“Our indicators tell us, we’re very close to a Lehman-like drawdown,” argues Larry McDonald, a former strategist at Société Générale who now runs The Bear Traps report.
Financial Times, February 20, 2020
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It’s Time for Thought Leadership on the US Dollar
Updated Friday, July 31, 2020, at 4:30 pm ET.
Commodities: Month over Month
The weak dollar has been commodities’ best friend over the last month. Late Friday CFTC data shows, short bets on the U.S. dollar are now the HIGHEST since 2011. *UNITED STATES OUTLOOK REVISED TO NEGATIVE FROM STABLE BY FITCH. *THE DOLLAR IS ON TRACK TO POST ITS BIGGEST MONTHLY DROP IN A DECADE (Bloomberg headlines, not ours).
World’s Reserve Currency?
Looking down the road ahead, the best way to dig into the most telling questions is to simply ask them. So here we go. Is the U.S. dollar on the road to losing its “World’s Reserve Currency” status? It’s time for thought leadership on the greenback. This narrative is getting louder by the week, we must listen. First, the VERY fact that we’re asking these questions below in this matter, speaks to just how oversold the greenback is.
How Oversold is the USD?
Dollar bulls have run for the hills at the second most fierce pace in the last seven years. See our bullish view on the metals sector here.
Fifteen Questions for the US Dollar
USA’s banking system, economy, and foreign policy are based on the US dollar’s reserve currency status. 1) What are the odds of the US dollar losing its reserve currency status? 2) If it were to happen, what are the ways it could happen? 3) If it happened, how exactly would the US banking system be hurt? 4) What industries would be hurt the most? How would it impact the overall US economy? 5) How would it weaken our ability to achieve our foreign policy goals? 6) On the other hand, how would it hurt China’s export economy and banking system and Belt and Road global domination policy? 7) Is the best way to crush China’s plan for global dominance to crush the dollar? (making china exports to the USA a lot more expensive) 8) Does a blasted dollar make foreign governments more dependent on US military hardware as it becomes cheaper in local currencies? 9) Does the benefit to US exports of hard goods generally outweigh the lowering of foreign demand for US financial assets? 10) Is it possible to have an export boom and a weaker financial system? 11) Does the rise in exports help the banks weather the US dollar no longer being the world’s reserve currency? 12) Does the loss of the US dollar’s reserve currency status not merely hurt the US economy in short term transition but save it in new long term stability? 13) Is a US dollar reserve status even a good idea for global long term stability, short term transition pain aside? 14) How much does a weak dollar feed positive economic activity globally, and what’s the positive feedback to the USA supporting US exports? 15) How much does the Fed want a weaker dollar? They turned every world government bond market into USD to prove that (see aggressive use of swap lines).
In the US, fiscal stimulus was supposed to struggle to cap the revenue drop caused by the unprecedented nature of this crisis. To an extent, it has, but what this narrative missed in a distributional sense is, the policy response to deflationary shocks has changed. The government sends out money and the central bank does open-ended QE. Does this mean future growth is promised, no, but it does change the recession landscape in terms of size and duration? Long-drawn out deflationary episodes have to be repriced as we seem to have a better recipe for dealing with them as opposed to 2008.
The Global Wrecking Ball Arrested
1. March – April: Fed expands repo / swap lines, attempts to arrest the global wrecking ball, which is the US Dollar.
2. DXY Dollar index historic plunge, free’s up financial conditions globally.
3. The Rest of the World (RoW) economies get a boost.
Dollar credit to non-bank borrowers outside the US rose to $12.6 trillion at end-March 2020. Bank loans grew at their fastest in 5 years and debt securities issuance stayed high amid COVID, BIS data. The component of this credit directed to emerging market and developing economies (EMDEs) expanded at an annual rate of 6% (reaching $3.9 trillion)
Global Dollar Funding Winners – Transports
Looking back at the last 5 years’ price action in the US dollar – it’s another example of the enormous power the Fed has over the global economy. How was the Fed going to downstream dollars to EM corporates and Asian non-banks, two huge users of dollar funding? And then from there, was there really going to be a change in global growth composition that would change the world of US asset outperformance continuing in perpetuity? Would previously frugal surplus countries step up with ambitious fiscal plans that would not only plug the COVID hole but transcend the current crisis and serve as an economic accelerant going forward? The immediate answer to a lot of these questions was, the most probable outcome is no, but the market traded the skew and that’s where we are today.
DXY Dollar Index Parallelogram
A clear down parallelogram was formed as a result of March high into the June low. Subsequently, it broke through the bottom line of the parallelogram, which sets up an early resolution, i.e. it sets up an early test of the apex price point. If that fails, it is in free fall.