Reply #43: T/A: Euro Bullish Divergence (Willie)

[54anickel]

http://www.321gold.com/editorials/willie/willie122205.html

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So, what does this mean? In my analysis, it means the euro is about to resume its bull trend which was launched in 2002 in earnest. Look for a euro rise toward 129 as early as the summer months of 2006, at least by year end. Correspondingly, it means the USDollar is about to resume its bear trend which began at the same time. The dollar DX index is a poor excuse for an index. It has been a regular target of my critical words. It is trade-weighted, but from the 1960 decade when the European weight was four times the Japanese weight. The DX index has over 50% weight in the euro, less than 20% with the Japanese yen, and nothing at all for the Chinese yuan. My best answer to the questions "Why use it? Why not update it?" are that it has forward trading and strategies which cannot easily be changed. Furthermore, the low weights given to Asian currencys permit us guys to ignore them, and to regard them as in a permanent state of official shun, a hedonic relegation to sidelined status. The lower that the yen went in recent years, the cheaper the US imports became in price. Consider the Chinese yuan, formerly pegged to the US$, and now in a quasi-peg outside the realm of trader whimsical action. The yuan peg has been broken, but it does not yet trade in free-floating fashion. Some call the Chinese - American sphere the "dollar bloc" since our economies act as one, without currency shifts of essence.

THE ANTI-EURO INDEX
The dollar DX is thus the most inaccurate, misrepresentative, least meaningful index among the high profile indexes. Some call the DX index the "anti-euro" index since its largest component is the euro currency. In a major Elliott Wave III phase, three things align in coordinated fashion, much like a perfect storm. One, the chart technicals and price movement look just right in one direction, a clear story depicted. Two, the fundamentals behind the movement become crystal clear. The experts line up in unison to proclaim the new phase in a consensus fashion, as they recite those fundamentals. Three, the public catches wind of the story, enough to propel the investment vehicles to new heights. We are fast approaching this EW3 phase. It is not here yet, but its day is nigh on the horizon. My suspicion is in the new 2006 year, hedge fund positions will unwind and lead to mining stock short covering, subsidiary repatriation of USDollars will end, and the new Bernanke USFed will be inaugurated to usher in a new hyper-inflation era. These events will mark major sea changes in the new year.




Look for the USDollar index to falter in coming months. Its pillars have eroded, one by one. Its fundamentals are far worse than dreadful. Yet so-called economic experts proclaim strength in the USEconomy in an absurd fashion, worthy of derision and laughter. The only detectable strong indicators in the USEconomy are high S&P500 stock prices and high housing prices. If the DX index falls much below the 90 level, look for hedge funds and program trades to kick in to send the DX downhill with significant speed and gusto. That will be the story during the Bernanke inauguration, as record trade gaps are announced to contradict claims of economic robustness and strength. The cognitive dissonance will be extremely loud and clear for all to hear and see.

YIELD CURVE: LOUD SIGNAL OF SLOWDOWN
The US Treasury yield curve has been flat for a couple months, a clear unmistakable warning signal. As in, the spread between the 2-yr TBill yield and the 10-yr TNote yield has been stuck in the 5 to 15 basis point range. A spread less than 0.15% is a very loud yet unheralded signal, considering how an inverted yield curve has been such a reliable market signal for economic recession over the past twenty years. The graphic below screams a 7 basis point difference for the Treasury 2-10 spread!!! The financial markets have shown a strong preference to declare "it is different this time" and deny critical turning points marred by losses. We saw it in 1999 with over-priced stocks, justified by technology advances, and telecom progress with cellular phones, fiber optic connections, broadband transmission speed, and the internet. Well, to be clear, the internet made profitability far MORE difficult, due to instant pricing information, despite the streamlined supply chains from orders to inventory to suppliers. The bond bubble is about to give off massive gas. The upshot will be lost opportunities to extract home equity, probably the biggest single source of money available to consumers. The USFed chairman and governors had better pay attention. This is a forced, mandated, controlled flattening of the yield curve imposed by a clueless central bank. They must believe the falsified statistics themselves, since in doing so, they pat themselves on the back for a robust economic performance. Chairman Greenspasm is on record denying the significance of the flattened or inverted yield curve. Recall he misread productivity in 1999, and denied technology stock over-valuation. This man has a track record, one fully forgotten at every critical turn in the road, or during every sea change.

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