inflation and a crushing national debt.
According to Reuters, the rolling 12-month inflation rate ticked up to 60.7% in May while prices year-to-date were up 29.3%, Argentina’s INDEC statistics agency said. This inflation is attributed to monetary expansion, of course, which is a massive problem around the world. As the money supply expands, more money chasing the same amount of goods drives prices up. But this is now exacerbated by the strong dollar, and the global economy is starting to break as a result.
This inflation is attributed to monetary expansion, of course, which is a massive problem around the world. As the money supply expands, more money chasing the same amount of goods drives prices up. But this is now exacerbated by the strong dollar, and the global economy is starting to break as a result.
George Gammon illustrates how the soaring dollar will spark a global economic crisis on his Rebel Capitalist YouTube channel. Watch it here. This is an important video for macro-driven investors and traders, and well worth the time invested (it’s a 30-minute video, but you can view it on 2x speed!)
Is This Good News?
As the dollar continues to rise, there has been an offset in commodity prices. This chart from Market Ear shows the dollar index inverted (that is, showing the opposite directional move to actual prices) against the Bloomberg commodities index, which has declined sharply since March.
Why do commodity prices fall when the dollar rises? This question is discussed in detail here. Briefly, it’s because increases in the value of the dollar means dollar-priced commodities get more expensive. This reduces demand, creating an offsetting price decline. In addition, the higher dollar slows economic growth in other countries (as described above), and this slowdown also leads to reduced demand and economic slowdown.
On the other hand, foreign produced commodities priced in U.S. dollars also become more expensive. When raw material prices rise, once again, demand tends to fall. So what we are seeing is the soaring dollar is bringing commodity prices down.
Which should be a good thing, right? Doesn’t this mean a reduction in inflationary pressures? Well, yes and no. For one thing, oil prices remain stubbornly high. Although off the high of around $120 earlier in the year, Crude Oil is still trading close to $100 a barrel (actually down to $95 at market close on Tuesday). As long as oil is still relatively expensive, economic costs remain high throughout the economy. Alongside record-high money supply, oil at this price level remains very inflationary. (For perspective, here’s a 10-year chart for Crude. Notice that we are at decade-long highs, even with the recent selloff.)
This brings us back to the tight wire act currently being performed by the Fed. Back in January we observed the Fed is caught between a rock and a hard place, needing to raise interest rates to rein in inflation, but aware that increasing rates too much or too fast could tank not only the stock market, but – much worse, from their point of view – the bond markets.
So far, the Fed’s rate hikes have been successful. The air is slowly escaping the stock market bubble, the bond market is holding its ground, and there are indications that inflation – at least by official measures – may be slowing. Like a skydiver experiencing a disastrous jump, the Fed and the Biden administration might be saying, “Well, everything’s okay so far…”
The problem is that the structural issues underpinning the Crisis of ’22 are not being addressed at all. In the next few weeks, Market Slice will revisit the continuing pandemic worries, supply chain breakdowns, food and energy shortages, unrelenting debt burdens, and ongoing geopolitical crises that continue to threaten at any moment to tip over into full-blown catastrophe.
While the mainstream media and conventional investment advisors remain blissfully unconcerned about the devastating implications of these macro factors, smart investors and traders want to remain vigilantly attentive to their portfolios, and the security of families and loved ones.
Nothing Up My Sleeve…
The big debate among market watchers this week is whether this is the bottom of the stock market tumble and the crypto crash — and the top of the inflation curve (so-called “peak inflation”) – or is it merely a temporary pause in a long-term bear market and stagflationary recession. The only reason this conversation is even taking place, is because the markets are being so manipulated that there is no authentic price discovery in any market. Some respected analysts contend the tide has already turned, and we are now heading into a deflationary cycle, where energy prices will regress to the mean, consumer spending will slow, and we will see a recession more along classic lines.
For example, Chris Vermeulen of The Technical Trader published an article last week contending that oil is going to $55 a barrel, and the Fed may in fact have “broken the back of inflation.” While this scenario is possible, our issue with Mr. Vermeulen’s approach is that it does not take into consideration the kind of inputs we raise every week in Market Slice.
It’s one thing to look at the charts and say, “here’s what I see.’ Vermeulen is one of the best at that… and we’ve referenced his research here more than once. But what’s missing from this view is any accounting for the unseen machinations of the Fed, market actors like Black Rock and JP Morgan, and the big banks at home and abroad. Just like in 2008, we are now seeing signs of market dysfunction being swept under the rug by these manipulators and their media sock puppets. The parallels with the collapse of Lehman Bros. et al are unmistakable. Investors who ignore these flashing warning signs are putting their next eggs at risk.
For a comprehensive analysis of how the gold market, specifically, is being manipulated – and how the jig is inevitably going to be up, maybe sooner than later – read this article from GoldSwitzerland.com’s Matthew Piepenburg. The market manipulators have been deferring their day of reckoning by unprincipled means ever since the Global Financial Crisis. We agree with Mr. Piepenburg that this scam is about to run out of gas. After all, you can only pull a rabbit out of a hat so many times. Sooner or later, you gotta get a new hat.