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dollar and oil
digging deeper

More history of politics and economics from a dilettante

Crude Macro overview

Let’s look at where it looks like oil is going on a bigger time frame.

Then, since I have posited elsewhere, that this action is primarily driven by the US dollar value, let’s do a deeper dollar dive, to analyze its prospects.

Zooming out, on a larger time frame, where is oil?

8-13-16 macro

The peak in June neatly tested the 50% level of the large down move, which was also the bottom of the consolidation area from May-Nov 2015.

It’s also interesting to note that the 161.8% extension of this whole lower distribution is almost exactly $100, right where price broke down in 2014. This lends weight to the idea that price will probably consolidate down here, and eventually return to those levels.

What is happening lately?

  1. We are setting up a consolidating wedge formation, a compression flag, indicated in purple.
  2. The acceleration of the price slide that broke through the down trend line (light dotted yellow) created the excess low in early 2016. This is the condition known as “oversold.”
  3. The early 2016 down acceleration, combined with the rise through June 2016 created the widening megaphone phenomena, indicative of a reversal.

Technically, what could happen?  We have to keep monitoring, for breaks of significant levels.  My broad prediction is that the bottom has indeed been set in oil.  And yet, the pace of the reversal is hard to predict.  It could spend some time (many months, even years) consolidating, and widening the megaphone phenomena, and also tightening the compression, in order to base for an eventual run back to $100.

Fibonacci fans can sometime be helpful, to imagine how price will make small breaks out of compression, then continue to compress further.

8-13-16 fib fans macro

Broadly speaking, we can see that we have broken through a very significant down trend line, and still have one more to go.  And now we are setting up a series of reversal megaphones.

8-13-16 macro megaphones

Megaphones show two way price action, as the auction participants increasingly explore value in various directions (as opposed to flags, or compression, where the auction sees value narrowing towards a fixed point.)

Trend lines are not particularly important, except as psychological barriers, and to roughly gauge the action.  Trend lines and breaks are very weak trading tools, and should only be used to sketch out thoughts and illustrate ideas.  But horizontal support (areas where the auction actually perceived value) is the only really tradable data.

To make educated guesses how this will all work out, I still think we really need to return to the dollar value.  In order to get a big, sharp, move up in oil, we would need a big, sudden breakdown in the dollar.  How, why and when would that be likely to happen?

$ Macro overview

I still maintain that the dollar appears to be a 2 year long bull flag.  However, as I’ve said elsewhere, that flag is a “big stinky mess.”

8-13-16 $ messy bull flag

You can see how in this time frame, price has repeatedly consolidated, had little breakouts, and failures, leading to other consolidations, and arguably a widening megaphone overall.

But flags are not always pretty.  And note how the 3 attempts to auction below $93 resulted in an inverse head and shoulders pattern.  And note how this widening action compares to the compression of the two years that led to this action.  The wave lengths got smaller and smaller back then, whereas now they are very volatile, and growing.

But 2 years, 4 years, these are blips of time in markets, and when we zoom out, the picture looks different.

8-13-16 $ 20 year

To me, this still looks quite clearly like a bull flag that wants to complete up.

But one very salient point about this chart is that, the entire last 20 years forms one big range, and we are right in the middle of it.  Dead center.

8-13-16 20 yr giant range

We can, should, and will look at all this action in light of international central bank interactions, and economic events in various countries that led to these.

Charts are maps of time and events, and suggest directions.  There are lots of interesting things to note in this chart.  And after going over those, I can make my macro dollar hypotheses, and guess the politics that will drive them.

Wave lengths, value and the auction

  1. The current volatility in the dollar value is big compared to years 2012-2014, but very small compared to 2006-2012, a considerably longer time period.
  2. The wave from 2002-2008 was HUGE! And it contained part of the volatility from 2006-2012.  In context of the huge wave, those six years were a settling period, when wave lengths shrunk, as the market slowly honed in on an agreed value for the dollar…exactly $80.
  3. The explosive reaction wave up was large compared to many years before it, but small compared to the biggest wave of the last 20 years.
  4. The current volatility, of the last two years, is high, compared to the wave lengths of the two years that preceded the pop in value….but still, historically not shocking at all.

Why and what next?

Why is all this happening, and what could happen next, to the dollar, and how would that affect other things?

