I don't think the entirety of Rick's assessment will occur, but he may just be spot on about the potential for a serious USD breakout here. That would be due to a fresh round of dollar denominated plunging asset settlement, which is dead ahead IMO.

BTW - Do we have capital punishment here for posting such deflationista rank heresies? :eek: Up against the wall and shot by firing squad at dawn?? :p Seriously, I think Rick is sniffing out a story here.

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IF DOLLAR IS BOTTOMING, KILLER DEFLATION IS NEXT

by Rick Ackerman on May 28, 2009 1:49 am ∑

Has the dollar put in an important low? It looks like it, since the NYBOT Dollar Index widened the gap on Wednesday between it and a key Hidden Pivot support at 80.04 that we drum-rolled here earlier. We had been using that number as a downside target since late April, when DXY was trading just above 84; it was first touched last Friday, then exceeded by a scant 0.23 points before bouncing back.

Now, if the dollar is indeed embarking on a major rally in line with our forecast, stocks are likely to fall, and gold and other precious metals to come under pressure, for the foreseeable future. These new trends may have begun to emerge yesterday, since the Dow Industrials fell 173 points and Comex June Gold reversed a promising rally early in the session to settle more than $10 below the dayís highs.


The short squeeze that has powered the stock marketís bear rally since March 6 corresponds precisely to a period of weakness in the dollar, and that is why we expect shares to fall hard if the dollar strengthens.

Why should this be so? The simplest answer is that a rising dollar is going to catch borrowers around the world with their pants down. For despite the deleveraging of the financial system that has occurred since the U.S. mortgage market began to implode about two years ago, borrowers are still caught in a vise, and the world is still massively short dollars because that is the currency in which nearly all borrowing has been done.

World Massively Short Dollars

Scores of millions of homeowners who are mortgaged to the hilt have implicitly bet against the dollar. So have financiers who have used derivatives to borrow dollars in some leveraged fashion. There are hundreds of trillions of dollars worth of these instruments still in play, most of them denominated in U.S. dollars, and if they cannot be rolled forward, the borrowers will have to settle up in cash.

Similarly urgent demand for otherwise shunned equity shares creates short squeezes in the stock market all the time, and there is no reason why a fundamentally worthless dollar could not be squeezed higher by the same implacable forces.

A rising dollar is most surely not what the world needs right now, since it will increase the real burden of debt on all who owe dollars. That is the crux of deflation, not the increase in the money supply that inflationists have been blathering about for years. Who cares what the supposed money supply is? Most of the yo-yos who cite growth in the money supply as inflation per se donít even know the difference between money and credit.

You should pay them no mind in any event, since the far more important concern, at both the personal and macroeconomic levels, is whether your and everyone elseís debts are becoming easier to service, or harder. As long as the latter condition persists - and it will, unless a bailout package comes along that arbitrarily adds three or four zeros to every Americanís bank account - all who owe will be subject to the asphyxiating effects of deflation.

$13 Trillion Just ĎSpití

A deflationary outcome might seem highly unintuitive at the moment, given that the U.S. is in the throes of the biggest fiscal and monetary blowout since the founding of the Republic. But as we continue to point out, the $13 trillion that has been expended already on bailout this-or-that is just spit compared to a global asset deflation that has already sucked $60 trillion to $80 trillion of asset values into a black hole.

We think this trend will continue and that asset values have much farther to fall before deflation has run its course in perhaps five or six years.