Beginning of the end for King Dollar?

As markets keep tumbling around the world – including the US - it is becoming clear that the picture of the US economy being painted by the media as “robust”, is in reality something different: it  is not “robust” at all but just a house of cards that was propped up by the massive intervention by the Federal Reserve injecting vast amounts of money created out of thin air, and the massive spending and construction boom led by China which brought the so-called myth of economic recovery in which everybody reveled.

But as with all the good things that come to end, the Chinese economic miracle has run out of gas and is sputtering.

Investors are pulling out their money from the Chinese markets. Chinese government is selling US paper (i.e. bonds) to inject foreign currency into the market to prop up the Yuan.

China Sells U.S. Treasuries to Support Yuan …… The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt – according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts. The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA. The figure was based on the bank’s calculation of how much liquidity will be added to China’s financial system through Tuesday’s reduction of interest rates and lenders’ reserve-requirement ratios. The assumption is that the central bank aims to replenish the funds it drained when it bought Yuan to stabilize the currency. …….

China seems to have no other alternative.  Here is what I wrote in earlier article:

The number one factor that is causing the turmoil in the market is China which acted as a savior of the world economy in 2008. By implementing a massive stimulus package, China fueled a massive construction boom pulling all the sectors of the economy with it – ranging from commodities to other resources. But now the Chinese economy has hit a bump and slowing down. Its economic growth this year is going to be below 7 percent. Given the totalitarian nature of the Chinese media, one can safely assume that the growth would be much lower than that. And, that is a scary scenario to assume. In order to stimulate its economy and flagging export sector, China has devalued currency which has sent shock waves throughout the world. By devaluing Yuan, China has effectively started a currency war.

China does not seem to have any more leverage on the markets and its policy of cutting rates won’t be of much help either. If it cuts the rates then Forex would still flee the Chinese market as there would no point in holding Yuan – cheap and diminished in value. But if it raises the interest rates, then its export sector gets hammered as the cost of Chinese produced goods will be expensive compared with other competitors – an outcome, I am sure, President Xi would not tolerate.

China’s policy of fueling massive growth by injecting tremendous amount of liquidity seems to have run its course. Its market will keep see-sawing keeping the world economy on pins and needles.

But what truly matters – and is the most important – for the global economy is this: Federal Reserve’s decision regarding rate hike.

Fed’s talk of rate hike has caused major problems among the emerging market economies as it has sucked Forex out of these markets.

We will not discuss what are the effects of flight of Forex from emerging market economies but focus solely on Fed’s Shakespearean dilemma: To raise or not to raise.

This is what I mentioned in my earlier article regarding Fed’s rate hike dilemma.

…… Last, and perhaps the most important, factor is the dithering by US Federal Reserve regarding the interest rate hike. Many investors are nervous over the ambiguity shown by Federal Reserve and are fleeing the market in droves for the safe haven assets like Swiss treasuries, gold etc. Investors, who were hoping for strong dollar and had invested in it, are becoming aware that the Federal Reserve is not going to increase interest rates – despite the constant talk of carrying out a rate hike – as they do not want to pressure the economies of its trading partners. In addition, the stronger dollar would also kill US exports as they become uncompetitive. The Federal Reserve is thus caught in a bind. If it raises interest rates, then saving cash in a bank would be an attractive proposition. In that case, stocks would suffer. It would also create tighter credit condition – another damper on the corporations. On the other hand, if it does not raise interest rates, then there would be no point in investing in dollar which would simply spark a flight into safe haven like Swiss treasuries, gold etc. Stocks would again get hammered. The Federal Reserve is thus caught between a rock and a hard place. And, there is nowhere else to go. ……..

Feds are trying to justify the rate hike by pointing to growing economy, improving job market and falling unemployment rate.

Even though Friday’s job numbers were dismal – employers added only 173,000 jobs vs. the expectation of 218,000 jobs – unemployment rate still fell to 5.1%, inching closer to the mark where economy can be said to be humming with full employment.

And, here is the funny part. Optimal unemployment rate ranging between 4 to 5% is considered good as it signifies economy operating with full employment.

If that is the case, then what about the astounding number of 94 million Americans who are unemployed and cannot find jobs as there are no good jobs left? The jobs that are getting created are in health, hospitality industry and most of them are part time jobs. Also, what about those who are unemployed for a longer amount of time – more than six months – and cannot find jobs and have fallen out of statistics?

