Changing Winds

One subject of history that Ive really enjoyed since I was a kid was alternative history. What if scenarios intrigued
me, such as wondering about an alternate world in which the Battle of Stamford in 1066 never took place before
the Battle of Hastings a month later. William of Normandy losing to King Harold wouldve radically changed the
trajectory of both English and European power. I believe global-macro is largely similar in the sense that imagining
a narrative and envisioning a world different from what we know to be true today requires the same mindset that
derives joy from such an exercise.
Chart 1 (US Dollar Index stretching back to 1985)

Chart 1 The charting software, wouldnt allow me to go back more than to 1985, but in actuality the trend shown
has been intact since the 1970s, when the U.S. formally moved away from the gold standard. If South Korea,
China, Brazil and Mexico were to be included in the weighting of the index, the breakout would have already
occurred.
Regardless, given that the two main drivers of the index (the euro and the yen) make up 70% of the weighting, I
dont think the conversation of whether the dollar index is technically extended or not matters very much if the two
underlying currencies have more room to run.
Chart 2 & 3 (Euro-Dollar dating back to 1999 when the currency was introduced)

Chart 2&3 The Euro-Dollar breaking all support levels in the last 10 years is becoming a highly probability event
which also happens to be the level at which the Euro was introduced to the markets in January of 1999.

Chart 4 (Dollar-Yen since 1985)

Chart 4 Dollar -Yen has already broken out of the multi-decade slope.

Whats exciting about these long-term charts is that they all hint at a possible liquidation event that also gives rise
to highly probable and favorable risk trades.

Breakdowns or breakouts of this magnitude can trigger liquidation events, as anyone who has bought or sold
within that vast time period could all become underwater on their positions. Take the Euro-Dollar for example.
Around 1.20, you are taking out every level of everyone who has bought in the last ten years. As Japan trashes its
own currency to support growth or blatantly monetizes its own debt, that will likely force others in the region to
devalue its currency in order to compete with the yen (South Korea - USD/KRW looks very interesting).

An unwind of the decades-long carry trade in which people have borrowed dollars and bought assets abroad
specifically Asia can have massive ramifications when growth is already fragile in the region. Such disruptions
would likely run parallel to the Asian financial crisis in 1997. Regardless, the U.S. dollar breakout is a high-probability
event and it makes little sense to be long Asian EM equities, including Japan. Its better to either short or avoid the
second derivative trade of the current monetary policies of the region (equities) and keep the trade simple by
focusing on the currency aspect. Another way to play it would be to be long US-equity and short EM.

Finally, all roads lead back to the shiny stuff. I believe its very possible that gold will decouple from its traditional
relationship with the U.S. dollar, ironically due to the uncertainty and disruptions that are created as the dollar
continues its ascent. The currency war among regional Asian nations should also cause the demand for gold to rise
in the region as the forced currency devaluation continues.

I laid out the case in the Nov. 3rd note that golds move has always been centered on financial stability. Golds
move from $700 to $1900 (from 2008 to 2011) in my opinion was driven by the fear of financial instability and the

perceived inability of central banks to calm the storm. Whether its extreme inflation or deflation, start of a bubble
or end of a bubble, the very existence of either extreme is a knock on the system and an erosion of confidence in
central banks. It wasnt until 2012, after several years of stock markets steady rise, that those fears were placated,
which also marked the top in gold. And I believe we are again setting up for an environment where gold should
perform like it did in 2008.

Trades placed on Friday (11/14):

- Short Emerging Markets ETF (EEM)
- Long USD/JPY
- Long USD/KRW
- Short EUR/USD
- Long Powershares QQQ ETF (QQQ)