PetroDollars no longer back by USD? Implications?
- Thread starter matador04
- Start date
guys:
All of these policies are based on the assumption that current trends will continue long term. Look at the US $ index over a long term chart and you'll see that a break of long term support in the past was more often a buying opportunity than the opposite.
Fundamentally, gulf state unpegging and further dollar dumping will occur based on political function, not merely 'trend following'. Now the public fear sets in because of whats occurred in the past.
But just as easily, this can all reverse. Here's some 'devil's advocate' arguments...
1) What if the US is closer to the end of the subprime debt bubble burst than the beginning? That implies an end to the rate cutting cycle.
2) What if the China growth story (thus underlying oil demand at the margin) is very close to a reversal of fortune? There's evidence high oil prices are causing problems: rationing starting to occur. What if China reacts by accelerating the strengthening of their currency (to increase their commodity input buying power)? This makes their exports less competitive at the same price. Look at Japan for evidence that no matter how much you evolve an export economy away from export dependance (it is a relatively mature developed export economy that has a mature consumption base), you can not avoid vulnerabilities to its export sector (currency valuation). Anyway, this slowdown of their export economy will kill oil demand.
3) what fundamentally makes the euro or any other currency so much more valuable than any others? Trade balances, yield differentials, and structural characteristics of underlying economies. Developed currencies (eur, usd, jpy) all have some serious long term negative future value implications caused by aging populations and their respective entitlement system (retirement, health care, and lack of workers) future drainage issues.
Furthermore, one could argue that emerging countries (ie China) without an entitlement system do not fairly account for their future entitlement liabilities. In other words, 1.5T of reserves in individual savings is only there because people save for the rainy day because their government won't take care of their sick and retired. What happens if those leveraged and re-routed (into the shanghai stockmarket) savings take a negative hit? In other words, its not fair to compare US savings rate against Chinese. Simply because they don't speak of the same thing nor reflect true future liabilities on the net society.
You might even go further say medicare/social security funds should be included in US reserve tallies. Thats some 3.5T or so, isn't it? Suddenly we don't look so poor, and don't appear to be such poor savers.
And instead because we put those funds into bonds, they tally as debts. Again, this is an accounting issue more than a way of showing true wealth. Just as easily you could turn Chinese 1.5T of reserves into debts if Chinese bond payouts were sizeable and attractive enough (to put reserves into) to compensate for out of control CPI.
4) How many EURO, saudi, etc products do you consume vs. US products? As long as US is still *the* center of innovation and possessor of what is valued (which it still is), it will remain a desireable currency store. The Chinese Yuan will never be a currency buying destination if CPI + carry > interest rate. Same goes for many export dependent emerging asian currencies.
For exactly this reason the dollar *is* still a safe haven. The more curious question: Who is the dumb money with prices at these levels? The US treasury buyers? Or the US dollar sellers?
10 yr yield at 4.17% says there is still belief in the dollar. A 9% unwind in about a week of the CADUSD (1.105 -> 1.01) says whats going on isn't as structural as it appears. I'd go out on a limb and bet there's a popular trade out there at your local hedge fund: buying treasury futures against a short USD position. In other words, the USD index doesn't tell the whole story of money flow.
All of these policies are based on the assumption that current trends will continue long term. Look at the US $ index over a long term chart and you'll see that a break of long term support in the past was more often a buying opportunity than the opposite.
Fundamentally, gulf state unpegging and further dollar dumping will occur based on political function, not merely 'trend following'. Now the public fear sets in because of whats occurred in the past.
But just as easily, this can all reverse. Here's some 'devil's advocate' arguments...
1) What if the US is closer to the end of the subprime debt bubble burst than the beginning? That implies an end to the rate cutting cycle.
2) What if the China growth story (thus underlying oil demand at the margin) is very close to a reversal of fortune? There's evidence high oil prices are causing problems: rationing starting to occur. What if China reacts by accelerating the strengthening of their currency (to increase their commodity input buying power)? This makes their exports less competitive at the same price. Look at Japan for evidence that no matter how much you evolve an export economy away from export dependance (it is a relatively mature developed export economy that has a mature consumption base), you can not avoid vulnerabilities to its export sector (currency valuation). Anyway, this slowdown of their export economy will kill oil demand.
