The Barbaric Bull’s Self-Feeding Dollar Loop (DXY, GDX)

In last week’s Bourbon and Bayonets we declared that the slide in the equity markets was over and all looked bright and breezy for the next leg of the bull market’s advance.

And we still believe that. The Dow popped above 17,000 again this week for the first time in almost a month, the NASDAQ Composite flew higher by more than 5.3% for its biggest weekly climb in 34 months, the S&P 500 is just a minute from regaining its former highs (less than 2% away) and the Dow Transports twice set new highs earlier this week.

Don’t blink here, friends. This is the ball game. It’s happening now. It’s a bull. Get on it.

ohlook

There’s very little left for investors to do at this point but climb aboard the greatest financial lie that has ever been perpetuated, ride it for as long as possible, and then abscond to the woods with whatever you can to wait out the storm.

It sounds mercenary, yes, but what’s the alternative?

You have a system that’s hell bent on its own destruction, owned and operated by folks who are suicidal in every respect, and, on their way out would be very pleased to take as many of our good souls with them as possible. It’s a system that cannot be re-engineered for the good without causing the selfsame result as what the inevitable breakdown will ultimately engender. So why even bother.

Yet at the same time, it also affords us one last opportunity to pull from it something of value… so that our tent in the woods, at the very least, remains free of leaks.

And that’s precisely why we’re here…

 

mcabby

Stay with us all year as we navigate the minefield that awaits. For this will be a year of war unlike any of us have ever known, and the greater part of the battle will be keeping your head while all about you are losing theirs AND BLAMING IT ON YOU.

Yes friends, despite our nutty appearance and unorthodox style, it’s precisely sanity that we offer in these letters, even as the sky begins to darken and the exit signs are extinguished. We will guide you through the investment cataclysm that awaits. We will extricate you from it with maximum profit. And we will point you directly down the winding paths of salvation that lead to a new world of bliss and tranquility.

So long as there’s electricity and an internet connection, we’ll be close.

Fear No Evil

 

The airwaves are teeming these days with talk of an end to the dollar’s hegemonic status as the world’s reserve currency. And to all that blather we feel obligated to respond with a hot and clamorous ‘BALDERDASH’.

The dollar’s not going anywhere for now, folks… anywhere but up, that is.

Take a look here –

dxy

It’s clear from the chart that after a long and sustained rally (in red), the dollar was in need of a rest. And that’s precisely what it got over the last four-weeks (in blue).

But the question on many market players’ minds is whether the rally can resume as yet. After all, the technicals for the buck show a grossly overbought condition that persisted for close to seven weeks as DXY was forging higher through August and September (black box). Shouldn’t that bode ill for further gains?

At a simpler time, yes, it would have.

But today, we’re not so sure.

And it’s here that we have to rely more on intuition and experience than anything that can be properly termed ‘professional’ or ‘analytic’ to inform our outlook. Because as we’ve mentioned many times in the past, standard measures of valuation and accepted norms of analysis will eventually be useless in examining the markets now that 1) the liquidity in the system has been jacked higher monumentally (courtesy of the world’s central banks), and 2) that same money has begun to enter the system in earnest via the mortgage market and faster expanding consumer and corporate loan portfolios.

In short, what we face is unprecedented, but it’s still dollar-positive.

Why?

 

1. To begin, Europe and Japan are reeling, and it’s anyone’s guess as to when they’ll recover from the persistent lack of growth we’ve seen over the last several quarters, and…

2. Both the European and the Japanese central banks are moving in the opposite direction of the Federal Reserve. That is, while they’re opening the spigots of Quantitative Easing (QE), here at home we’re shutting them off.

Global investment flows will therefore continue to favor American assets, which in itself will spur the dollar higher, inviting more pure currency purchases that will induce further buying of U.S. assets in a self feeding loop that we estimate will push the Dollar Index to at least its last retracement high in the 89 – 90 range before pausing for breath.

[Take a breath.]

Betting on a widening Dollar/Euro or Dollar/Yen spread should be a near-term winner.

Betting on the precious metals will be an almost certain loser.

The, the Market Vectors Gold Miners ETF (NYSE:GDX) just hit new bear market lows.

Take a look –

gdx
The miners lead the metals, friends.

Stand clear.

Many happy returns,

Matt McAbby, Senior Analyst, Normandy Research

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