HOLY SH*T! The Dollar is About to CRASH the Stock Market!

0:00 The dollar is set to skyrocket as excess liquidity just turned negative for the first time since 2021. It's threatening to pull the rug right out from underneath the entire market. And the man behind the move, Fed chair Kevin Walsh. And the market bought his hawkish pivot and sent the dollar index above the critical 100.5 level. Now, history shows when the dollar spikes, a massive mean reversion stocks is inevitable. Today, I've got all the charts to prove it. And why I may be forced to put this hat away for good. Because the Fed just gave the green back the green light and the machines, the CTAs, well, they're already piling in. And as the euro looks over a cliff, it could provide the final fuel for that dollar breakout. And when the dollar spikes, stocks come crashing down. Now, to slow things down a bit and go back to that first chart because I

0:46 want you to understand what's going on with the dollar and why we're facing liquidity trap. Now, I know what some of you are thinking, Steve, I thought you were dollar bear, and today you're saying the dollar is going to go up. Well, wait until you see my contrarian take on this. But yesterday, everything changed when we heard from Fed Chair Kevin WS who said the committee will deliver price stability and the market. They interpreted that very clearly that he's going to raise rates and far sooner than anyone thought. And because we often see the underlying currency move right along with the federal funds rate, it means the dollar is going to go up. And the charts, well, they validate that. Let's take a look at that first chart of the DXY index because as of today, it's breaking out over that 100.5 level. And what's critical about that is this is where everybody believes the

1:32 shorts are going to get squeezed. And that means the dollar is going to go straight up. Let me explain how this breaks out. Because what you're seeing in this consolidated pattern here of the dollar is on the top between these two purple lines. These are where dollar sellers have been at. So every time price has rallied in up into this zone, the sellers come in and sell the dollar. Now below this is where the buyers are at. You can see very clearly where they want to be buying. Now at the point if we break out here, what happens to all these people that are short? Well, they start to get squeezed and lose money. And that means they've got to close those shorts. And when that happens, you start to see the dollar go straight up. And that is the biggest risk right now for the entire economy because what it suggests is we get stuck in a monster liquidity trap and next thing you know

2:18 the stock market comes crumbling down. The dollar extended its rally for the second day pushing it back toward the late March peak as traders piled into bets that the Federal Reserve will start raising interest rates as soon as late next month. That's just six weeks away from the next meeting. And so while we no longer have forward guidance, Kevin Walsh indicated that he is going to do whatever it takes to contain inflation. And given he only has one policy tool that he believes in, that's the funds rate, the market now believes he's going to hike. And that pushed up short-term Treasury yields sharply. Global investors were given a renewed incentive to shift money into US assets. The euro dropped to the lowest since March. Now, why does the euro matter here? Well, because in that DXY index, it's the biggest opposing side to the dollar. So,

3:05 if the euro goes down, the dollar goes up. But we'll get into more of that later because I want to focus on yields because right now there is a big setup between yield and the dollar. And you need to understand this. Let's take a look at threemon Treasury yields here. What you can see upon Kevin W's press conference, what we saw a threemon yields took off and went straight up. Now, they're pulling back a little bit here, but hang on. What I want you to see is when we zoom out to a longer range chart, we'll notice, remember how that dollar chart came all the way down and went sideways? Well, look what happened with three-month yield. So, right now, what we're seeing is a lot of sync with the bond market and the dollar. So, the dollar is saying, "Look, we bought into this." And the bond market is saying, "Yeah, we did, too."

3:51 So the question here is what's really matters is what is about to happen because is Kevin W an absolute genius here? Is he trying to engineer some big move where he can keep from raising the fund rate and get inflation down? Well, this next chart suggests that he can. Let's take a look at the consumer price index in blue against the nominal broad US dollar index in red. And I want you to be thinking, if you were Kevin W and you didn't want to raise rates because the guy that just appointed you to the position doesn't want you to raise rates, how do you do it? Well, you get the dollar to go up. Take a look. So, let's see. As we look into the middle of the financial crisis, what happens? The nominal broad dollar index goes up and the consumer price index goes down. How about around 2012? You see it? The

4:36 dollar's going up, inflation cools off. Same thing around 2014 into 15. How about right before the Fed cut rates in 2018? And how about during the pandemic? Same dynamic. And how about after that? Look at 2022. Inflation was skyrocketing. The dollar goes up and says, "You know what? You're going to stop your trend." And it reversed. How about right here around 2025? The dollar contained inflation. And now it's setting up for the same move. So all he's got to do here is just get the dollar to go up. He doesn't need rates to fall. He doesn't need to raise the funds rate. He can let the dollar do the heavy lifting. And the problem is he already knows there's a massive amount of dollar short positions. If he squeezes them, the dollar spikes, but the problem is the market goes. Now, the Fed's hawkish policy update is

5:22 threatening a trigger of a bullish breakout for the US dollar more than offsetting the dampening impact from the US Iran deal. Now, here's what I want you to understand about this is anytime economies kind of reopen, and that's what we're going to see here, is dollars are going to start to move around. And of course, what is traded in dollars? Oil. And what are all these people going to need? Oil. And how are they going to get it? They're going to go to the banks and borrow it. That's going to create money into the financial system. So, what he's trying to do is he's trying to offset that because the market's saying, look, as the global economy returns, oil prices are going to come down. demand for dollars is going to go and banks are going to lend and that brings the value of the dollar down. He doesn't want that to happen. But he's got some things on his side. Let's talk about the bullish case for the dollar here because the

6:08 CTAs, they're rather long. They're seeing just under about a 60% nominal position. Typically, that gets up to around 80. In rare conditions, they push up to 100. So, as we look at the short term, if the dollar were to break out here, the big note is the machines are going to play chase. But there's someone else who loves to play chase. They're called hedge funds. Hedge funds and asset managers and other speculators, keep in mind, there are big short positions on the dollar, held 27.8 billion worth of bullish dollar positions as of June 9th. That's the most since February 2025. So they're starting to take the opposite position here, but they've got a whole lot of room to run because we've note in the past that net speculative positions in the US dollar. Well, we don't see a peak in the dollar until everybody is long

6:55 the dollar. So we're not there yet. So we could see between machines and hedge funds, we've got a whole lot of buying that could happen. But there's another catalyst here that could send the dollar higher, and it's a weaker euro. The euro US dollar briefly traded below the key 1.15 level yesterday and that it's a line in the sand. Decisive close below this level will be a technical setback that could open the door to a much faster move lower as downside momentum starts feeding upon itself. And this is absolutely critical because if the euro breaks down that means that DXY index is going up. Now, you might be looking on this and saying, "Wow, Steve, I see a lot of potential opportunities to make money in the markets." And you're right, there are. And I'd love to you to join us in our trading system because look at this trade our subscribers got. Now,

7:40 I've got two trading systems out there. One that trades pure momentum indicators, the other machine positioning. And all you need to do if you want to find out what those trades are, how I'm trading the market, grab those links below, sign up for one of them, or even both of them, and use a coupon code for your free 30-day trial. start taking advantage because the market's going to make some big moves that you can profit on. And speaking of big moves, let's go back to the euro here because look at this. It's in a consolidating pattern just the opposite of what you see in the dollar. And if we go back to around 2022, what happened? It broke out of this range and came crashing down. And now the market's starting to see the same setup. But it's not just a currency move here because there's something behind the euro that's suggesting it is likely to go down. And

8:26 the euro US dollar and oil have often moved in the same direction with a sharp inverse correlation after the Ukraine war being more of the exception than the rule. Check this chart out because here you can see Brent crude against the euro and you can see by and large they move together with exception of this one period right here. But let's zoom in because here's what the market is clearly telling you. Oil prices are going down. And based on the relationship between that and the euro, it's telling you the euro is going down. And if it goes down, that dollar index is going to go skyhigh. But remember in yesterday's show, we talked about the risk for oil because inventory levels are going down. In fact, they're so low that they're going to have to get refilled. So any downward move on oil is likely to be muted and potentially if

