Dollar : Default or Debase?

While the bond market may have bounced over the last couple days (which I suspect is mostly because the bond market knows the Fed will soon be getting more aggressive with its monetization programs), that bounce has only occurred in terms of dollars.

Because of the dollar’s steep decline, the US bond market continues to crash as far as foreigners are concerned - and these foreigners obviously own a lot of US Treasury debt.

And gold, on the other hand, continues to rally in all the major fiat currencies (see chart above).

What’s the message there? I’ll leave that for readers to decide for themselves, but I'd submit that the market may be catching on to the predicament that the Fed and Treasury are in. There are only 2 options that lie ahead for the biggest debtor on the planet (i.e. the US government), and those options are :

1) default or

2) debase - and they both lead to more inflation.

Can China Allow Its Largest Exporting Partner To Fall Apart ?

Realistically, how high can the 10-year rise from the 3.40% level? Looking at low rates in Japan (and now in the US), there seems to be a bigger force in control. It seems to me, traders don't have the courage to step aside and let rates rise.

China certainly isn't going to step aside and allow its largest exporting partner to fall apart. The government isn't going to stand by and allow rates to rise. There just seems to be a large collusion of groups keeping rates low. I'd like to see rates rise, as I believe it's unfair to prudent investors who are deprived of higher safe rates.

They'll do whatever it takes to keep rates low. My point is that if the dollar falls apart -- and they cannot control that dynamic -- then rates will be jacked for them whether they like it or not.

And if they stand in front of it by monetizing Treasuries, it will actually exacerbate the problem. So they're at the mercy of the dollar here, and the lower the dollar goes, the harder it makes it for them to prop up rates. If I were Ben Bernanke or Tim Geithner right now, I'd be going long on Pampers, extra-absorbent in size.

Not sure if this makes sense, but some are arguing they want the dollar down to stimulate exports, and in fact, are behind this dollar devaluation. Why didn't they lose control of rates as the dollar dropped from 2004-2008? How did Japan keep rates near zero with "quantitative easing"? I'm not challenging anyone, but trying to understand why this go-around, the drop in the dollar would create a problem. Personally, I hope they get what they deserve for playing with Mother Nature!

I think there are two main differences though.. : one, during that period I don’t think the U.S. was being viewed as bankrupt yet, so people were buying U.S. bonds and pushing rates lower as the “safety trade." Two, I think the currents of protectionism are rising to the surface - today’s pissing match over steel being the latest.

And to add to that, I'm wondering whether China has as much an interest in buying U.S. bonds, considering the money isn't being recycled into buying their exports, rather to fund U.S. financial capital holes -- healthcare, education, union paybacks, etc. -- none of which would send the money back to China.

Rally Will Eventually Run Out Of Ground - And Comsumers Still Won't Be Spending.

The infamous "green shoots" may end up "bamboo shoots" if the consumer is fed up with the Fed, and the flowers of unrealized gains that the rally is sending may end up dead and dry on arrival before the end of the year.

The Dow and S&P came back, the S&P may be tracing out a Backtest of 915. Moreover, breadth was down and down volume trumped up volume. A strong close above 915 sets up a move for another test of the key 930 level.

All in all, a roller-coaster, with the indices whipping up and down across the breakeven point several times. Will positive words from Captain Greenspan that the financial markets should continue to improve and that housing may have bottomed prove once again that the emperor has no clothes?

The U.S. government can attempt to stimulate all they want, but they cannot control the consumer - who may continue to cut back and against their expectations, heaven forbid, save.

Sequencing The KLCI.

When the KLCI hits a 13 on Tom Demark Sequential, the market falls off (from Thursday's high) like a dead wood...!

Could this signals that a top is in placed? ... Moreover, the VIX is climbing...!

Greenback's Survival.

The dollar wars are heating up.

Weeks ago, the governor of the People's Bank of China, Zhou Xiao chuan, made unambiguous comments about his country's desire for a single, international currency. Gone, he said, were the days when the money of choice for global trade was that of a single sovereign nation. Russia, along with a host of other nations only moderately friendly to the US, expressed similar sentiments.

