The past nine months have been very interesting indeed. There are a large number of developments worth considering, and our view is that there is one theme connecting them all: The US dollar.
Let’s jump back to June 2014. The ECB announces its move into negative rates for the Eurozone. Banks (and other third parties) are told they will be charged for holdings excess reserves at the ECB. Here are the details:
Many market commentators are confused by the move, considering that it will exacerbate deflationary pressures within the Eurozone. Banks are concerned that their systems simply can’t cope with negative rates on ‘money’, and of course don’t like the idea of being charged interest on surplus reserves.
We feel that the ECB was working with an entirely different agenda to the one published. That agenda was to cause a flood of hot money to head across the Atlantic to America. Within one month of the ECB announcement the US dollar index takes off, after having been settled in a range between 78 and 83 since early 2011, as the chart below shows:
Our thesis of the planned evolution of the world’s monetary system would support this view, as the current (non) system, based upon the US Dollar, has been seen as unfit for purpose since the 1970s, and preparations have been being made to move to a better system ever since. Only now do we enter the final stages of the move away from the dollar.
Further evidence emerges in support of our view over the past eight months, as we see the price of crude oil slump, partly in response to the rising dollar, but in our view, due to further coordination in applying pressure to the dollar and to America itself. (It should be apparent that pressure is applied to the dollar and America by causing or allowing the dollar to rise against other currencies). The Saudis have made it quite clear that they are not frightened by low oil prices, and why should they be? Already though we are seeing that the viability of US fracking is at risk. We also see that US dollar debt funding for oil purchases is much reduced, further adding to the dollar squeeze.
We also see that credit advanced around the world in dollars (mostly Eurodollars, supplied by funding outside of America) is becoming dramatically more expensive for foreign borrowers, whose own currencies are now significantly weaker against the US dollar, just as their economies are slowing down. Everywhere, tightness is evident in the dollar market, and this propels the dollar ever higher. Already US executives are bemoaning the ‘strong dollar’ and begging for some reprieve from the US Treasury or the Fed. What can the Fed do, as it strives to avoid negative rates at all costs (for therein lies the death of the dollar)?
Also, we see more evidence of foreign governments moving away from supporting American government deficits. Please review the US Treasury’s TIC data for the past year or so, it is very clear that China (and other official entities) have stopped accumulating new US treasuries, and very gradually are dis-investing some of their existing holdings. We believe the timing is not a coincidence, rather all part of a well hidden plan.
Finally, we see European QE launched recently, but in a different fashion to that of the other major central banks. The biggest difference is that most government bonds will be bought by their own national central banks, with no risk sharing on future potential losses. To date the ECB have not announced how the national central banks will repay any losses back to the ECB if Euros created to buy national government debt turns out to produce losses.
In reality, there is only one way that repayment can be made, via traditional means. Think about it.
As we approach the final stages of implementation of this 60+ year-old plan to move away from the US dollar there remains much danger, both economically and geo-politically. America knows it is trapped, but how will it respond is still unknown. However it responds, the end result has already been decided, by the laws of mathematics. Therein lies both danger and opportunity for investors.