Fleckenstein's recent piece describes a good matrix (*) for the USD action.
moneycentral.msn.com
I think the key points those of us who pay attention to such things can take away is the notion of where we are in the process. Fleckenstein says probably somewhere in step three or four, and probably most here would agree. I guess I'm saying (and I recall someone here stating that I tended to suffer from "time compression", we will see?)this process is now more advanced, and that they will move more quickly towards step 5 "stronger action", and that when they do, we will get a squeeze on the funds and specs that will last more than a day. If "stronger action" is just more intervention (*), and a fund selling panic, then we really have an opportunity. I will admit that it is anyone's guess and certainly can appreciate/understand the "no defense for the USD view", but as the old saying goes, we have to "place our bets, and take our chances".
(*) 7 small steps to crisis
Here, then, is my outline of a 7-step process of creating a full-blown crisis.
Step 1. Nobody notices or pays attention that the dollar is falling.
Step 2. Folks wake up, but they either don't care or rationalize dollar weakness as a good thing.
Step 3. The central banks now know they have a problem, but the bankers think the market will obey them. It will, for a while. (This is the step we have now reached and what emerged at the G7 meeting.)
Step 4. The dollar now tests everyone's resolve by resuming its decline. The currency markets will not respond to jawboning by finance ministers.
Step 5. In this step, the finance ministers are forced to take action. (Think about it. Even if they'd stated that they wanted the dollar to go up, nothing either explicit or implied indicates they'll do anything about what's happening. That will come next.) When they do take action, the market will do what they want -- but only for a while.
Step 6. The ministers take some additional action, but it won't be enough, and the currency markets won't do what the ministers want.
Step 7. Finally, we'll have a full-blown crisis, and that will be the end game.
(*) My definition of bogus/temporary USD defenses are:
1. MoP words or misleading "economic statistics" designed to scare specs/funds out of anti-USD positions.
2. Strong currency countries lowering rates, gold will skyrocket in this scenario.
3. Printing even more money to do "coordinated" currency intervention, with Europe in particular getting on board this approach.
My definition of a more serious USD defense is:
1. The US moving more aggressively to raise rates, removing "the measured" language, etc.
If they did all four we could get a pretty big USD pop that might stick for several months. |