Today, firing back against the single-global-currency crew, Saudi Arabia, Bahrain and Qatar reaffirmed their support of the dollar. Bloomberg reports the 3 Gulf nations have no plans to abandon their US dollar pegs, applauding its resilience in the face of crisis.

Last June, as the dollar tanked and inflation soared, experts feared these and other countries would push the dollar from its place atop the currency hierarchy. But amid signs that the US economy may no longer be in freefall -- and the rapid repayment of dollar-denominated debt.-- the greenback has rallied more than 10% off its July 2008 lows.

Geopolitical grandstanding aside, the fate of the dollar and American corporate profits are inextricably linked. Corporate profits and jobs are also closely linked.

Big multinationals like Wal-Mart, and IBM earned windfall profits by converting international revenue into dollars at favorable rates. As the greenback lost value over the last decade, those euros, pesos and reals earned abroad translated into bigger and bigger numbers when tallied here at home.

And that's the high-wire act currently being performed by Federal Reserve Chairman Ben Bernanke and other US monetary and fiscal bureaucrats: A weak dollar buoys corporate profits, even as it keeps prices rising at home. Strengthen the dollar to combat inflation, and exports -- along with profits -- slump.

The Americans have reached the critical juncture. After 18 months of running the printing presses around the clock to keep our economy out of the morgue, the relative wisdom of the Fed's ways will become increasingly clear.

At stake isn't just bragging rights on the global economic stage, but the integrity of the little green bills that keep the global economy running - the same ones each of us still uses to buy bread.

Upside Momentum Maybe Changing Tunes.

The divergences principles, which states that price action must be accompanied by the internals of the market. Back in early March, price in the form of lower lows wasn't being matched by the internals, which are measured by momentum and MACD.

Well, guess what? That exact same set of circumstances is now in play, only in reverse - higher highs aren't being matched with strength in momentum and MACD (first and second indicators below price). This can be seen very clearly in the accompanying S&P chart above.

Moreover, as was the case back in early March, these conditions are nearly across the board, as the divergences aren't exclusive to the US major indices. Even the strongest of the strong in this rally -- such as emerging market, Brazil -- has nearly exactly the same set of divergence conditions setting up (higher highs in price, non-confirmation by both momentum and MACD).

As if that wasn’t enough to cause a bullish investor some concern, the very short-term indicator I track, Slow Stochastics, is edging toward an overbought reading (>80), which tilts the odds even more in favor of a market stall if not outright decline.

In my experience, when both sets of indicators -- one measuring the near-term strength, the other the very short term -- are flashing warning signs, it's advisable to be more than a touch more cautious, especially after stocks have rallied 32% off its devilishly low of 666 (S&P 500).

The last area to explore is the historical record. Sam Stovall, Chief Investment Strategist with S&P, produces some of the very best historical data around. In one of his most recent commentaries, he notes:

“Since 1929, the S&P 500 gained 4.8% from November 1 - April 30 versus 1.6% from May 1 - Oct. 31. Also, the November - April period beat the May - October period 68% of the time. Yet after bear market bottoms, the S&P 500 gained an average 12.2% in May - October and advanced in 12 of 14 observations.”

The key phrase in Sam’s comments is “after bear market bottoms,” which means you have to buy the idea that the November 2008 lows was the low. In this regard, I'm not in that camp just yet. That’s not to say I think we'll take out the November low, but that things are much too fluid -- the stress-test results to be released next Monday being the most immediate area for concern -- for me to base my investment-strategy decisions on a high-risk "maybe."

Many of you are familiar with Gann’s Panic Zone for bottoms of 49 days (7 squared to 55 days)--the same timing can often times be used to find blowoff tops: Friday 24th April, was the 49th day from the March 6 low.

The Wheel of Time and Price suggest that another break of 856/860 support level should magnetize the S&P down toward 800.

Why? 860 is opposition the March 6 low - a second break of this level suggests lower prices. It implies that the S&P has been churning around this level and that the action has been distributive. At the same time, 803 is on the same "vector" - opposition 860 and conjunct March 6 (i.e., 180 degrees down in price).

790 is a corrective 270 degrees down in price from the 875 high.