Mark Twain & $US

Summary

As the man said: "Rumours of my death are premature". Huckleberry Fed (huckster that he is) seems to have done it again.

Not a day goes by when I don't read something or other about how the US Dollar is inevitably going to collapse.

I am not an apologist for the US Dollar, but it seems to me that the very concept of fiat currency is inextricably linked to the fortunes of the US Dollar. In short, if the US Dollar Index collapses, an implication will be: "Well, if it could happen to the mighty US Dollar, it could happen to any Fiat Currency".

Before the gold-philes reach for the champagne in celebration of the demise of Fiat Currencies, perhaps we should look at what the charts are telling us about the fortunes of the US Dollar. The chart below is courtesy Decisionpoint.com.

The first point of interest is that the price chart is showing a series of descending bottoms dating back to December 2006, whereas the PMO Oscillator chart is showing a series of bullishly non-confirming rising lows over the same period.

Recently, the daily oscillators have been showing further non-confirmations as can be seen from the chart below (courtesy stockcharts.com)

The problem with daily charts is that they can be influenced, so let's look at the weekly stockcharts.com chart:

In this case, the non-confirmations are absent, but there is a clear "falling wedge" which looks like it wants to break up given the distance of the price away from the 50 week Moving Average and the 200 week moving average.

The monthly chart is perhaps the most voluble of all: (Courtesy Decisionpoint.com)

Here the PMO Oscillator is screaming a non-confirmation. It has risen from roughly -6.0 to -3.0 whilst the price is bouncing off the 80 support level.

Of course, anything is possible, but according to strict technical analysis techniques there is an argument which could be put forward as to why it should bounce up from this point.

One solid reason might be that the long bond yield is sending serious messages that it does not want to fall further from this point.

Note the series of rising bottoms from 1999 to 2003 which foreshadowed a bottoming of yields in mid 2005. Note further how the PMO has broken into positive territory with higher highs - for the first time since 1987.

Of course, this has been the ultimate cause of the fallout in the sub-prime mortgage market, and the economic temperature is plummeting within the USA, as evidenced by the following quotes which I extracted from various USA media reports o July 25th 2007.

• "[California] Lenders filed 53,943 notices of default (NoDs) during the April-through-June period, up 15.4 percent from 46,760 for the previous quarter, and up 158 percent from 20,909 for second-quarter 2006, according to DataQuick Information Systems of La Jolla". Source:www.inman.com/inmanstories.aspx?ID=63974
• "Countrywide [the US's largest mortgage lender] said about 5.4 percent of the home equity loans to customers with good credit that it held an interest in were past due at the end of June, up from 2.2 percent at the end of June 2006. By comparison, more than a fifth of subprime loans were past due at the end of June, up from 13.4 percent a year ago". …

Mr. Mozilo said that because of a large number of homes on the market, the housing sector would continue to suffer until sometime in 2008 and not begin recovering until 2009. (Source: www.nytimes.com/2007/07/25/business/25lend.html?_r=1&th&emc=th&oref=slogin)

That this is unlikely to cause a collapse in the US Dollar flows from the fact that the US is not alone in deterioration of creditworthiness of consumers. Here are a couple of quotes which I extracted from the Australian media in that same week:

• "There were 31,964 personal insolvencies across Australia, up 17 per cent from 2005/06 to the highest level on record." Source: Insolvency and Trustee Service Australia, July 2007.
• "The debt burden has soared to a record and Australians are spending almost 12 per cent of their disposable income on interest repayments"

"Prime Minister John Howard said that while some families were doing it tough, the Reserve Bank's March financial stability review found most people who took on debt could afford it. He said with wages strong and the unemployment rate at a 32-year low, "fairness in Australia is at a 32-year high". Source:www.theage.com.au/articles/2007/06/21/1182019283559.html

Bloom comment: Prime Minister Howard's comment can, at best be politely described as "amoral". "Fairness" (whatever that may mean) is being financed by growing debt and a shrinking ability to service that debt, as evidenced by record insolvencies.

At best it can be argued that the level of the water in the global economic bath is probably receding, and there is no reason why the US dollar should cop any special punishment.

But, if US Interest Rates are rising, this will likely give rise to "issues" in the bond markets - so let's look at the likelihood of this:

This Point and Figure Chart (Courtesy stockcharts.com) has a "feeling" of sideways movement about it - where the majority of the price action in the 30 year bond has been oscillating between 97 and 114 for the past decade (7th February 1998 to 7th August 2007). i.e. The level of 5.5% - 6% (possibly 5.75%) seems to be the "steady as she goes" level with which the Fed would be happy to live. That would likely keep the US Dollar from falling below the 80 level, and also keep the US property market from falling out of bed.

Of course, the issue of inflation will raise its head if the oil price keeps heading north, so let's look at that:

This particular chart of the oil index ($XOI) looks like it may want to test the support of the upward pointing trendline that has been in place since around 2004.

Indeed, the weekly chart of the price of Brent Crude looks like it might have been "managed" downwards last week (Source: http://tfc-charts.w2d.com/chart/BC/W)

If the daily price chart of oil can stabilise at around $70 - $72 a barrel, then the markets might win some breathing space.

Interim Conclusion

The technical evidence seems to be pointing to the conclusion that Central Banks are adopting a "steady as she goes" policy. Technically, it seems unlikely that the US Dollar Index will break below 80, and there is, as yet, no sign of panic in the Bond Markets.

Unfortunately, the risks have not gone away, as the charts of the Dow Jones Industrials and the $SPX are showing (courtesy Decisionpoint.com)

The DJIA monthly chart looks like it may have some downside from here (within a rising trend)

This downside potential is mirrored in the much weaker S&P monthly index which is showing signs of a possible double top formation.

Just to check the risk exposure in the Derivatives Industry, I had a look at the chart of JP Morgan (courtesy Bigcharts.com)

Here there is definite evidence of "scrambling". The price of JPM has been weakening for over a month, whilst the On Balance Volume chart gave a serious sell signal a couple of weeks ago.

Fascinating to this analyst is the fact that the OBV clawed its way back above the rising trendline. Whew! Talk about close shaves.

Finally, let's look at the impact of the Sub-Prime fallout on the gold markets, if any:

Nothing to get excited about in the $XAU - which came back to its rising trendline before bouncing up again, although the price of the shares relative to bullion itself gave a small buy signal

Oops!

The weekly gold price chart is showing a bearish non-conformation in that the price chart is showing rising bottoms since October 2007, whilst the PMO oscillator is showing falling bottoms.

Personally, I like the "feel" of the weekly chart of gold. Notwithstanding this non-confirmation, it feels comfortable - even though the daily chart (not shown) is a mite overbought.

Overall Conclusion

The little black duck known as the US Federal Reserve seems calm on the water's surface, but below the surface there is evidence that he has been paddling furiously.

The underlying trend of gold is "up", but this has been successfully capped in the interim by the little black duck who was paddling against a strong current.

If I had to bet on it, I would bet on a calm patch as markets move sideways from here, with the possible exception of gold.

I can't put my finger on it, but there's something about gold that is starting to feel slightly different than before.

Maybe it's the following chart of the goldollar index (courtesy Decisionpoint.com) - which is approaching the apex of an important triangle. My gut is telling me that the break out will be to the upside because, if the Dollar does what I'm expecting it to do - which is "refuse" to break down - we might be entering a new era for gold. Nevertheless, we should let the market tell us.

Brian Bloom
www.beyondneanderthal.com

PS. An anomaly in the above is the price of oil. We may be witnessing the emergence of an awareness that there are technologies waiting in the wings to replace oil. See www.beyondneanderthal.com/sample-chapter.html