Marketvane’s Bullish Consensus for the $US hit 90% yesterday. At the beginning of March it was 83%. Market bullish sentiment toward the dollar has not been this bullish since the turn of the millenium. It is a very strong contrarian signal…
The US Dollar index is going parabolic. More often than not, markets that go parabolic will crash. This is what happened with the dollar in 2008 (click to enlarge):
The common “narrative” out there is that the dollar squeeze is being fueled by European sovereign and corporate entities scrambling for dollars in order to pay dollar-denominated debt obligations. Yes, this is part of the equation. But, just like in 2008, it is a sympton of a castrophic underlying systemic problem. After all, the Fed has created close to $4 trillion in new dollars, $2.6 trillion of which are sitting in the excess reserve account of the big banks at the Fed earning interest. That’s $2.6 trillion in excess dollars that can used to fund any excess demand for dollars.
There’s also a repo collateral short squeeze plus a vicious Treasury short-squeeze going on, especially in the middle of the curve, where the Fed has removed most of the supply. But again, these are all “symptoms” of an underlying problem. Let’s not forget that the price of oil, along with many other key economic indicators are collapsing right now.
I believe that the collapse in the energy sector has triggered a silent derivatives counterparty bomb that we can’t see because of the intentional opacity of the OTC derivatives market. But you don’t have a 50% collapse in a key economic commodity like oil – a commodity which has $100’s of billions in OTC derivatives securities wrapped around it – without some kind of counterparty default tsunami that has been triggered. Throw on top of that the Greece situation and you have a recipe for a derivatives financial nuclear meltdown.
Wall Street has been stunningly silent about the meltdown in the energy sector. There has not been one utterance about any derivatives connected to the situation. But we’ve seen at least two big energy junk bond issuers blow up. One of them did not even make the first interest payment on its debt. Without question there were OTC credit default swaps connected to this debt.
The parabolic dollar “short squeeze” storyline is what they want you see. I would suggest that something much bigger and catastrophic unfolding behind that curtain…