Dollar Freefall

by Addison Wiggin – April 21, 2011

  • Dollar index breaks below 74… the rumor that could send it to the woodshed…
  • Abe Cofnas on a pivotal week next week… and offers trades that could help you profit
  • New napkin math: Debt ceiling could be reached well before May 16…
  • New study from GAO suggests Congress considering withholding passports…
  • Reader rage: "Where's the empathy?" one asks… "Equal time" demands another… "Take it to the board" we say…

Fear is as cheap as it's been in nearly four years.

The volatility index (VIX) — measuring the volume of S&P 500 index options — broke below 15 this morning.

The VIX, also known as the "fear gauge," is now its lowest since the summer of 2007 — when Ben Bernanke was assuring us the subprime mortgage crisis was "contained." Ah, memories.

At the same time, the dollar index is in free fall.

From a peak of 75.8 on Monday morning, the index has tumbled to 73.8 as we write. It has decisively broken below the lows of November 2008.

Indeed, the last time it was this low was August 2008 — which readers with keen memories will note was just before the September-October panic brought everyone rushing into the greenback.

But this is a good thing, the Financial Times tells us: "Buoyant risk appetite prompted investors to sell the currency to fund carry trades."

Shades of 2008… with fear this cheap… and the dollar taking the shellacking it is… we may be shaping up for something unexpected.

There's a rumor, for example, the People's Bank of China might revalue the yuan, by as much as 10%, maybe as early as tomorrow, when U.S. markets are closed for Good Friday.

"Next week is going to be huge" for the dollar, says our currency trading expert Abe Cofnas, looking ahead to Wednesday's scheduled meeting of the Federal Reserve's Open Market Committee.

"While any FOMC meeting is a potential market changer, I believe this one will be more volatile than most. There is a lot of confusion out there. Part of it revolves around inflation."

Abe pulled apart an April 8 speech by Dallas Fed chief Richard Fisher. This quote made headlines: "Adding still more liquidity, or not withdrawing in a timely manner what we already provided in abundance, would do nothing to quell emerging inflationary pressures and might well compound them, proving doubly injurious to savers and the earnings of those who do have jobs."

Sounds hawkish, right? Not after Abe plugs the speech into a word-cloud generator…

"As you can see, 'inflation' is one of the bigger terms emphasized in the speech. But the word 'fiscal' is much bigger. To me, it indicates that the fear of fiscal problems is more prominent than the fear of inflation — at least with Fisher."

And that's what will make Ben Bernanke's first regularly scheduled press conference so interesting: "He may use the opportunity to discuss the U.S. budget deficit," Abe theorizes. "If so, his tone will make all the difference.

"If he stresses that Congress must attack the deficit, it will be a sign the Fed is putting pressure on politicians to act. That would be dollar positive. Or he could be less forceful about the deficit, which may be interpreted as Fed pessimism — and therefore dollar negative."

It all adds up to volatility: "The last time I saw anything like it was during the November 2010 election. If you were with me then, you may remember our S&P 500 binary that shot up 138% and the USDCHF binary that soared 545%. I believe we could easily see those kinds of gains again, thanks to the event risk on Wednesday, April 27."

[This just in: Markets are closed tomorrow, so Abe's weekly trades expire today. As of this writing, all three of the gold trade recommendations we talked about on Monday are going to be "in the money."

The total gain for all three positions is 52% — 16% for the conservative recommendation, 59% for the regular recommendation and 108% for the speculative recommendation. Not bad for a week's worth of trades. If you want to give these weekly trades a try, you can still gain entry to Strategic Currency Trader at the discount charter rate.]

Alas, Uncle Sam is in danger of bumping up against the debt ceiling well before the "drop-dead" date of May 16 that Treasury Secretary Tim Geithner has been warning about.

As of the close of business yesterday — the most recent figure available — the national debt totals $14.32 trillion. Readers with keen memories will once again perk up at this fact, since we've reported for lo these many months that the ceiling was $14.29 trillion.

Turns out there's a tiny portion of debt that's not subject to the limit, for a host of arcane reasons. The part of the debt that is subject to the limit now totals $14.27 trillion, leaving Congress with less than $26 billion in wiggle room.

Hmm… let's do a little napkin math:

Oops. They've got about a week, give or take. Treasury plans to auction $99 billion in new debt next week.

We'll have to see how that goes.

"Default by the United States is unthinkable," Treasury Secretary Tim Geithner warned on April 4, 2011, in a letter to Sen. Majority Leader Harry Reid. Even as he acknowledges "In order to avoid an increase in the debt limit, Congress would need to eliminate annual deficits immediately."

Heh. They haven't even begun to discuss the real costs driving deficits for years to come: Mandatory spending on Social Security, Medicare, Medicaid and interest on the national debt now make up 45 cents out of every dollar the government spends.

[Click to enlarge]

If our inbox, below, is any indication, folks are in no mood for casual debate on the subject.

Congress will also have to address this imbalance: For the first time since the Great Depression, U.S. households as an aggregate are collecting more money in payments from the government than they're paying in taxes.

"Households paid $2.2 trillion in income, payroll and other taxes" during 2010, according to the Fiscal Times, one of Pete Peterson's projects raising awareness about the national debt.

Meanwhile, "Households received $2.3 trillion in income support from unemployment benefits, Social Security, disability insurance, Medicare, Medicaid, veterans' benefits, education assistance and other cash transfers of government funds to individuals."

That's a tall order for a week. Especially, given Congress went home to observe Easter from this past Monday till May 2.

No wonder events in 2011 "could wreck the dollar, bring a blast of crippling inflation… and spark a new tornado of jobs, mortgage, credit and consumer-price fallout that decimates millions of American families," warns our stock market vigilante Dan Amoss.

Dan has just put the finishing touches on a six-part strategy to brace you for whatever's coming. Here's where you can prepare.

Major stock indexes are adding to yesterday's gains. The S&P is less than 10 points away from its February high of 1,344.

Traders might be even more enthusiastic if the weekly jobless claims had clocked in a little better: They're down from last week, but still above 400,000.

Gold is holding its own at $1,505. Silver, after blowing through $46 in overnight trading, has pulled back to $45.85.

Oil is up $4 this week as the dollar plunges. At last check, a barrel of West Texas Intermediate fetches $111.70 — just a few dimes shy of the post-2008 record set two weeks ago.

If you're looking at the charts above and thinking, Hmmmn… maybe the "flight" option in our proposed debate is not such a bad idea, you better get your ducks in a row quickly.

Last year, we mentioned the provision neatly tucked into HR 2487 (The "jobs" bill) requiring you to report all contracts you have with foreign companies by 2013. One helping you store bullion at the Zurich airport, for example.

This week, a new study commissioned by the Government Accountability Office suggests tax receipts could go up as much as $5.8 billion a year by withholding passports from Americans who have unsettled debts with the IRS.

Assuming, of course, Congress passes legislation to make it happen.

"Such legislation," the GAO report says, "could have the potential to help generate substantial collections of known unpaid federal taxes and increase tax compliance for tens of millions of Americans holding passports."

Presumably that's music to the ears of Sens. Max Baucus and Chuck Grassley, who asked the GAO to work up the numbers, but who had no comment when asked about the panel's final product.

The GAO shared the not-so-comforting thought that passports are already withheld for people who owe more than $2,500 in child support.

"I am a Resource Reserve member," writes a reader identifying herself as a Ph.D economist. "I read your 5 Min. Forecast regularly. I find it mostly helpful. But…"

Of course, there's always a "but."

"I have to take extreme exception to your depiction of President Obama in Wednesday's post.

"Furthermore, you are way over the top on your comments about raising taxes. The implication is that corporations should continue paying little or no taxes and their overpaid executives not be taxed a bit more to help the unemployed, poor and homeless, who are sinking further and further into poverty and starvation while the already bad education of their children is made worse with funding cuts.

