The DXY has been Strong but the Dollar Hasn’t

After having thus successively taken each member of the community in its powerful grasp, and fashioned him at will, the supreme power then extends its arm over the whole community.  It covers the surface of society with a network of small complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate to rise above the crowd.  The will of man is not shattered but softened, bent and guided; men are seldom forced by it to act, but they are constantly restrained from acting.  Such a power does not destroy by it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to be nothing better than a flock of timid and industrial animals, of which the government is the shepherd.  I have always thought that servitude of the regular quiet, and gentle kind which I have just described might be combined more easily than is commonly believed with some of the outward forms of freedom and that it might even establish itself under the wing of the sovereignty of the people.
– Alexis de Tocqueville from Democracy in America (1835)

Government is not reason; it is not eloquent; it is force. Like fire, it is a dangerous servant and a fearful master.
– George Washington

The DXY has been Strong but the Dollar Hasn’t
The DXY is a simple Bloomberg function that for many including myself at times in these pieces has been used as a proxy for dollar strength/weakness.  Last year I pointed out that this index had becoming increasingly useless because it really only measured the dollar versus a basket of other terminally ill OECD nations and that it wasn’t very important to the macro picture as relates to commodities because the biggest adjustment that needs to occur is a major devaluation of the OECD currencies to the currencies of emerging Asia and the commodity nations.  It doesn’t take much effort to see why the DXY is so unhelpful as an indicator at this stage, all you need to do is examine its composition.  The DXY is the dollar versus the euro (57.6% of the index), the yen (13.6%), the pound (11.9%), the Canadian dollar (9.1%), the Swedish Kroner (4.2%) and the Swiss Franc (3.6%).  We may as well call  this thing the dollar/euro cross.  It’s a relic.

So while you may hear a lot of noise about dollar strength, the truth of the matter is the only thing we have seen is euro (and pound) weakness.  Comparing the dollar, euro and pound (or even the yen) to each other and trying to make any logical fundamental bet is an exercise in pure futility and a waste of time in my view.  It is beside the point.  I may as well go trade zombie stocks like AIG or C.  No interest.  Therefore, the fact that the stock market and commodities have been so strong despite perceived dollar strength is a result of the fact that there really isn’t any dollar strength.  You can see this in the relationship of the dollar to other currencies versus the Aussie dollar, the Canadian dollar, the Indian rupee, the Thai Baht, the Korean Won and the Brazilian real.   For crying out loud the Canadian dollar is basically back at parity again.  In light of this let’s look back to the quote from John Maynard Keynes’ book the Economic Consequences of the Peace where he attributed to Lenin the following:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

The reason I have pasted this quote again is to make the point that this is EXACTLY what is being done to the citizens of the world, particularly the OECD nations.  The unrest we have seen in Greece will not be quelled nor will it be prevented from spreading throughout much of Europe and highly likely ultimately in the UK and U.S.  Why do you think there are so many cameras in the UK?  Do you really think that is for petty crimes or “terrorists.”  They know what’s coming when the people finally find out the true extent of the gross negligence of their leaders.  I continue to think that you want to play the “symptom” of this negligence and I continue to believe commodity price spikes will be the major symptom.

What a Passage of Healthcare Might Spark
Before I get into this paragraph I want to reiterate an important point.  I am not a Democrat or a Republican.  I think they are two sides of the same coin on the really important things and whenever each party has gotten into power they have both done two clear things over the past 10 years.  1) Massively expand government. 2) Massively crack down on civil liberties.  There have been excuses for this from both sides (excuses that just so happened to appeal to the base of the parties in power).  The Republicans used 9/11 and the Democrats used the financial crisis.   The bottom line is the trend must be clear now to everyone.  More government and less individual rights no matter which establishment party is in power.  I consider myself more of a libertarian, which very simplistically means fiscally conservative, socially liberal and anti-war (in the war for empire sense, no against war for true self-defense).  A never ending war on terror reminds me of the never-ending war described in Orwell’s classic novel 1984.  If you can keep the people in fear of a war that has no end you own them psychologically can get away with things never imaginable prior to that perpetual fear state.  While the media attempts to portray libertarians as right-wing and radical this is total propaganda as well.  This represents one of the more genuine ideological threats to the current establishment and the current establishment of both parties are terrified as a result.  If you want proof of this read the following article from Politico that demonstrates how scared the establishment Republicans are of Rand Paul’s (Ron Paul’s son) lead in the Senate primary race in Kentucky (

Anyway on to healthcare.  If this gets passed I think an already divisive social atmosphere in the U.S. will get far worse and I think the nation will be more divided than at any time since the 1830-1860 period where nullification, states’ rights, tariffs and slavery tore the union apart.  This is a very, very dangerous time we are living in.  Anyway on that cheery note, I have pasted below commentary I sent to a small group of friends a couple of months ago regarding the U.S. treasury market.  Since this goes out to a wider list I thought it would be appreciated.  It all ties into what is a very dynamic and volatile situation here in the U.S. socially and politically.

Will the U.S. Ultimately Repudiate its Debt? Will All Western Nations?
Just a quick thought on the state of sovereign debts.  As the massive forces of inflation in everyday goods and the massive deflationary flow underneath the surface battle it out in the markets and in financial debates, there is another big debate that isn’t getting much attention but surely will in the years ahead.  This relates to HOW the U.S. and other Western nations default on the debts.  Anyone that takes an honest look at the debt and unfunded liabilities (the social security ponzi scheme and Medicare) of the U.S. government knows without a doubt we are bankrupt and must default.  So the real question is how do we do it?  At the moment the strategy is clear to all, default via high inflation.  The problem for Banana Ben Bernanke and others is that they need to do this while at the same time fool the general public and particularly the investment community that there is no inflation or that it is very low so that people don’t react to the inflation threat since that would essentially defeat the entire strategy.  As I have said before, they will fail and so it’s important to think about how the social mood shifts as more people wake from their delusional state.  As George Gurdjieff claimed, people cannot perceive reality in their current state because they do not possess consciousness but rather live in a state of a hypnotic “waking sleep”. “Man lives his life in sleep, and in sleep he dies.”  Based on the talking heads and the inability of most to see the cold reality staring them right in the face this quote seems entirely true to me. However, it is at times of crisis that people are compelled as a matter of survival to wake up and learn about how the world really works.  This awakening has been happening and will only grow exponentially from here.  This means a lot of things, many of which I have written about for years but one I haven’t touched on is the risk of outright refusal of the U.S. to pay its debts.  If the social mood shifts enough, the next populist trend that politicians will grasp onto is the idea that the debt is “illegitimate”” and imposed upon the people against their will.  I am actually sympathetic this viewpoint, however this will not be a good thing.  Neither is the inflation option, so basically there’s no good way out.  We should have never gone with this voodoo Keynesian nonsense to begin with.  That said, it is too late and so it’s just up to everyone to protect themselves and their financial assets now.  The backstabbing phase has begun, everyone and every faction from special interest groups to nations are going to look inward and sell everyone out that they need to.  The fact so much of out debt is owned by foreigners will only make the debt repudiation option that much more appealing as things get worse. This may seem extreme and such a repudiation may never happen, however, I will bet strongly that the rhetoric emerges sometime in the next 1-2 years and will throw markets into a frenzy.  Anyway, the mega trends for this year are: 1) A reversal of globalization and increase in protectionism 2) Increased calls for Hard Money 3) The realization that virtually all Western nations are bankrupt and must default.  The push to print money will accelerate and then later when the money’s purchasing power is clearly decimated there will be the push for outright debt repudiation as the social winds blow the politicians in that direction.



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