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Abridged from
the November edition of TRIGGER$
Since
September, the Currency Wars have escalated. It isn't just because of the
seminal monetary events of the Federal Reserve's QE III "unlimited"
and the ECB's OMT "Uncapped". It is highly likely, more about the
fact that China announced its eleventh agreement that effectively bypasses
using the US dollar with China's strategic trading partners. The latest
agreement with Russia places trading oil, in non-US dollars, into the
spotlight. The infamous petrodollar has had its destructive profile raised.
The Petrodollar
has long been the cornerstone that solidified the US dollar as the key
currency reserve holding. The Petrodollar strategy is arguably more important
that the Bretton Woods agreement which officially made the US dollar the
world's reserve currency at the end of WW II. This is now being called into
question. Minimally, it suggests a weakened requirement for holdings of the
current levels of US dollars in sovereign reserve accounts.
For the sake of
space I won't lay out all the details of this but instead refer you to two
recent video releases I have produced and participated in on the subject.
Ø Currency
Wars: The Failing Petro$$ Strategy - YouTube
Ø Triffin's Paradox & the Rule of Law - YouTube
What is
important to Traders is what it means to your trading strategy in the short
to intermediate term. To Investors it has profound longer term consequences.
To determine
short term effects, we first need to understand the relationship of the
Driver$ involved. The three critical currency relationships near term are the
US$, the € and the ¥. Then we need to understand how they will effect US Treasury yields.
First however
it is important to understand the controlling mechanism of global fiat
currencies.
THE $67 TRILLION SHADOW BANKING SYSTEM (The Fiat Currency Control Block)
The Global
Economy is approximately $70 Trillion. According to a just released report by the Financial Stability Authority (FSA),
charged with investigating it globally, the Global Shadow Banking System was
$67T in 2011.
It is up a
staggering $6T in 2011.
This means that
unofficial, unregulated, offshore entities now effectively control the
pricing of global fiat currencies. Through the $637 Trillion SWAP market
(also unregulated and offshore trading currency, interest & credit
default swaps) they in turn control global interest rates.
The major
currency domiciles within the Shadow Banking Industry. It's called absolute
control.
Ø ¥:
The Early December Japanese Election is likely to result in dramatically
increased BOJ Liquidity, Negative yields and the political process dictating
to the Bank of Japan in attempt to devalue the Yen for competitive trade
advantage as the Japanese trade balance worsens.
Ø $: A
political resolution to the Fiscal Cliff that results in a Credit Downgrade
of US Debt.
Ø €:
Though the € will rise relative to the dollar and Yen it is more about
the resumption of the Yen Carry Trade and a slowing of the "Flight to
Safety" Trade dominating the EU for months.
EURO:YEN
Consider first
the Euro : Yen Cross
 
The rising green arrow in the above graphic is more
about a planned and managed attempt at weakening the Yen than strength in the
Euro.
The YEN must be weakened as its strength is
crippling Japan's export economy.
The Yen will soon start weakening SIGNIFICANTLY
against the Euro
EURO: US$
EU-EURO SITUATIONAL ANALYSIS (charts below):
o The present strategy in
the EU is a "Political Union" and to change the treaty accord to
put EU "teeth" into countries having to take stronger actions to
bring their debt within EU targets. There is no solution given on how the EU
does this other than austerity, which almost assures economic weakness and
possible collapse going forward. Expect increasing broad based social unrest.
o The hidden and real
reason for this is to change the mandate of the European Central Bank (ECB)
to allow it to become the "lender of last resort". This is an euphemism for 'allowed to print money'. The mandate of
the ECB is different than the US Federal Reserve and the hidden agenda is to
change this.
o As we predicted in
previous reports, and is now showing signs of coming to fruition, we expect
Spain / Portugal & Italy to soon launch the next and more serious round
of the EU crisis. Keep your eye on France and other peripheral nations such
as Cyprus, the Netherlands. The fact Poland has deferred Eurozone entry is
very telling.
o The only solution for the
EU is the ECB monetizing money for funding bailouts. Draghi
began this process in September with OMT or SMT2 which is OPEN ended. Support in the German courts and by Merkel suggest the
Euro should strengthen somewhat in the near term. It will be more about the
YEN and US$ weakening than the Euro strengthening
YEN:US$
US DOLLAR
The final chart
show what in fact occurred over the last 30 days and what we presently
anticipate:
US TREASURY DEBT & FISCAL CLIFF
This chart shows what we presently anticipate . "THIS IS A MAJOR INFLECTION POINT.
Expect a correction and
consolidation."
REMEMBER:
Financial Repression is at work here and US Bond Yields and Interest Rates
MUST be further reduced.
We presently
expect the 10 Year US Treasury Bill to eventually break below 1% which
supports the potential target shown above & below.
THIS IS A WELL
MANAGED AND CONTROLLED REGRESSION CHANNEL
as the
developed world tries to rebalance within global imbalances.
CONCLUSIONS
The global
economy is near stall speed as the already attempted stimulus and monetary
policies have failed to deliver. The controllers of the fiat currency camp
(US, EU, Japan and UK) must therefore further lower REAL yields and extend
duration through central bank guarantees.
They will do
this in attempt to buy further time until the 'magical' recovery happens.
Frankly, the
politicos know of no other recourse despite it having already failed
continuously.
NIRP
Japan has just
completed its ninth Quantitative Easing and have
concluded ZIRP now needs to be NIRP (negative Interest Rate Policy). It is
highly probable that this will reignite the Yen Carry Trade and strengthen
the US$. In turn this will hurt equities and compress PE ratios further.
Expect violent
counter rallies as the right shoulder is put in, within a long term, 10 year
Head and Shoulders pattern.
Traders need to
carefully watch the US$, the € and the ¥. cross
relationships and credit spreads associated with US Treasury Yield curve and
High Yield (HY) "B" rated instruments.
Good luck, and good trading.
Gordon T. Long
Tipping Points
Mr. Long is a former senior
group executive with IBM & Motorola, a principle in a high tech public
start-up and founder of a private venture capital fund. He is presently
involved in private equity placements internationally along with proprietary
trading involving the development & application of Chaos Theory and
Mandelbrot Generator algorithms.
Gordon T
Long is not a registered advisor and does not give investment advice. His
comments are an expression of opinion only and should not be construed in any
manner whatsoever as recommendations to buy or sell a stock, option, future,
bond, commodity or any other financial instrument at any time. While he
believes his statements to be true, they always depend on the reliability of
his own credible sources. Of course, he recommends that you consult with a
qualified investment advisor, one licensed by appropriate regulatory agencies
in your legal jurisdiction, before making any investment decisions, and
barring that, you are encouraged to confirm the facts on your own before
making important investment commitments.
© Copyright 2010 Gordon T Long. The information herein
was obtained from sources which Mr. Long believes reliable, but he does not
guarantee its accuracy. None of the information, advertisements, website
links, or any opinions expressed constitutes a solicitation of the purchase
or sale of any securities or commodities. Please note that Mr. Long may
already have invested or may from time to time invest in securities that are
recommended or otherwise covered on this website. Mr. Long does not intend to
disclose the extent of any current holdings or future transactions with
respect to any particular security. You should consider this possibility
before investing in any security based upon statements and information
contained in any report, post, comment or recommendation you receive from
him.
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