Before sketching out the politics behind this chart, and guessing what the world will do next, let’s consider a few technical hypos for how this could play out, and consequences in commodities, equities, bonds, etc.

Hypo 1.

I see that 61.8% level of the huge down move from 2002-2008 as a strong candidate for resistance.  It has the backup of the range high from 1997-2000.  Price could make one push higher, stop there, create a megaphone and reverse back down.

Politics and price correlations: this would disappoint Europe, Japan and Brittan (and China, if they ever join the basket) …and probably much of the world.  It would probably be caused by a new round of money printing in the US, where the Fed devalues dollars quicker than other countries can devalue their currencies.  No matter when or how the dollar falls, it would be caused by some version of this scenario, and/or negative US interest rates.

This would probably cause another wave up in the value of equities, commodities, and probably bonds, similar to during the last round of “QE.”

Hypo 2.

The entire lower distribution of the dollar value could be seen as a value range, which we popped out of in late 2014.  One common idea when emerging from a value range is to double the range to get a target.  This sets a MUCH higher target in the dollar.  Way up at $113, just under the peak ranges of 2000-2002.

8-13-16 hypo 2 range doubling potential

If this happened, commodities would crash in value.  There would be lots of dramatic consequences. Probably a massive recession or depression.  And it could set up a technical picture of a much more volatile dollar value, for 10 or 20 years to come….as large wave lengths go back and forth through the center of the range, which is right about where we are now.

Imagining the future and currency archeology

Imagining the considerably different political scenarios that would lead to these events, and the economic consequences, will probably be a thought process that unfolds over days, weeks and years.  But we can get started at any time, and revise as new data comes in.

But before we do that, let’s look and the politics and market valuations associated with past waves in the dollar value.

And even before that, let’s do a couple of forward projections of how the technical chart might look, in the two hypos.

Hypo 1 future

If hypo 1 plays out, and we only go a little higher, test the 61.8% level, form a megaphone, and fall back, the future chart might look something like this, which only attempts to peer in to 2017.

8-13-16 hypo 1 future

Hypo 2 future

If, on the other hand, something more like hypo 2 is our fate, the time frame is probably bigger, and might look more like this, which takes us way out in to the 2020s.

8-13-16 hypo 2 future

How did we get here?

Let’s go back to the 20 year chart, and compare what we know about history, to the dollar action.

8-13-16 $ 20 year

$ vis a vis US history

This chart picks up at the end of the giant bull-run in US equities, that lasted from approximately 1970-2001.  That was a 30 year “secular bull market,” for the US.  From 2002-2013, the US experienced a “secular bear market,” when markets went sideways.

The recession starting approximately in 2000, and the next one in 2008, both erased all market gains, going back to 1997.  Only in 2013, did equities markets finally break above the highs set in 2000 and 2007.  Since the 2013 breakout, we have arguably set out on a new secular bull run, in stocks.

Secular Bear range

SPX secular bear

We need to look at international interactions, to really read the dollar chart.  But first, let’s just consider it in light of US economic events.

We can see the sharp response of the dollar value in 2002, to the crash in equities, and subsequent recession.  The Fed took action, and lowered interest rates.  This spurred a huge wave of borrowing, which massively increased the money supply, lowered the value of the dollar through inflation, and led to the housing bubble.

The dollar value dramatically slid through this time frame.

In 2008, the housing bubble popped, and in order to stabilize markets, the Fed took even more dramatic action than in 2002, or EVER!  Not only were interest rates lowered to zero…for the first time since the 1940s.  But they set about printing money on an unprecedented scale.


This action merely served to replace the money supply that was lost as money disappeared from existence, when millions of Americans defaulted on their home loans.  The dollar chart, accordingly, just bounded around sideways.  In spite of the Fed printing $4.5 trillion, the money supply only equalized.

Then, in 2014, when they turned off the printing spigot, either the huge default wave was still not over, and the still shrinking money supply rapidly spiked the dollar value, and/or the new EU QE increased the Euro supply relative to dollars, until supplies equalized from 2015-2016.

One of the most interesting and noteworthy consequences of the sideways phase in the dollar from 2008-2014, is that, while all that money was printed, QE simply equalized the total money supply, in order to avert catastrophic deflation, the new money clearly flowed in to stocks, bonds and commodities, all of which commenced bull runs.

So that, while millions of Americans became poorer, when they lost their homes, when the new money was created, those that could get their hands on it went on a buying spree, and bought a bunch of products, which rapidly appreciated.  So that this group became rapidly richer.

I have shown the 20 year charts of equities, gold, bonds and the dollar together in my 20 year macro correlations study.

$ vis a vis the world

What was happening around the world at this time?  As an American, only drawing from memory, who has only been slowly developing the hobby, over many years, of following world economic interactions, my history of the world will certainly be a bit sketchier than the US.

Since the dollar value is more than 50% a comparison to the value of the Euro, Europe is the first country to examine.

While China was rapidly becoming a powerhouse, with wild volatile swings on its way up, it is only indirectly correlated to the value of the dollar, since, up to now, it still is not included in the basket of currencies.

The other two primary players are Great Brittan and Japan.

But let’s focus on the EU.

First, let’s quickly contrast the EURO Dollar currency pair.

eur-usd 8-13-16

To me, at a glance, this chart looks like it wants to go lower, just as the dollar looks like it wants to go higher.

We can see that when the dollar hit it’s peak in 2000-2002, the Euro hit its nadir.  As the dollar rapidly fell in value (inflated) from 2002-2008, while Americans were buying houses hand over fist with loans, and so minting a shit ton of money, the Euro haplessly deflated (rose in value relative to the dollar).

The US economy was being driven, giddy and euphoric, by cheap money.  Everyone thought houses would go up forever, just as a few years earlier, they thought stocks would go up forever.  Little did they know, they were only in the middle of the first wave of a secular bear market.  When it crashed the second time, the US public lost confidence.  By 2013, everyone thought markets always crash, just as before they had thought markets go up forever.  The “recency bias.”

Meanwhile, in Europe, the Euro had only recently launched, in 1999.  It plummeted in value as the dollar rose, from 1999-2002.  In terms of money supply, this means the supply of euros was being increased more quickly than the supply of dollars, during this phase.

Without studies about causes, the natural assumption would be that Europe, during this phase was loaning more money to businesses and households than the US.  Maybe by this time, the dot com boom was self-fueling, and borrowing had slowed, or else maybe borrowing in Europe was just more pronounced.

In 2001, as businesses in the US started defaulting, the Fed action caused disappearing money to be replaced by lowering rates, and seeding the housing boom, fueled by a spree of debt/money creation.

Meanwhile, in Europe, a short recession was declared around 2000, and then quickly called over.  The EU central bank responded by “austerity measures” and tax cuts, unlike the US Fed, which rapidly lowered interest rates.

The result was that the US economy seemed to not only recover, but go in to overdrive, while the EU, keeping interest rates flattish, had flatter growth.  US money supply dramatically outgrew Euros.

The whole situation reversed in 2008.  As the US went in to crisis mode, and rapidly reduced rates to zero, and printed money hand over fist, the EU was slow to follow (stodgy Germans.)  Although interest rates were dropping in Europe from 4% in 2009, they didn’t hit zero until 2014, 5 years after the US.

This time, 2014, roughly corresponded to the end of US QE, and the beginning of EU QE.  So the Eurozone trailed the US Fed measures to weaken its currency by a few years.

The future

So, what’s next?  EU QE is scheduled to end in Sept 2014.  It has only be going 2 years (compared to the US 5 year spree.)  Will ECB announce another round of printing?  I think so.  Additionally, the EU has now gone even further than the US Fed, by lowering rates in to negative territory, which has been sustained for a couple of years now, with no end in sight.

The EU has suffered a series of blows, or worries, from Grexit to Brexit.  The political landscape seems locked in ongoing fear that the EU could crumble, and EU economies face one worry after another, which will likely lead to ongoing efforts to cheapen the Euro, in order to keep the economy on life support, if not spur growth.

Meanwhile, the US economy is ostensibly strong.  The US Fed never dipped in to negative rates, stopped printing, and even made one anemic gesture of raising rates, .25%.  The perception of US economic strength, in whatever parts charade, truth, relativity, seems likely to persist for some time to come.

So this is likely to drive the value of the dollar higher vs comparable currencies, primarily the Euro.

All this said, to be honest, we have to admit we are WAY out in uncharted central banking waters.  There are leviathans out here like robotics and a.i. than can, and will, cause sea changes in fundamental economic characteristics.

Central banks have taken measures never before tested, and on scales never before imagined.  So what will really happen next, on the voyage, is difficult to predict.


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