Something about the BLS statistics – its falling unemployment rate but dismal job creation number – just does not smell right.

But it is this statistics – absolutely disappointing – the Feds are relying upon to justify the rate hike. They seem to be oblivious to the fact that raising the rates would severely restrict the credit market thereby impacting the corporate sector and eventually the export sector.

Low oil prices have already devastated shale oil industry and caused numerous job losses. The tightening credit would also devastate real estate market. I am sure Federal Reserve is aware of all this but are still insisting on rate hike.

Even Alan Greenspan, former Federal Reserve Chairman who is intimately familiar with bubbles – Dotcom and Sub-prime mortgage bubbles,  and which blew up spectacularly with the latter almost bringing down the world financial system in 2008 – is baffled by the Fed’s incessant talk of rate hike.

With China and Russia dumping the treasuries at record pace, the pressure seems to be mounting on the Feds to make them more attractive and hence the rush to raise the rates citing all sorts of questionable statistics.

The dollar, the reserve currency of the world – and exactly this excuse utilized by US Justice Department to meddle in the sovereign affairs of other countries – thus seems to be getting unattractive day by day.

And, President Putin - along with President Xi – seem to be doing everything he can to make it completely unattractive and fully dethrone it.

Here is RT……

Putin says dump the dollar Russian President Vladimir Putin has drafted a bill that aims to eliminate the US dollar and the Euro from trade between CIS countries. This means the creation of a single financial market between Russia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan and other countries of the former Soviet Union. “This would help expand the use of national currencies in foreign trade payments and financial services and thus create preconditions for greater liquidity of domestic currency markets”, said a statement from Kremlin. Today, some 50 percent of turnover in the EEU is in dollars and Euro, which increases the dependence of the union on countries issuing those currencies. Outside the CIS and EEU, Russia and China have been trying to curtail the dollar’s dominance as well. In August, China's central bank put the Russian Ruble into circulation in Suifenhe City, Heilongjiang Province, launching a pilot two-currency (Ruble and Yuan) program. The Ruble was introduced in place of the US dollar. In 2014, the Russian Central Bank and the People’s Bank of China signed a three-year currency swap agreement, worth 150 billion Yuan (around $23.5 billion), thus boosting financial cooperation between the two countries. …….

The currency swap agreement that Russia has signed with China, its oil and gas deals totaling $400 billion to be transacted in Yuan and Ruble, the bilateral trade agreements that Russia and china are signing with other countries bypassing dollar, the AIIB, the BRICS bank etc., all seem to be pointing to only one conclusion: that the King Dollar is on the verge of getting dethroned.

And, in its place we are witnessing the rise of a new reserve currency and the new global financial structure based on the principles of Multipolarity, Equality and – most important – the respect for the sovereignties of various nations and the rule of international law; unlike the current and old repressive system based on World Bank and IMF designed to perpetuate the oppressive neo-colonialist hegemony of US-UK Anglo-axis and its predatory capitalist policies.

Even Japan also seems to getting in the game of bilateral currency swap.

Japan Bank: US Sanctions Could Lead to Direct Ruble-Yen Swaps VLADIVOSTOK (Sputnik) – Japan Bank for International Cooperation (JBIC) is turning to currency swaps as using the US dollar in transactions is difficult because of the Western anti-Russia sanctions, the bank’s senior managing director said answering a question from Sputnik. "We’re now studying that [the effects of Ruble devaluation]. We need some of the swap arrangements with the local banks. We are elaborating opportunities with Russian banks such as Gazprombank, VTB, VEB… Because of the US sanctions, we cannot use the US dollar anymore, we have to switch to other currencies," Tadashi Maeda said on Thursday, speaking after a conference at the Eastern Economic Forum (EEF) in the Russian city of Vladivostok. …….

This brings me to the conclusion that I wrote in my earlier article.

Does that mean, Federal Reserve has thrown in a towel and are preparing for the global crisis? I don’t know and – I hope – I am wrong to draw this conclusion, but the ambiguity certainly seems to be pointing in that direction. All the talk of suspense is just to try to keep the current chaos from descending into uncontrolled frenzy. As a matter of interest - think about it - if there is a flight out of dollar as they are no longer attractive, does that mean we are seeing a slow death of petro-dollar? All the bilateral agreements happening between nations bypassing dollar also seem to be pointing in that direction.

