It is fascinating to watch how the bias in people just ensures not just that a sucker is born every minute to replace the one that wises-up, but there are suckers who never learn from experience and cling to their ideas no matter how much it costs them. The U.S. dollar has been climbing against major currencies for several months, with the dollar index .DXY up is trading up about 2.84% for the year. It is true that the dollar has strengthened since late 2015 as the Federal Reserve began raising interest rates against a background of steady economic growth, slowly rising inflation and the lowest U.S. unemployment rate since the 1960s. But the strength in the dollar is more than just interest rates. It is the prettiest of the three ugly sisters as they say – US – Europe – Asia.

The Fed has raised rates twice this year and is expected to raise rates a couple more times by year end which may attract more foreign capital into the U.S. dollar with monetary policy remaining loose to very insane in Europe and Japan. We have the ECM, which has destroyed the European bond market, frozen like a deal in headlights. It is trapped and it realizes that it has been buying the debt of member states who are now addicted to excessively low-interest rates. If the ECB actually stops buying, we are looking at a major debt crisis in Europe as interest rates explode exponentially. However, their policy of austerity has really oppressed the Greek economy and now they have their eyes set on Italy which will more likely create a revolution before the Italian accept going the way of Greeks – quietly into the night.

In Japan, there to they have wiped out the bond market. The government actually bragged that they bought 97% of the government debt auction. Hellow? That’s a good thing? The Bank of Japan has reduced debt purchases for a third time in June 2018, taking advantage of the recent stability in bond yields and the yen. At least Japan is reducing its purchases whereas the ECB talks a good game, but cannot actually do anything. The attempt to force austerity by the EU upon southern Europe is tearing the system apart.

The dollar bottomed in February 2018. It has yet to elect a Monthly Bullish Reversal. Trump has been unusually vocal about the dollar, unlike most Presidents, following more in the footsteps of Treasury officials. Trump has publicly been criticizing the dollar’s strength several times. He obviously thinks a lower dollar is better for trade. But the markets are going against Trump. You cannot “Make America Great Again” without also strengthening the dollar especially when we still have insanity in Europe economically and Japan still in never-never-land.

In a CNBC television interview, Trump said he was concerned about the potential impact of a stronger dollar on American exports. He also broke tradition by criticizing Federal Reserve policy on raising interest rates, saying it takes away from the United States’ “big competitive edge”. Trump has had no problem with deficit spending hoping it would reduce the dollar to support trade and therefore jobs. While investors and traders have been concerned about the spending, they have been forced to attribute some of the gains to the Trump administration’s tax cuts which are bringing capital home. On the other hand, they see the tax cuts as widening the fiscal deficit, and that they expect leads to borrowing more on the government’s part. Then Trump’s imposition of import tariffs against China, Europe, Mexico and Canada, they generally think will contribute to inflation. But they fail to grasp that Trump is using Tariffs to force a better trade deal.

So hang on to your hat. The strength behind the dollar CANNOT be analyzed simply by looking at the domestic situation. We are in a position of capital flight on a global scale. All these arguments add up to nothing when capital begins to flee from one economic crisis to another. Remember Herbert Hoover’s words from 1931. When we begin to see the first crack in Sovereign Debt, both in Emerging Markets and inside the EU, it will be Kattie-bar-the-door!

QUESTION: Thank you very much for your blog and all the knowledge that you pas on.
You are well known in many circles and I would think have great influence in the inner circles and behind the curtain. Now then your computer forecasts can sway a lot of people because of that. If you were to advice in advance of a major market crash you could be accused of starting a panic or worse. So my question is would you do it or sit on it and explain later?
Retired in Canada.

AW

ANSWER: No. We have ALWAYS provided forecasting regardless of the consequences. The Computer itself is writing the analysis on over 1,000 instruments daily. Everyone knows that there is no human writing these reports. Besides that, there are those behind the curtain who want the real forecast even though it may be against them. I have been on the phone with central banks during a crisis when they have asked me does it look like they will need to intervene. So you will be surprised. Even they want the truth when it counts.

I am not doing mainstream media interviews that would ever appear as a headline that the market will crash tomorrow or something like that. ONLY is such information appears in the mainstream media does it raise a red flag.

The talk behind the curtain remains that the Fed is still under pressure to PLEASE don’t raise rates. The lobbying continues from the IMF, ECB, and Emerging Markets. Meanwhile, the Fed leaves rates unchanged, but it upgraded its view of the US economy to ‘strong’ which remains a signal that the Fed is still prone to raise rates if the stock market continues to rally.

The Federal Open Market Committee voted unanimously to keep the target range for its benchmark rate at 1.75 percent to 2 percent. Still, the committee said that “economic activity has been rising at a strong rate,” which is a more bullish view than the June characterization of “solid” growth. Consequently, this statement also noted that household spending has “grown strongly.”

The bottom-line remains clear. The US economy is holding up the entire world and lowering taxes has helped to bring capital home and attract foreign capital as the USA remains actually a tax haven outside of the world reporting system agreement

European banks have been lending in the United States quiet aggressively because (1) the economy is doing good so there is a demand for loans contrary to Europe, and (2) the behind the curtain view that the euro will decline and the dollar will rise. During the first half of 2017, European banks have lent about $53 billion in US dollars taking the currency risk which they have benefited from as the euro declines. According to Bloomberg, Europeans’ combined market share in the United States rose to nearly 24%.

The concern of some has been that the loans are going into leverage structures once again. In total, banks and other companies issued $494 billion in new leveraged loans 2017, which has been the largest amount since 2011. The European banks at the top of the list are the British Barclays Bank, which bought Lehman Brothers Holdings’ US businesses after the collapse. Barclay’s now controls more than 6% of the market for new loans and is the third largest leveraged loan arranger in the US this year. Barclay’s is also big in issuing credit cards in the United States. The second on that list is Credit Suisse Group AG. Then we have Deutsche Bank, which on the one hand wants to withdraw from US markets, has also been looking at lending in dollars for the same reason of gaining on the currency in the face of a collapsing euro. We see similar policies being adopted in the British HSBC, Swiss UBS, French BNP Paribas, Dutch ING Groep and Credit Agricole.

While many believe that as major central banks continue to push ahead with monetary policy normalization of raising interest rates, they wrongly think that raising rates will hurt the credit market and create a downturn. What they fail to grasp is that rates can rise with no impact provided the economy is expanding, but rates can also rise because there is no demand and government is forced to keep offering higher rates to find buyers of their debt in the real world. It all depends upon what people believe. This is why low rates in Europe have FAILED to stimulate demand when people lack confidence in the future, they will NOT borrow at any rate. Expectations of profit MUST exceed the level of interest rate before people will borrow. They function differently than governments which are addicted to debt and borrows all the time with no cyclical expectation