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Wednesday, August 12, 2009

USDX Count Update and Thoughts

I wrote a new post on the US Dollar that expresses all the opinions here with updated counts at: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog

I was asked earlier about my thoughts on the US Dollar because Robert Prechter was interviewed recently talking about a major bottom in the US Dollar and deflation. I will agree that we made a bottom in the dollar recently, but I think the qualifier "major" is up for interpretation.

Short term is all noise. And the current dollar weakness is fueling the equity rally. Long term, equities will go down (due to poor fundamentals) and the dollar will go down (due to confidence crisis) together (such as 2007-2008 and numerous other occasions)

edit 8/23/09 - 11:15 - added long term correlation chart

I could spend pages and pages right here talking about why I think the dollar is not strong, why I don't think the ultimate outcome is deflationary. In fact I am really fighting the urge not to. But I have dedicated a whole other blog post to this issue, which I wrote on June 17: Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog. Before proceeding any further or interpreting these charts, please read this post first.

Here are the charts from this post - from June 17. Please read the post first! An updated chart and thoughts will follow:

So some more recent thoughts why I am long term bearish on the dollar (besides the ones found in this post):

1. GDP is fake. All consumer based GDP components are dropping drastically. All production based growth is anemic / slightly negative. And the biggest growth portion is the government.

We are deficit spending (and devaluing the dollar) on non-productive GDP growth just to make GDP look "not as bad as it really is".

2. Treasury auctions are so much worse that most people imagine. The Fed is now buying a *HUGE* portion (like 50%) of the latest treasury auctions.

They are hell-bent on keeping interest rates low at the direct expense to the value of the dollar.

And yes, while I realize that the US is not the only one doing this, no other central bank is even close to the magnitude that Fed is engaging in debt monetization.

So in terms of a bottom, yes I think we have a "temporary" bottom (for a couple of months). I think wave 1 (gray scale) is complete and we will be into a correction up (bullish for the US Dollar) for the next few months while it completes a 2 (gray scale). But I think this setups up a Head and Shoulders. However H&S or no, my preferred count is still bearish on the dollar long term.

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