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Minyanville Monitor: Under the Macro-Scope



Apathy reigns.

The Administration cares not, the U.S. Treasury cares not, and the Fed Chairman cares not ... as the U.S. policy of COMPLETE APATHY towards the 'value' of its IOU ... errrr, ahem, ugh, currency ... continues to drive the USD to yet another fresh multi-year low.

We focus on the Swiss Franc, as noted in the daily chart below ...

... and the Japanese Yen, which has followed the lead of the CHF, and converged to violate its own early-2004, then-secular, low.

Anxiety over the pace of depreciation in the USD ... as relates to the onerous capital flow imbalances and BOP deficit in the U.S. ... has reached a feverish pitch. Markets seem troubled by either of two prospective outcomes:

One ... a reflation gone amok ...

... or two ... a dollar-liquidation, globally.

If it were the former ... the chart of the U.S. Yield Curve would NOT look as it does below, with a PANCAKE flattening taking place amid fresh USD lows.

Indeed, anxiety is NOT related to an over-blown reflation-episode ... but rather, towards a dollar-liquidation driven U.S. debt-deflation ...

... which ... given the spectrum-stretched stance of the U.S. consumer, defined by the status of being severely leveraged to irrationally 'exuberated-and-reflated' home-values, at adjustable interest-rates rates ... would lead to an eco-contraction ... and THUS ... the concurrent convergent move towards PANCAKE FLATTENING in both the U.S. Yield Curve AND the Eurodollar strip makes more 'sense' from the macro-perspective.

BUT WAIT ... there has been a MAJOR change ... as previous flattening in the Eurodollar strip has been CAUSED by a more rapid price RALLY in the deferred months, than the rally in the front end. NOW ... it is the FRONT end of the strip LEADING the back end higher in YIELD, in a significant shift.

The CAUSE for this ... 'starts' with the USD ... and extends to the fact that the short-end of the curve, AND the nearby end of the strip ... are breaking DOWN, price wise, indicating an upside breakout in the nearest term interest rates, in line with the new USD low.

HIGHLY PROBLEMATIC for the U.S. macro-scene, is the horrific technical structure exhibited by the Dec05 Eurodollar contract, as evidenced in the daily chart below, noting the dual-directional downturns posted by the MA and the Oscillator.

Tied into ONE single neat bow ...we focus on the severe technical BREAKDOWN in the price of the benchmark 2-Year Treasury Note, when PRICED in EUR, as exhibited in the long-term weekly chart below, revealing the lowest U.S. -Year Treasury price for European investors since 1996 !!

Foreign holders of short-term U.S. paper are feeling the PAIN.

This is ESPECIALLY true for Asian Central Banks that have plowed dollar reserves into short-term U.S. Treasury paper LIKE MAD ... to the tune of HUNDREDS OF BILLIONS over the past two years ...

... to the point where China AND Japan, INDIVIDUALLY, EACH, own MORE U.S. Treasury paper in total, than does the U.S. Federal Reserve Bank ITSELF.

They FEEL the pain.

Moreover, while we admit that foreigners may not be the HUGE holders of U.S. equities that they once were, they have been net sellers over the most recent two months for which data is available ...

... and, as was the case in 1987, AS short-term U.S. interest rates had SPIKED to the UPSIDE ... BECAUSE of the weakening USD ...

... U.S. stocks NOW, as then, are in the sweet-spot, deriving support from the dollar's depreciation and its monetary stimulus impact

HENCE, we continue to monitor the upside push in the short-end U.S. Treasury market, as relates directly to the deprecation of the USD, with a SPECIFIC eye on the equity market, for signs to suggest that the house-of-cards is finally ready to come tumbling down. Observe one of the CRACKS in the foundation of that house, already developed as a result of the USD decline.

From this perspective, we COULD argue, that the ENTIRE equity-wealth reflation in the U.S. has been a DIRECT result of dollar-depreciation.

Simply, as the fundamental backdrop as per the complete LACK of labor-market driven INCOME reflation ... the dollar-depreciation driven reflation in U.S. paper wealth ... is NOT sustainable.

With that thought in mind, accompanied by the chart shown above, we ask you to contemplate these FACTS:

The rise in the U.S. 2-Year Note Yield from March 1987 to the peak in October of 1987, was 291 basis points, or, a nominal percentage increase to the 6.32% yield of +46%.

The CURRENT rise in the U.S. 2-Year Note Yield, which hit a NEW HIGH YIELD TODAY ... is already TWICE the rise in 1987, in nominal percentage terms, with the 158 basis point rise since March alone, being equal to a 110% rise in the yield.

Additionally, the decline in the USD prior to the Oct-87 experience was DEEP, and over time, roughly equal to the current decline. Indeed, the decline in the USD from Jan-87 into the stock-market crash later that year, was (-) 14% ... which compares to the current depreciation of (-) 13% since last November.

All we can say is ... give thanks that October 2004 is PAST ...

... but we must also state, that sometime in 2005 was ALWAYS the focal point, all along, as per our own macro-event-horizon time-line laid out in the 4Q of LAST year, for the SNAPPING of the consumer-rubber-band ...

... as defined by our thematic-thought-process related to the 'Secular Spectrum Stretch', which professes that monetary-wealth-reflation stacks up directly against extreme levels of consumer debt and leverage to that same monetary wealth reflation ... is embattled in a MAJOR MACRO 'tug-of-war' ... with DEFLATION pulling against REFLATION in one of the all-time secular matches.

Sure, there is still another 5 weeks left in 2004 ... but we say ...

... Game ON, for a major macro-evolution in 2005.

Thanks to the Rice Crispie Dollar, prepare for some SNAP, CRACKLE and POP.

No positions in stocks mentioned.
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