9:13 demand from the economy comes back online, we could see oil prices go back up and in a big way. But let's take a look at the old chart because the market is kind of suggesting here that oil prices are going to completely crash. But let's give you one contrarian view here and that is this chart of the ETF on USO. Now let's take a look because it broke below that six-month volume profile, that red line there, and that's usually a super bearish position. But look at over here. See all that volume has spiked up? This is where those people bought and look what's happening. Price is coming right back down to that level. So the question is, are these people that were bullish on oil going to stay bullish on oil or are they going to flip? If they hold this, that means we could see a reversal here. If they don't, I still think the cases we see a pullback and then we see oil prices go

9:59 higher. So now as we talk about the dollar, there's one big question right now that remains and that is, is this a bull trap or is this going to be a massive breakout that's going to trigger a huge short squeeze and a big move in the dollar? And that is the issue because right now this 100.5 level that just got breached today, you can see it's above where all these shorts are at. Now, previously we saw it move above it and they came back and drove it down. The question is, are they going to do it this time? Well, just wait. I've got a whole contrarian take on that's going to blow you away. But first, I want you to understand that a rising dollar, it's a massive squeeze on liquidity, and it's just getting started because it's a trend that's now impossible to ignore. In some, liquidity is getting

10:45 unequivocally squeezed and rates are becoming more restrictive, posing an increasingly formal headwind for stocks and other risk assets. So what's happening here is everybody is short dollars and they're looking to get them. So that's the underlying issue here. That's what's going to cause the dollar to go higher. But what if it doesn't? Again, wait till you see what my take is on this. But first, let's talk about risk assets here because can stocks go up with a rising dollar? And the answer is absolutely yes, they can. Go back to 2012. You can see the dollar steadily rising. The market's rising. You can see it happened here around 2018 or 2019. You can see around 2021. and you see 2023 and yes, you can get cases where you see a steadily rising dollar is not a problem. Stocks can continue to go up.

11:30 If that were to happen, well, S&P 8000 absolutely in the cards, but the risk is it's a spike in the dollar that's a problem. Let's go back to a global financial crisis. Look what happens. The dollar spikes as we see a liquidity crisis, stocks come crashing down. Same thing going into 2012. How about around 2016? You've got same thing around late 2018, 2019. Obviously, the pandemic, you've got that market crash in 2022, and of course, you've got that little dip in 2025. So, the risk right now is, and this is what the market's really trying to tell you, is look, if there's a big squeeze and the dollar shoots higher, that's it for me, I'd be closing out my positions as fast as I can because what the dollar at this point is telling me, there's a massive liquidity crisis coming. In fact, there's a lot of validation that it could because excess

12:18 liquidity called real money growth versus economic growth is now negative and falling for the first time since 2021. So what we're seeing is tighter conditions coming as excess liquidity drops. So the projection is it's going to go down. Now the underlying issue that could stop it is again if banks come out and start lending as we start to see the global economy and trade and oil start moving and we see new dollars created. Yes, this could be stopped pretty quick, but for the moment, it's not looking that way. Now, when excess liquidity weakens, capital is more likely to gravitate away from risk assets. So, think away from stocks to longerterm bonds, flattening the curve, which is interesting because I got a chart for bonds. I'm going to show you here in a little bit that's going to validate everything you're seeing in the market right now. But let's talk about

