Back on April 1, I wrote about the slowing trajectory of the U.S. dollar's rise against most currencies
. Since then the euro, Australian dollar, Canadian dollar, Singapore dollar and most other currencies have risen by 5 percent or more. Even dogs in the currency world, such as Brazilian real, have risen by 10 percent.
If you had traded this idea with a put option on the Dollar Index, you would have double-digit gains within one month. It is not too late to jump in on this trade as long as the talking heads on CNBC still spout phrases like, "The Fed is likely to raise rates later in 2015."
In reality, I believe we will see the exact opposite happen later in 2015. I suspect we will see the fourth round of quantitative easing (QE4) by September.
I realize this is a very contrarian view and diametrically opposite to what the world markets are pricing into the asset classes, but let me walk you through this scenario:
The Federal Reserve has kept the fed funds rate near 0 percent not only through the financial crisis of 2008 but for seven years after that. This has led to tremendous amounts of liquidity that has helped inflate all kinds of asset prices, from stock markets to real estate, art, fine wines and other ridiculous assets.
This was money that nobody earned. It was conjured out of thin air and distributed to the elite class (banks) and the larger corporations so that they could earn a living on this free money. The S&P 500 is trading at 27 times the past 10-year average earnings, adjusted for inflation.
How would money be made when the corporations cannot sell anything because consumers don't have disposable-income-producing jobs?
The U.S. game is nearly up now. For the past 40 years the U.S. has been creating current account deficits. The U.S. buys more from overseas than it sells abroad and finances the difference on credit.
U.S. dollars go to overseas suppliers. Their central banks take the cash and send much of it back to the U.S., where it was used to buy stocks and bonds.
Many of the asset bubbles have been caused by this trade. The dot.com and subprime mortgage bubbles are just a few that were created by this excess liquidity. And when the trade deficit slowed, the Fed came up with another source of liquidity — QE.
The Liquidity Gauge is the sum of foreign exchange reserves overseas plus QE funds produced, less Washington's borrowings.
In 2013, low government borrowing combined with QE led to near record levels of liquidity. The S&P 500 reflected this with a 30 percent gain.
So what will happen in 2015?
It is predicted by the Congressional Budget Office that the deficits will likely remain constant at $500 billion per year until 2020. While some funds will seep into the U.S. via the Japanese and European QE programs, it will be small.
The only major source of liquidity would be from dollar foreign exchange reserves overseas. But world trade has slowed, greatly reducing those reserves.
So we have no other inflow of liquidity to fund the continuation of asset bubble growth. As a result we will have negative net liquidity.
The reason I believe QE4 will be in around September is because usually in the second quarter we have tax revenue, as tax filing dates are April and June. By September this liquidity will dry up and we will see the collapse of the stock markets and a plunging U.S. dollar.
Voila — QE4 is born!
As I have mentioned at the start of this missive, it is not too late betting against the U.S. dollar now.
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