Sucker rally in the USD

All of the sudden, it seems to appear to many that the US dollar was oversold and that the Euro was over-valued. Even Mish - who I highly respect - keeps on insisting that the $ was supposed to rally - even though I never read anything about this rally on his blog before it actually happened.
  • Here, he dismisses Central Banks interventions and he says that Marc Faber weights in.
  • Here, he says that a fundamental change has occurred to justify the rally.
First, I don't think that we can dismiss interventionism and obscurantism from the Fed. Obviously, I don't have any proof of interventionism but only the longer term view will show if the rally was a real one or if it was just interventionism. I have no real opinion about that, but just can't think of dismissing it neither.

Then, I can't believe that Marc Faber was able to push the USD up 5-7% just by being bullish on it. During the same interview where he said he is bullish on the USD, he also said he is bearish on the US stocks. Did that sink the US indices into the abyss? It didn't even prevent the US stocks from rallying about 10% since mid-July! So this is dismissed as well.

Finally, what kind of fundamental change can be so sudden and violent?

What happened during the past few days? As expected, all the bad news are still piling up, companies are still announcing weaker and weaker results, the US consumer is still broke and homeless, inflation is rising (I need to put a post on my point of view about inflation) and - surprise surprise - the Eurozone's growth has been announced as negative.

Did anyone expect the Eurozone's growth to be positive? Did anyone expect the UE's growth to be positive? One must be blind to believe the official figures about the US gov about growth, and even blinder to think that with Spain, Ireland, France, Portugal, Greece in the UE, the UE will keep on growing...

Finally, I had written that a few days ago that Trichet was abandonning the war against inflation but:
  • If the Euro continues to collapse against the USD, inflation will rise further and Trichet will have to raise rates. The Eurozone is really lucky to have a real independent central bank, and not a for-profit, private, Central bank owned by the banking industry as in the US and UK. And the ECB only role is to keep a stable currency.
  • According to the two charts below, the M3 growth is declining quickly in the Eurozone while it is growing a lot faster in the US and the growth is stable. I think it is obvious where we are going from here...

I will publish a post about the inflation/deflation debate as well as I read many interesting things from both sides.


NMMM.NU said...


I have a question, and hope you will answer.

M3 decrease - I saw this weeks ago. Why this happen - bank loses? But bank loses are profits to the other party. Can money just dissapeared? I dont thik FED stopped print money?

NMMM.NU said...

Just one more comment (not a question :-) )

If (just IF) Mish is right for EU, this trully means EUR/USD will fall. But this DO NOT justify the fall we see in gold, oil, commodities and US stocks.

(Actually US stocks are not that down)

pej said...

I think M3 growth is decreasing (do not confuse: M3 is still growing a lot! it's growth rate is just decreasing) probably because even with all the money printing and liquidity injections from central banks, they haven't been able to cope up with the credit drying and the mortgage market disappearing.

That's just my thoughts, I am not sure about it...

Mish is saying that all the major currencies are falling against the USD (UK, EU, AU, CAD, NZ...) which causes a rally in USD terms. Re commodities, my guess is that many positions are unwinding and that hedge funds and other asset managers need money because of redemptions.

Also, the SEC and the CFTC are trying to freeze shorting and cutting leverage, this might impact the market on the short term. They are preventing the market from working correctly, which will probably have big negative impacts later down the road.

Oil was too high as well, so a correction is welcome. It will allow people to find a nice entry point. Same thing happened when oil decreased from $80 to $59 before rebounding to $145 :-)

NMMM.NU said...

Until now I missed the word M3 "growth". Is it 'first derivative' (math)? In such case it explains everithing.

pej said...

yes, indeed, it's the rate of change.