13:04 some more excess liquidity issues here because a chart below shows that the 1030s curve which has already been flattening points to the real Fed funds rate rising relative to the neutral rate. So what they're saying is in the coming months that Kevin W is absolutely going to raise rates because he said very clearly in the press conference, I'm going to look to the biggest sign of what I should do. It's called the market. And the market's saying you're going to raise rates. And that's why we went from that September hike to one in six weeks because Mark is saying he's going to respond to what the bond market is telling him. And that means there is no liquidity available and that excess to support risk assets or stocks or before long liquidity will need to come out of the market to maintain growth in the real economy. So what it's saying is the economy is getting choked by people

13:49 stuffing money in the market. So what it means is money's got to come out in the market, get into the bond market, cool off the Fed here, and that will cause things to get back to normal. In the meantime, what it means is if you see the Fed raise rates, if you see the dollar goes higher, it means the stock market very likely to go down. And don't forget, there'll be more competition for what there is. Net equity supply just turned positive for the first time since 2021, meaning more money's got to get into the stock market. and it has a good likelihood of staying supported through a surfet of in issuance and fewer buybacks than expected posing a structural headwind for stocks. So that is an issue if we don't have enough money flowing in prices are going to come down. But let's talk about the contrarian view now because as you know I'm dollar bearish. I haven't changed my

14:35 view. I'm still wearing the hat. I still think stocks can go up. I'm just getting cautious here and prepared to hit the button if I need to bail. Let's take a look at the case of why the dollar is actually going to go down. Because the consumer price index in blue, we've got overlaid against average hourly earnings of production and non-supervisory employees in red. And what's Kevin W telling you? I am going to bring inflation down. Now, we know changing the funds rate doesn't do that. But nevertheless, he wants inflation down. So, what's the biggest case for inflation coming down? It's slowing wage growth. And here's the evidence. Look back at 91. We have the recession there. inflation spikes and then comes crashing down. Wasn't because of the Fed. It was because average hourly earnings went down and demand went with it because consumers could not afford higher

15:21 prices. Same thing happens in the dotcom bubble, the financial crisis. Post crisis as we face a double dip recession around 2012. How about that big spike of inflation? It wasn't just the dollar that brought it to its knees. It was also the fact that wages came down and consumer spending cut. And how about now? You can see the trend very clearly. Average hourly earnings still moving down, inflation moving up. We know inflation becomes transitory, which is why maybe we get one hike from the Fed, but after that, they're likely to do a series of cuts. But let's put the test to the dollar. How about we now overlay the nominal broad US dollar index against average hourly earns of production non-supervisor employees and look at the relationship. It's pretty good. In fact, when the dollar you see in blue gets out of line, it pops back

16:06 up to wage growth. You said it happened again around 2011. It happened again around 2017. And you can see it's kind of been happening along the way suggesting that if this relationship is indeed correct and average hourly earnings continue the downward trend, which I believe they will, it means the dollar index likely to go down as well. But what about the bond market? It's saying look, you said, "Wait a m Steve, you said the three-month bills were going up." But maybe that is again another trap because US treasuries rebound after Walsh's debut at the Fed stoked a selloff and that indeed happened. But let's take a look at two-year Treasury yields here because I want you to see something very clearly again. We've got average hourly earnings overlaid and still in red and look what happens when the bond market gets out of line with earnings. Rates come back

16:52 down. You can see it happens again here right around 95. You see around 2000 but look at how they're relatively in sync. And now what happens? They're starting to deviate once again, suggesting that the bond market is going to see rates reverse. In fact, the biggest indicator that Kevin W's notion that he's going to have to raise rates here that's telling us it's completely wrong is the long bond. And look at this. Let's go to TLT. Why is TLT going up? Because it's telling you very clearly that growth and inflation expectations are coming down. When that happens, it's not dollar bullish, it's dollar bearish. And what that means, inflation keeps comes back down. And in the short term, do we see stocks go up because of that? Yeah, absolutely. I think that happens. So now you've got the case. The market's saying

17:38 the dollar's going to go up. I think it's one big bear trap. But the question is, what do you think? Weigh in the comments. And with that, I'm Steve Ed Meter. Thanks for watching. Thanks for being fans. Bye now.