David Galland put together an analysis worthy of your time where he discusses various viable scenarios we may see play out with the US dollar, stocks, commodities, and precious metals in coming months:
…given the current ill health of the dollar, I remain convinced that the Fed will pause in its blunt-force monetization, come June. And that is likely to provide a shot in the arm for the dollar – versus the equivalent of a shot in the head to the dollar, should they reverse themselves and attempt to continue monetizing at the same elevated levels, past June. Among other consequences, a rising dollar could spell trouble for overheated commodities, at least over the short term.
The big unknown, of course, is what will happen to U.S. Treasury rates. And for reasons discussed a moment ago, this is a really important unknown. We shouldn’t have to wait overly long for some answers. But while we wait, a few scenarios to ponder:
- Best Case: For a time, post-June the Fed becomes a relatively less important player at the Treasury auctions, buying about $17 billion in Treasuries, vs. the $100 billion or so they are buying now, and the market responds favorably to the policy shift. The gap left by the Fed is filled in by institutions, and by friendly governments, looking to roll back their diversification into the euro and the yen – given the poor outlook for both. For a while Treasury rates remain relatively stable. And that encourages the U.S. government to continue spending willy-nilly and keeps the party for equities continuing for awhile longer, albeit with the participants on edge and watching the exits for any movement.A rebound in the dollar, one result of an inflow of renewed foreign buying, would hit the commodities, causing them to underperform until it becomes obvious to all down the road that the Fed will have to once again begin monetizing.
- Medium Case: Post-June, participation at the Treasury auctions weakens, but not disastrously. Rates rise, but also not disastrously. The economy teeters on the edge, but doesn’t fall. Neither does the dollar rise overly much, and something akin to a twitchy status quo continues as people wait for the other shoe to drop, as it inevitably must given that the overarching problem of sovereign and household debt has not been resolved. Volatility in equities and commodities increases, but there is no sustained move one way or the other. Yet.
- Worst Case: Post-June, auction participation falls significantly, and interest rates begin to accelerate to the upside, sending equities markets into a tailspin, dragging commodities down with them. The Fed quickly reverses course and begins writing the big checks to the Treasury, stabilizing interest rates but sending shock waves through FX markets as the dollar hits the floor and discovers the floor is made of glass.The precious metals and other commodities soar. With nowhere else to run, investors begin bargain shopping for fallen equities – which are linked to tangible businesses, after all – and they bounce relatively quickly as well. Meanwhile, as the dollar collapses, the cost of everything begins to soar, crushing the unprepared and triggering real hardship. Unable to push interest rates higher to head off the price inflation, the Fed heads retreat to a hidden bunker and begin looking for friendly countries willing to give them sanctuary.
Of course, no one can see the future – but I think all three of those scenarios are likely to materialize in the relatively near future, one after the other from Best to Worst.
If I am right, then the way to play it is to expect a near-term rally in the dollar. While the U.S. dollar is toilet paper, it is of a better quality than the euro or the yen. Which is not to say that it doesn’t deserve its ultimate fate – the fate of all fiat currencies – but rather that, as long as the Fed shows some restraint here, it may be able to stave off that fate a bit longer.
Source: Silver Bear Cafe
With the second round of quantitative easing slated to come to an end in June, there may very well be a reprieve for the dollar – albeit for a short period.
We’ve maintained that any market crash or correction in equities, commodities and precious metals would likely have to occur as a result of upward pressure on the dollar. As Mr. Galland points out, the “best” case scenario that will play out initially is an official halt to Fed monetary easing, which will be followed by a generally positive sentiment all around.
This should sound an alarm for what’s coming next.
How long this will last is anyone’s guess, but optimism in stock markets and renewed US dollar strength will be short-lived, especially if we consider that earnings reports post-Fukushima may be, in effect, a collapse countdown clock ending sometime in July. If the Fed does curb their purchases of US Treasuries and the only buyers that remain are non-government institutions and foreigners, then sometime in June/July we may very well see a breaking point in stocks and commodities, as well as recent parabolic moves in precious metals like silver.
Once that breaking point is triggered, it is possible that we get into flash crash territory, and then potentially a sustained and rapid crash on the order of late 2008. How severe will it be and will we go to new lows? Impossible to say, because it is an unknown variable essentially in the hands of Federal Reserve policy. For an asset like silver, which has been rocketing up for over a year, Pragmatic Capitalism via The Daily Crux suggests that we could be looking at a pull back from the current $50 all the way down to between $30 – $35 by this July – a significant, and for investors, very scary decline. Stocks and commodities have seen similar gains – and the same fate may await them during the “medium” case phase described by Mr. Galland.
So, if you see the “best” case scenario of general euphoria, followed by the “medium” case scenario of collapsing stock markets and commodities a short time later, then your personal preparedness alarm’s decibel levels should go up a few notches, because what’s coming next is not going to be fun.
At this point, unless the Fed and the Obama administration want complete panic, they will be left with no choice but to infuse the system with even more cash in an effort to ‘stabilize’ financial markets.
However, this time around those stabilization policies could be the final nail in the coffin, leading eventually to unprecedented inflation levels in the US, and the real possibility of a US dollar collapse and hyperinflation.
It is our view that, while events may not necessarily play out exactly as described, an increasing number of people understand that the system is deteriorating, which explains why many are preparing at unprecedented levels. For those who still have cash on hand, you may see one more great buying opportunity for precious metals and food commodities before the next inflation leg up.
We urge our readers to remain vigilant because we are either at, or very quickly approaching, the precipice. June and July may be critical in determining how severe the next phase of this economic crisis will be.
Look for the signs we’ve discussed in this and previous commentaries, as they may be the harbingers of the next high intensity wave.
Some Related Reading and Signs to Watch For: