It's All About The Dollar!

October 1, 2014

Sometimes seemingly unrelated news is actually joined at the hip and directly related.  For example, what does Bill Gross leaving PIMCO, China announcing "yuan for euro" direct trade and unrest in Ukraine, ISIS overrunning part of Syria and Iraq, and the recent protests in Hong Kong ...have in common?  I'll talk briefly about each and give you some clues along the way to an obvious ending.

First, Bill Gross left PIMCO last week to join Janus funds.  He started the funds over 30 years ago and had grown assets under management to the staggering number of over $2 trillion!  The vast majority of assets held are bonds or some sort of bond/interest rate derivative.  The bull market in bonds which began in 1982 and started with a 15.375% coupon, 20 year Treasury yield has run its course to almost non existent yields.  A simple question might be something like "what will happen to bonds when interest rates begin to rise"?  Or another,  "what will happen to bond's collateral if these low rates have created asset bubbles"? (they have, everywhere). 

Do you think these two questions might have passed through Bill Gross's mind?  Might this thought and the "answers" have contributed to his "exit" from PIMCO?  Might the phrase "getting out while the gittin's good" apply here?  PIMCO already began small asset sales this past Friday and received $10 billion worth of liquidation requests... over the weekend.  This amounts to 1/2% of assets under management without even including a single business day.  Could this be the start of a "run" not only on PIMCO but of U.S. credit markets?

Next, and I believe the most significant news ... and not really even reported on, was an announcement out of China on Monday.  The PBOC announced that direct trading of yuan for euros will be allowed in the FX markets.  This move will allow Chinese/European trade and investment to move more freely ...and without the use of any dollars.  We already knew of currency swaps set up with foreign trading partners by China, this latest news is more or less a "starting gun" being fired.  Could this be the start of a "run" on dollars where if they are not needed they will be sent back to the States?  This is truly huge news and how it is not reported on in the U.S. is simply amazing!

Another area to look at is the violence and unrest in Ukraine, the new "caliphate" state in Syria and Iraq, and now protests in Hong Kong.  Much speculation has been written which suggests all of these are U.S. sponsored upheavals.  I will only ask questions rather than writing in depth as each one of these issues is long and complicated but Occam's Razor applies.  Was the coup in Ukraine a coincidence while Russia hosted the Olympics?  Is the U.S. now supporting the regime that took power?  Has the U.S. wanted to bomb Syria for at least the last year (or many years)?  Is there a gas pipeline "issue" in both the Ukraine and also Syria?  Did Saudi Arabia want the bombing of Syria last year?  Did they still?  They do "support the dollar", right?  And what of Hong Kong all of a sudden?  Why would "protests for democracy" sprout out of nowhere ...and just before China announced the ability to trade yuan for euros?   Do you see a pattern here where "destabilizing" an area could be disruptive to foreign currencies and supportive of the dollar?

So what do all of these stories have in common?  It's all about the dollar!  All of it!  Bill Gross obviously sees and feels the "flows" in the bond market.  If the Fed has (is) truly tapered and no longer taking his "product" off his hands at a profit like they once did, he is simply jumping ship.  China facilitating their trade with Europe without using any more dollars is certainly in their favor and dollar negative while "unrest" which certainly "smells" like it is being stirred up by the U.S. is dollar supportive. 

These events are in my opinion all about a currency war where it is the dollar pitted against everything else.  I only tangentially (via Ukraine) even mentioned Russia but we pursued the "brilliant" course of telling them they are shut out and can no longer use dollars.  What will our reaction to this Chinese/European FOREX deal be?  Will we sanction China and "tell" them they cannot use dollars anymore?  How about Europe as a whole?  Are we going to sanction Germany, France, Belgium, Holland and all the rest for not using dollars?  ...And the "punishment" or sanction will be what exactly?  We will tell all of Europe they also cannot use dollars anymore?  This is like telling a kid that his punishment for eating chocolate is... "no vanilla for you"?

At this point it is so important you understand how quickly the world (particularly "our" world if you are American) can and will change.  The rest of the world is now overwhelmingly aligned against the U.S. and thus the dollar.  The dollar has been our position of power and comparable to a heavyweight's overhand right.  Unfortunately for the world as a whole, the odds of a nuclear event occurring when the dollar fails is high and growing.  No one ever willingly gives up power and often times the one losing power resorts to desperate measures.

Hemming and hawing and waiting to purchase "real money" for your financial survival is a very bad bet in my opinion.  Gold and silver can and I believe will very easily move to a position of "no offer".  No offer meaning that once foreigners no longer accept dollars for metal, neither will anyone domestically.  In this scenario there will be no "price" for gold or silver in dollars.  I believe the current run up in the dollar on FOREX is a result of the so called tapering making dollars slightly less plentiful and tighter on the margin.  This will completely change when something financial breaks, the monetary spigots will again be forced wide open.  Once foreigners decide they no longer have a use for dollars...they will come flooding back to our shores.  The Fed will have no choice but to "un taper" and monetize massively.  The only problem is this, "how do you buy dollars with dollars" to sop up the supply?  As I wrote yesterday, please do not wait and try to time your purchases of metal now, the world can and will look very different one morning soon.  The day will come when everyone knows exactly what they should do ...without the ability to do it.

Courtesy of

Bill Holter writes and is partnered with Jim Sinclair at the newly formed Holter/Sinclair collaboration. Prior, he wrote for Miles Franklin from 2012-15. Bill worked as a retail stockbroker for 23 years, including 12 as a branch manager at A.G. Edwards. He left Wall Street in late 2006 to avoid potential liabilities related to management of paper assets. In retirement he and his family moved to Costa Rica where he lived until 2011 when he moved back to the United States. Bill was a well-known contributor to the Gold Anti-Trust Action Committee (GATA) commentaries from 2007-present.

Spanish Conquistadores invaded the Inca Empire in 1528 to steal their silver and gold.