The Hard Truth About the Dollar

Don’t Believe the Narrative Were you forwarded this email? [Sign-up to The Daily Reckoning here.]( [Unsubscribe]( [Daily Reckoning] The Hard Truth About the Dollar - The narrative and reality are sharply diverging… - This C.O.B.R.A. bites hard… - Expect a lower dollar… Recommended Link [This Amendment could cause a Stock Market explosion…]( [Read more here...]( The Dawn of Socialism is at hand here in America… And its trigger lies in the details of one Constitutional Amendment set to cause havoc in our country. This is why I’ve put together a special briefing detailing my prediction… [See The Biggest Prediction Of My Career]( Portsmouth, New Hampshire July 13, 2021 [Jim Rickards]Dear Reader, Foreign exchange markets are at an interesting turning point. The main driver of exchange rate fluctuations are capital flows, which are driven by a combination of economic growth and interest rates. Typically, exchange rate forecasting involves forecasting economic growth, identifying trends in monetary and fiscal policy and predicting the likely path of interest rates. You then look at exchange rates to see if they reflect the interest rate trends. If they do, you can forecast a continuation. If they don’t, you can forecast a reversal. It’s easier said than done, but the tools are available. Most American analysts rely on information from London in sources such as The Economist or The Financial Times for their understanding about the relationship between the euro and the U.S. dollar. But London has always been highly prejudiced against the euro. Traditional tools (most left over from the 1960s and the original Bretton Woods system) don’t work. Purchasing power parity (PPP) is cited, but it’s useless for forecasting because most services and many goods cannot be exported. Who cares if a McDonald’s Big Mac is more expensive in Austria than Austin? No one is going to put a Big Mac on a plane and fly it to Vienna. You can safely ignore The Economist Big Mac Index on this point. Like Stopping a Car on a Sheet of Ice Capital flows are what matter and those are driven by hot money in search of additional yields and by hedge funds engaged in trend following. That’s why exchange rate trends (in either direction) often overshoot. It’s like stopping a car on a sheet of ice. You can hit the brakes, but the car will keep moving based on momentum. It’s possible to make money on the overshoot, but more often it’s a good signal that a reversion is coming. With that as background, why is forecasting exchange rates especially challenging right now? The reason is that the narrative and the reality have diverged. The narrative is the “story” that markets believe and respond to. Right now, the narrative goes like this: U.S. economic growth is strong. There’s a labor shortage that’s forcing wages higher. Those higher wages will feed through the economy in the form of higher consumer prices. This will result in what’s known as cost-push inflation affecting the economy as a whole. Higher inflation will result in higher interest rates. Those higher interest rates will attract capital to U.S. markets causing the dollar to grow stronger. The euro and other major currencies will retreat in the face of a stronger dollar. Recommended Link [“Odd” Investment Nearly Doubles The Market?]( [Read more here...]( “I just don’t believe it” — That’s what most people would say about a 114.5% total return from less than 9 minutes of “work.” But investing icon Jim Fink has defied Wall Street time and time again thanks to the incredible precision and power of his “odd” system… [Click Here To Learn More]( The Reality Here’s the reality: U.S. growth is steadily weakening. The Atlanta Fed GDP forecast for Q2 has been lowered from 10.5% (June 15) to 9.7% (June 24) to a current level of 7.9%. That’s strong by the standards of the 2009 – 2019 expansion (average annual growth was only 2.2% over that period), but it’s not impressive given the fact that we are coming off the worst economic collapse since 1946. The trend is not encouraging. The labor shortage is a mirage; there are tens of millions of prime working age individuals on the sidelines of the labor market. It’s just that employers don’t want to pay up to hire them. That’s more a sign of disinflation than inflation. Real wages were flat in the most recent employment report. Critically, the yield-to-maturity on the 10-year Treasury note has declined sharply from 1.745% on March 31 to 1.437% on July 3. That’s as clear a signal of disinflation (or even deflation) as you can find. Collectively, slower growth, flat wages, weak labor force participation and falling interest rates all point to a weaker dollar and to gains in the euro, Sterling, Swiss Franc and other developed economy currencies. So, which is it? What’s driving FX markets? Is it the strong growth narrative or the weak growth reality? C.O.B.R.A. I’ve recently released a new trading service called [Tactical Currency Profits.]( I use the C.O.B.R.A. trading system, which stands for [Currency-Optimized Breakout and Reversion Analysis.]( That’s a reference to my proprietary automated system for identifying the best trading opportunities in foreign exchange as and when they arise. The major currencies I recommend display unique trading characteristics that distinguish them from traditional stocks and bonds. The first unique feature is liquidity. Global currency markets trade in volumes of over $6 trillion per day compared to about $165 billion per day for global stock markets. Global currency trading is principally conducted by the largest banks in the world including Citigroup, JP Morgan, Goldman, Barclays and others. This combination of huge volume and large bank participation as market-makers gives the foreign exchange market 24/7 liquidity that stock markets cannot match. The second unique feature is that currencies are range-bound when compared to other currencies. Stocks such as Apple, Facebook and Netflix can figuratively “go to the