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Given my concerns with this chart, I have been getting a lot of questions as to why I have not yet shorted US Equities. The answer is obviously one of timing. Dollar down = REFLATION. Breaking The Buck has been one of our 1H09' Investment Themes, and I am very respectful of this global macro factor's influence on asset prices. Three months ago was the time to get invested on this Theme, not three hours ago.

So far, I have sold down gross long exposure as opposed to selling short aggressively into strength (taking the number of long position in our virtual portfolio down from 38 to 12, and holding short positions around 12 all the while). The most emotionally charged part of the REFLATION trade can be the most powerful. If you have a solid year-to-date performance, selling up here is a very easy decision to make. If you don't, you're forced to chase. When people are forced to chase, I like to sit back and watch.

In the chart below, Andrew Barber has shown the US Dollar on two durations:

  • 1. Long Term TREND, breaking the $81.60 line of support (red line), going back to 1971 (when Nixon abandoned the Gold Standard)
  • 2. Intermediate Term TREND, highlighting the last year of US Dollar pricing

In the longer term chart, we shine a flashlight on the crisis period of the US Dollar = Q407' to Q209'. This is where we see the impact of 3 camps Breaking The Buck:

  • 1. Bernanke - a politicized Federal Reserve cutting rates to zero (economic crisis)
  • 2. Bush/Obama - socializing the country's losses (credibility crisis)
  • 3. China - getting upset (Client crisis), countering with USD replacement rhetoric as world's reserve currency

With the US Dollar down again today (despite Geithner galloping to the rhetorical rescue), my currency crisis questions remain. After paying out every politician and holder of the almighty petrodollar, when will our Chinese creditors and American savers get paid?


Keith R. McCullough
Chief Executive Officer

Chart Of The Week: US Dollar Moves Into Crisis - usd1