3) what fundamentally makes the euro or any other currency so much more valuable than any others? Trade balances, yield differentials, and structural characteristics of underlying economies. Developed currencies (eur, usd, jpy) all have some serious long term negative future value implications caused by aging populations and their respective entitlement system (retirement, health care, and lack of workers) future drainage issues.
Furthermore, one could argue that emerging countries (ie China) without an entitlement system do not fairly account for their future entitlement liabilities. In other words, 1.5T of reserves in individual savings is only there because people save for the rainy day because their government won't take care of their sick and retired. What happens if those leveraged and re-routed (into the shanghai stockmarket) savings take a negative hit? In other words, its not fair to compare US savings rate against Chinese. Simply because they don't speak of the same thing nor reflect true future liabilities on the net society.
You might even go further say medicare/social security funds should be included in US reserve tallies. Thats some 3.5T or so, isn't it? Suddenly we don't look so poor, and don't appear to be such poor savers.
And instead because we put those funds into bonds, they tally as debts. Again, this is an accounting issue more than a way of showing true wealth. Just as easily you could turn Chinese 1.5T of reserves into debts if Chinese bond payouts were sizeable and attractive enough (to put reserves into) to compensate for out of control CPI.
4) How many EURO, saudi, etc products do you consume vs. US products? As long as US is still *the* center of innovation and possessor of what is valued (which it still is), it will remain a desireable currency store. The Chinese Yuan will never be a currency buying destination if CPI + carry > interest rate. Same goes for many export dependent emerging asian currencies.
For exactly this reason the dollar *is* still a safe haven. The more curious question: Who is the dumb money with prices at these levels? The US treasury buyers? Or the US dollar sellers?
10 yr yield at 4.17% says there is still belief in the dollar. A 9% unwind in about a week of the CADUSD (1.105 -> 1.01) says whats going on isn't as structural as it appears. I'd go out on a limb and bet there's a popular trade out there at your local hedge fund: buying treasury futures against a short USD position. In other words, the USD index doesn't tell the whole story of money flow.
scriabinop too many ifs, but what if arab states stop working with the US Dollar and convert most of their savings to other currencies, they will do so if Saudi Arabia decides to do so, America will try to stop it but, then if it does happen the only buyers of USD will be US and it's third world allies
US foreign policies were the most intelligent some years ago, but now everyone has learned what rules they play based on, they easily counter play it, rendering it obsolete and in some cases even turn it against the states
for God sakes just look, America couldn't play the mullas in Iran, Iran is getting away with what it wants, and America is just talking and wasting time and spending more money hiring more US Citizens for worthless positions like the TSA, I respect the fact that they are creating jobs for US Citizens, but what the hell, either let'em go home and just send them their monthly paychecks, or give them something serious to work on. I once saw a TSA manager shouting at those in line, as if she was the airport goddess or something, and everyone else was a criminal or some inferior being for coming to the airport. For all I know when a government stops respecting it's people, other countries stop respecting that country and it's men. Have you been outside of US lately, not too far ago you would gain respect just by letting people know that you are a US Citizen, now it's like "oh American, let's try and insult him".
you know other countries trying to move away from the US dollar isn't because it has fallen against major currencies, like you said it's happened in the past, but now they're just blaming it on that, they want something else
US foreign policies were the most intelligent some years ago, but now everyone has learned what rules they play based on, they easily counter play it, rendering it obsolete and in some cases even turn it against the states
for God sakes just look, America couldn't play the mullas in Iran, Iran is getting away with what it wants, and America is just talking and wasting time and spending more money hiring more US Citizens for worthless positions like the TSA, I respect the fact that they are creating jobs for US Citizens, but what the hell, either let'em go home and just send them their monthly paychecks, or give them something serious to work on. I once saw a TSA manager shouting at those in line, as if she was the airport goddess or something, and everyone else was a criminal or some inferior being for coming to the airport. For all I know when a government stops respecting it's people, other countries stop respecting that country and it's men. Have you been outside of US lately, not too far ago you would gain respect just by letting people know that you are a US Citizen, now it's like "oh American, let's try and insult him".
you know other countries trying to move away from the US dollar isn't because it has fallen against major currencies, like you said it's happened in the past, but now they're just blaming it on that, they want something else
US military invades Iran to protect dollar hegemony...
No...We went in to Iraq to get the WMD's..Then it was to set up a democracy in Iraq and prepare their police and militrary to keep the peace...then it was to fight al queda..and then the civil war exploded....I forget, why are we there now?