"Where's the empathy for those who are less privileged than you. And don't give me the Boehner tearful BS reply. Many unemployed people have striven just as hard for the American Dream but have simply been stomped by the greed of people like you.

"If corporations and people like you continue to have your way. someday we could see an uprising like that in Middle Eastern countries."

The 5: You're right. Something's gotta give. Grouping us with "corporations" is a first, we have to say.

"What a stupid argument!" writes another, bypassing the niceties altogether.

The 5: We woke up on the wrong side of the bed yesterday. Unfortunately, sarcasm doesn't seem to be received with the playful spirit it used to.

"What makes you think that people will stop innovating and starting new businesses if tax rates on the wealthy returned to Clinton-era rates?" the reader goes on. "Are you arguing that nobody started new businesses under Reagan?

"Or during the 25 years before Reagan when taxes on high incomes were much higher than even during the Clinton Presidency? Of course they did. American prosperity was even higher in the 'high tax' era.

[So higher taxes = good thing?]

Since the Bush tax cuts, America has lost jobs, middle-class incomes have stagnated or declined and, of course, our national debt has ballooned.

[Preaching to the choir. We've been on this beat for years… I.O.U.S.A., Empire of Debt, Financial Reckoning Day.]

"Indeed, more than half of that debt that the Tea Partiers decry was caused by lowering taxes on the rich while still engaging in two foreign wars.

[No argument there.]

"There is one simple economic fact you need to keep in mind: As long as a businessman can make more money by innovating or starting a new business than he could by doing nothing, he's going to go for it, no matter what the taxes are. If taxes become too burdensome, he will hire a tax lawyer to structure his business to minimize taxes; but otherwise, taxes rarely, if ever, factor into a decision to start a business.

"If you think otherwise, where's your proof?"

The 5: We're making a film on the very subject. We'll let you know when it's done.

"If you are going to portray Obama as a socialist clone," chimes in another, "how about giving equal time to Bush Jr.?

"On his watch, we got into two wars whose bookkeeping conveniently were not made a part of any budget. We got massive tax cuts with no correlated spending reduction. How about showing the Shrub as an Alfred E. Neuman clone?

"That would be fair and balanced. Otherwise, you are all the victims of your own selective memory."

The 5: Hah. We're neither fair… nor balanced. We do, however, recall having a great deal of fun during the Bush W. years:

Who could forget this gem?

We lamented Bush leaving the White House, in fact, because he was such an easy target. We still miss him.

Reagan did this or didn't do that… Clinton was or wasn't this. Bush Jr., Boehner, Obama, yada, yada… if you want to spend your time assigning blame or feeling good about your party, you'll have to do it on the discussion board without us.

"I'm not a Republican and wouldn't vote for one if my life depended on it," writes a fourth reader on that very discussion board, "but Republicans do have some good ideas, just as Democrats do, and we need to expand our logic beyond A or B to both A and B (consensus) or neither A nor B, because our dichotomous logic is getting us nowhere."

The 5: That's not entirely true. A or B… or neither A nor B… is bankrupting the government and making lobbyists rich. That's, at least, somewhere.

The reader began by suggesting Congress should eliminate Medicare and Medicaid. Heh. Post your response here.


Addison Wiggin
The 5 Min. Forecast

P.S. "There seems to be some debate about whether or not Social Security is an entitlement program," writes a reader from Oregon, tiptoeing into a minefield. "I may be an outlier here, but I've paid into the system for 35 years now.

"My monthly 'take' from the government, if I'm ever able to retire, will be well above what I ever paid in on a monthly basis. Even if I give myself the generous 8% annual increase that our great state guarantees their employees, I'm still taking the government to the cleaners.

"Of course, it's an entitlement program!

"I, for one, will not sign up for it. Not Social Security, not Medicare, nothing from the government. Not even my free burial plot for being a veteran. Hmm… I better book my reservation for July in Vancouver, B.C."

The 5: Indeed. We look forward to seeing you there.


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