Dark clouds certainly seem to be gathering on the empire of King Dollar. The months of September and October are turning out to be crucial. The market chaos could decide whether the King Dollar remains atop the perch or gets dethroned by way of great economic reset.

Black Monday: Is financial Armageddon on the horizon?

- Global financial markets are in turmoil, currency wars are heating up, commodities are crashing into the ground, and the omnipotent central banks are proving to be utterly incompetent to cope with the emerging crisis.

Running of the bulls in Pamplona, Spain, is a fantastic, adrenaline-rushing, heart pounding event held from July 6-14 every year during San Fermin festival. The event involves running a few bulls – typically six – let loose on a cordoned off street. And, in front of them, runs a small crowd of youngsters full of bravado.

As is the case, when you run in front of bulls that are surely pissed off, there are bound to suffer injuries – sometimes death by goring. Typically 50 to 100 people are injured as the bulls make a mad dash to the final destination – a bullring where the event ends.

The bull on the Wall Street also seemed to be in the running mood – but just not the kind that the traders and markets expect. Instead of running up the pre-charted lane – i.e. running the markets higher – the bull on the Wall Street seemed to have other ideas regarding the direction he should take to run.

And the end result was not pretty good.  Nobody was prepared for the bull running amok.

 

http://www.flickr.com/photos/aseba/6179708990/

For Dow Jones industrial average it was the very wild ride. From plunging more than 1000 points at the start of the trading, it stabilized little bit during the mid-day session before plunging and then stabilizing again little bit, only to see it fall by 588 points by the end of the trading day.

According to Marketwatch, Black Monday saw 1.8trillion of the wealth of American households getting wiped out from the market. The pension funds seem to have been hit pretty hard as they are most dependent on high rate of return to fund the pension obligations to the retirees.

Households just saw $1.8 trillion in wealth vanish as stocks fall By Steve Goldstein ………. As of March 31, households and nonprofits held $24.1 trillion in stocks. That’s both directly, and through mutual funds, pension funds and the like. That also includes the holdings of U.S.-based hedge funds, though you’d have to think that most hedge funds are held by households. Using the Dow Jones Total Stock Market index DWCF, -1.24%  through midmorning trade that number had dropped to $22.32 trillion. In other words, a cool $1.8 trillion has been lost between now and the first quarter — and overwhelmingly, those losses occurred in the last few days. This will probably be the worst quarter for stock-market destruction since the third quarter of 2011, when $2.8 trillion was wiped away. ………

But why did the bull market – which was going up and up all the time – got into such a tailspin from which it might be very difficult to recover?  According to various experts, the recent upward trajectory of the stock was nothing but a creation of a bubble as the fundamentals were not able to justify and which was bound to burst. And burst it did on Black Monday.

The root of the stock market crisis can be traced back to the meltdown of 2008.  Stunning collapse of the Lehman brothers – in less than 24 hours – threatened to take down the global financial sector with it. In order to prevent that the central banks, acting as a lender of last resort, printed – out of thin air – vast amounts of money which they pumped in the financial sector to prevents its collapse.

But as is the case with law of nature, all good times eventually have to come to an end. And, so the party that began in 2008 seems to be nearing its end in 2015.  There are a number of factors that seem to be causing the panic in the market. Instead of detailing all of them, let us just consider the few major ones.

The number one factor that is causing the turmoil in the market is China which acted as a savior of the world economy in 2008. By implementing a massive stimulus package, China fueled a massive construction boom pulling all the sectors of the economy with it – ranging from commodities to other resources. But now the Chinese economy has hit a bump and slowing down. It‘s economic growth this year is going to be below 7 percent. Given the totalitarian nature of the Chinese media, one can safely assume that the growth would be much lower than that. And, that is a scary scenario to assume.

In order to stimulate its economy and flagging export sector, China has devalued currency which has sent shock waves throughout the world. By devaluing Yuan, China has effectively started a currency war. Other nations also - not wanting to be the left alone – have entered the fray. Recent example is Kazakhstan, another oil exporter which allowed its currency to float freely resulting in 25pc drop in its value.

Every nation in the world is now in the race to protect its export sector and the only way they can do it is by devaluing their own currency – a kind of race to the abyss. How long before USA gets into the game as a very strong dollar would certainly put a kibosh on USA exports, is anybody’s guess. Eventually, US too, would have to enter the currency war and the race to the abyss would begin in earnest.