moon.” But, stocks can also go to zero when they face bankruptcy or large unexpected liabilities. That’s not true for major currencies. They can go up or down and investors can make or lose money, but the cross-exchange rates remain in a range. For example, the most active currency pair, EUR/USD, (the Euro/U.S. Dollar cross rate) has traded since 1999 in a broad range of $0.80 to $1.60 and mostly in a narrower range of $1.05 to $1.40. The euro has never gone to $0.50 and has never gone to $2.00. It would be an unprecedented shock to global markets if it did. Once you identify the trading range for a currency pair and know the dynamics of the cross-rate, you can spot turning points where a strong currency is headed for a fall or a weak currency is set to rally. Recommended Link [Dave Forest (One of America’s Top Angel Investors) Says… “This is a Ground Floor 5G Opportunity in 2021”]( [Read more here...]( 5G will be great. It’s estimated to add $12 trillion to the economy... And set off huge innovations like self-driving cars and smart cities. The Internet of Things market alone is projected to skyrocket 3,040% by 2026. But first, 5G has to overcome a major flaw in 2021. That’s why angel investor and tech expert Dave Forest spent days in Denver investigating 5G. And he unveiled a miracle tech — what he calls the 5G “Master Key” — that can fix 5G and take it nationwide. This is a ground floor opportunity. Dave has a track record of pulling big numbers like 4,942% and 2,805% from previous recommendations in one of his research services. And he believes the 5G “Master Key” stock could post substantial gains too. [Get Details On The “Master Key” Stock]( The Sweet Spot In the C.O.B.R.A system, breakouts are situations where a currency breaks out of a trading pattern to the upside or downside. Reversions are situations where the currency is near the high or low of its trading range and is set to move back to a central tendency. Those turning points are the sweet spots where the C.O.B.R.A. dashboard sees the turn and allows you to position for consistent profits. The C.O.B.R.A. system is the result of decades of research and experience beginning with my time at the CIA developing financial warfare tools and continuing through my private collaboration with a team of world-class applied mathematicians and computer engineers. I’m pleased to be able to make this research available to you in its newest form — [C.O.B.R.A.]( Reconciling a strong growth narrative with a weak growth reality is straightforward. Reality always wins. The harder question has to do with timing. At what point does the narrative begin to fade and the reality start to prevail in markets? It’s happening now. The U.S. Treasury note market signal is too strong to ignore. The euro fell from $1.2251 on May 25 to $1.1864 on June 18 based on the narrative. Since then, the euro has rallied. In other words, it appears a bottom is in for the euro. The same pattern appears in the cross-rate between pounds sterling and the U.S. dollar (GBP/USD). Reality is beginning to intrude on the narrative. Expect a Lower Dollar The hot inflation numbers of April and May will cool off fast. These are based on year-over-year comparisons. April and May were compared to the worst days of the pandemic in 2020 in terms of lockdowns and quarantines. June, July and August will be compared to a strong bounce-back in the summer of 2020. When those 2020 base effects are stripped out of the 2021 figures, inflation will be back down to its 1.7% long-term range. Second quarter GDP numbers will be released the last week of July and are likely to disappoint. The yield-to-maturity on the 10-year Treasury note will continue its round-trip back down to the 1.2% level or lower. These trends all point to a lower U.S. dollar and higher euro, yen and sterling in the weeks and months ahead. That means excellent trading opportunities for those who want to tap into this massive, yet often neglected market. And my system gives investors the currency exposure they want using exchange-traded funds or ETFs. They can execute my recommendations just as easily as they trade stocks in their regular brokerage accounts. [Go here now]( to learn more about tapping into this massive, $6.6 trillion market. Regards, Jim Rickards for The Daily Reckoning P.S. [I recently revealed my proprietary secret]( for profiting from this massive daily flow of capital I described above. And, of the over 100,000 signups, a few hundred lucky attendees were able to join me in my brand-new V.I.P. membership. Now I’m launching the next step in this project… You can join me with my brand-new Charter Membership by [clicking here.]( I’ve got to warn you though… This membership is only for folks serious about learning how to make money using my $6.6 trillion discovery. [Click here for details.]( Furthermore, the Charter Membership will only be available for a limited-time. That means… If you don’t get in now, I can’t guarantee you’ll ever get this opportunity again. So if you want in on my $6.6 trillion secret, [click here to learn more.]( --------------------------------------------------------------- Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [James Rickards][James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Add feedback@dailyreckoning.com to your address book: [Whitelist us]( Additional Articles & Commentary: [Daily Reckoning Website]( Join the conversation! Follow us on social media: [Facebook]( [LinkedIn]( [Twitter]( [RSS Feed]( [YouTube]( The Daily Reckoning is committed to protecting and respecting your privacy. We do not rent or share your email address. By submitting your email address, you consent to Paradigm Press delivering daily email issues and advertisements. To end your Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [unsubscribe here.]( Please read our [Privacy Statement](. For any further comments or concerns please email us at feedback@dailyreckoning.com. 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