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$100 Oil. $850 Gold. Federal Reserve Easing. China mentions diversifying, loosening the peg, letting the yuan rise. Dollar tied firmly to whipping post:

Potential Wolfe Wave-type reversal mentioned in previous post has failed spectacularly.

Are we headed for $150 oil, $1200 gold and $2.00/euro? I don’t believe so. Note that a falling dollar would be the market’s natural method of correcting the ills of a massive trade deficit and a spendthrift government. (Here’s where I get to link to my diagram from over a year ago).

I still think the impending debt-deflation from an imploding mortgage market will outstrip the Fed’s ability to inflate us out of this crisis by once again rapidly expanding the money supply.

I would like to point out that, equity-wise, neither a catastrophically falling dollar nor a catastrophically rising dollar is a positive thing. We are on a tightrope here.

Even though I’ve discussed the potential for a falling dollar for years, I currently lean in the direction of a dollar bottom and rise because that’s now the extreme contrarian viewpoint, and I’m, well… me.

Deflation could do it. Although the revision of the numbers from one (August) employment report ruled out any possibility of a recession, much less a deflationary recession, right? Right?

How about debt deflation? It’s coming, only question is whether the Fed has the power to stop it. In some circumstances, they don’t, just as Japan hasn’t for… what, 20 or so years. A deflationary contraction could conceivably outrun the Fed’s inflationary power, if it were severe enough.

Or maybe not. Hell, I grew up hunting rabbits and driving tractors, for Chrissakes. I’m still pissed that Case bought IH.

Here’s the chart:

(click for larger image)

That’s a very Wolfe Wave -looking pattern to me. An ascending wedge for over 18 months, now a spike out of the wedge, a near-term bottom which touched the top trendline, and a retrace.

A break below $1.40/Euro would look like the start of a thrust, no? Could we see the low 1.30s in short order?

Let me put it this way: Think of every single thing you’ve heard or read about the dollar, gold, oil, etc recently. What percentage of people and articles are forecasting

• A stronger dollar?

• Falling gold prices?

• Falling oil prices?

• Falling stock prices?

Ten percent? Five percent? One percent? How many guests on CNBC are saying, “Oh yeah, Maria, $60 oil and $500 gold on the horizon”? Limit as x goes to zero?

Now, with virtually everyone on earth on the same side of the boat, what does your trading experience tell you would bring Mr. Market the greatest gleeful pleasure, evil sadist that he is?

Think about it.

Heads-up to a developing situation:

Credit is crunching again, and banks are having liquidity problems- the Fed did $31.25 billion in Repurchase Agreements today. That sounded like a lot, so I went to the Federal Reserve Bank of New York website and copied the daily figures into Excel from August 1 thru today. Here’s what a quick chart of those figures shows:

Clearly something is up. Another point of interest- of the $31 billion in repos today, the Fed accepted $4.1 billion in the infamous mortgage-backed securities. Contrast that to August 10th, when they accepted that moldy paper for all $38 billion worth of repos.

So, the banks are in a temporary liquidity crisis, but it’s not because the MBS market is locked up and no one will buy the moldy paper. That doesn’t sound good…

Now for the next bit of chartage. The market is suddenly expecting a large amount of permanent money to be added to the system. This is reflected in the spike in the price of gold and the drop of the dollar against the euro. Here’s gold:

Credit Crisis anew. Permanent money. Sounds like only one answer to me: a cut in the Funds Rate. I had already publicly said that I felt the Fed would try to wait until the 9/18 meeting to cut, so as not to spook anyone. Today’s data leads me to believe they may not be able to wait that long.

Cheers.