The second factor that is causing the panic is falling commodity sector – particularly oil sector. The weak economic growth of China has put a damper on its demand for oil which is exerting a downward pressure on the oil prices thereby creating massive turmoil in the economies of the oil producing nations.

In addition, there is also a glut of oil in the market since OPEC – led by Saudi Arabia – is refusing to lower the production output – a stance borne out of cold war style geo-political calculations of trying to destroy Russian oil sector but gone awfully wrong for both the USA and Saudi Arabia.

By glutting the market with oil, USA and Saudi Arabia hoped to crush Russian oil sector thereby depriving it the major source of revenue which would have triggered massive demonstrations against President Putin resulting in his overthrow and replacing him with someone amenable to western interest – a la Yeltsin. At least that was USA’s plan – not a new plan but a rehash of the plan of mid eighties.

But nature has a tendency – and political field certainly does – to make sure that even the well formulated plans go awry. Russia has withstood the falling oil prices. On the contrary, USA and Saudi Arabia’s plan of colluding to keep oil prices down has boomeranged on the US shale oil industry.  Saudi economy – totally dependent on the oil revenue – is also suffering. Its stock market registered a 7 percent drop due to falling oil prices.

(Needing a minimum of $80 per barrel, the price of $40 is a death knell for shale oil industry as many of the players involved had borrowed money from the market in anticipation that the price would remain at or above $80 to remain profitable. The falling oil prices have put many of the companies on the path to bankruptcy with all the associated detrimental consequences like lay-offs etc.)

Last, and perhaps the most important, factor is the dithering by US Federal Reserve regarding the interest rate hike. Many investors are nervous over the ambiguity shown by Federal Reserve and are fleeing the market in droves for the safe haven assets like Swiss treasuries, gold etc.

Investors, who were hoping for strong dollar and had invested in it, are becoming aware that the Federal Reserve is not going to increase interest rates – despite the constant talk of carrying out a rate hike – as they do not want to pressure the economies of its trading partners. In addition, the stronger dollar would also kill US exports as they become uncompetitive.

The US Federal Reserve is thus caught in a bind. If it raises interest rates, then saving cash in a bank would be an attractive proposition. In that case, stocks would suffer. It would also create tighter credit condition – another damper on the corporations.

On the other hand, if it does not raise interest rates, then there would be no point in investing in dollar which would simply spark a flight into safe haven like Swiss treasuries, gold etc. Stocks would again get hammered.

The Federal Reserve is thus caught between a rock and a hard place. And, there is nowhere else to go (not even short term interest rates would be sufficient as this would be just a band-aid).

Does that mean, Federal Reserve has thrown in a towel and are preparing for the global crisis? I don’t know and – I hope – I am wrong to draw this conclusion, but the ambiguity certainly seems to be pointing in that direction. All the talk of suspense is just to try to keep the current chaos from descending into uncontrolled frenzy.

As a matter of interest – think about it – if there is a flight out of dollar as they are no longer attractive, does that mean we are seeing a slow death of petro-dollar? All the bilateral agreements happening between nations bypassing dollar also seem to be pointing in that direction.

Talking heads on TV are proclaiming that the markets could be in for 10% correction and no more. But the reality is that nobody knows how far the stock market correction would go. Therecould even be 70% correction and Dow Jones Industrial Average could fall to5000 level.

Opinion: Dow 5,000? Yes, it could happen By Brett Arends Published: Aug 24, 2015 10:46 a.m. ET ……… Such a scenario can’t be completely ruled out ….. For the past couple of years, Wall Street’s perma-bulls have had it their way. They’ve been gloating openly as stocks went up and up and up, seemingly without pause. It got to the point that those warning about valuations and danger signs had been mocked into silence — or were simply ignored. Not now. I don’t mean to be alarmist or to induce panic, but someone needs to tell the public that there is a plausible scenario in which the U.S. stock market now collapses by another 70% until the Dow Jones Industrial Average falls to about 5,000. The index tumbled more than 3% to 16,460 on Friday and over 1,000 points in early trading Monday. Dow 5,000? Really? ……

(I urge the readers to please read the whole article as it features a graph from Federal Reserve.)

The markets on Tuesday opened higher but the rally fizzled and by the end of the day, Dow Jones Industrial Average was back into red losing nearly 205 points.

The raging bull, it seems, has gotten loose and on the wild run destroying everything in its path – just like the bull in a china shop.

The global economy is certainly facing financial Armageddon.