Since China is leading the pack in terms of dynamics, it would make sense that when China starts tightening credit, then other markets would feel the same issues of that, namely less easy money.

The US is due this year for rising interest rates. If rates on the 10 year US T rise (they already are), mortgage rates will rise. So, since the US is due for higher interest rates, and China is also tightening, markets should indeed start to fall fairly hard in the second quarter of 2010.
That does not mean that the central banks will not try another $trillion of stimulus to prop up markets, but they are running out of ammunition – their public won’t buy this anymore, and the fiscal deficits of $2 Trillion for 2010 for the US will soak up pretty much all the money they can raise on the bond markets.

Then again, the US has to issue/roll over an astounding $5 trillion of its bonds in the next year and a half! So… where are they going to get another $1 trillion to stimulate the markets??? We are hitting the wall.

As big as the US Treasury market is, having to roll over more than half of the outstanding US Treasuries, $5 trillion, is going to be a real problem. Again, we are about to hit a wall in 2010 on the USD.

USD WOBBLE

My surmise on how that will happen is that the USD will begin to show some wobbling first, not an outright collapse. The first thing we will have to track on this coming wobble is US interest rates. When they start to rise, the increased yield might attract more buyers, however the whole issue is in question now with so much issuing, and maybe the US will see a rapid spike in interest rates, rather than a slow smooth one.

If there is a rapid spike, then we might see the first evidence of the USD starting to wobble (for example it drops 5 points rapidly on the USDX in about two weeks would be an example of a big wobble, but this is not a crash yet).

In the wobble phase probably we’ll get some panicky USD recovery in FX markets as the Asians and everyone else step in to stabilize the USD like they have at the 75 and 77 levels in recent months on the USDX (those lows were defended and publicly defended in FX markets by central banks all over the world in recent months).

Because of this linkage – everyone attempting to devalue along with the USD – the USD gets legs it otherwise would not have…that’s why with our awful US fiscal situation and deficits of probably $2 trillion a year for years, the USD still holds steady! But that phase, where the USD always surprises to the upside (Warren Buffet lost about $2 billion betting against the USD around 2005 and had to bail out) is about to end. We are about to begin a USD wobble phase! Percent likelihood of this starting in 2010 in my estimate is 80%.

If the USD surprises to the upside still, and the wobble phase has not begun, then the remaining likelihood is for this all to start within one year from lets say January 2010 – or the period from January 2010 to January/February 2011…With a combined likelihood of wobbling appearing at 90pct probability (in my estimation).

If the USD still surprises on the upside past February 2011, without beginning to wobble, I will be surprised.

A wobble phase does not equate to a USD crisis. A real USD crisis would appear as follows: after the wobble phase some event triggers a spike in US interest rates again, US related credit default spreads widen to several hundred basis points above good sovereign debt, and the USD has a mini panic dropping 10 or more points on the USDX in two weeks time. The USD then strengthens again briefly. And so on.

If that situation (first serious wobble) is not stabilized, we may have 6 months of harrowing USD decline of 20 or more points on the USDX, and things begin to get rather hairy…everywhere. The implications of this kind of disorderly USD unwinding are huge and worth ten books, something that I mentioned in the USD 2012 article- the end of the world as we know it.
The reason I delineated the two phases of the coming USD decline is to

1. Give a rough timeline in that we are probably not going to see a chaotic USD drop until we see a rise in world interest rates plus a first phase of wobble appearing before the USD crash of say 20 points on the USDX.
2. To remind us that we are not at a USD collapse phase at this point, rather we are approaching the wobble phase first. That period will be marked with a great deal of world FX volatility…the speculators will love it, and the central banks will hate it…This should appear in 2010 to begin with.

Another alternative USD scenario that is quite different

One very big open question on markets crashing in two months and also the prediction that the USD will begin to wobble in 2010 is that the USD is rapidly becoming a huge carry trade currency, like the Yen. This is a complicated situation, but basically if the US manages to keep interest rates at practically zero and manages to defy rising world interest rates in 2010, then demand for the USD in carry trade keeps the USD up longer than you would think, like Japan and the Yen.

The Japan / Yen carry trade has lasted over 10 years now, and still is going strong (a carry trade is borrowing cheap money in one country and using that to buy various financial markets). But, the US probably cannot pull off that long of a carry trade because its fiscal situation is deteriorating so fast (remember that $5 trillion the US has to finance/roll over in the next 18 months).

If this alternate scenario appears, this would add roughly one year to the entire calculation before a major USD devaluation period. A wobble may still appear. Percentage likelihood of this alternate USD carry trade scenario holding off a US market crash in two months and a major USD wobble in 2010 (meaning we add a year to the date so what happens in 2010 actually happens roughly a year later in 2011) is about 20 to 40% in my estimation.

Concluding, the more likely USD scenario is a USD wobble in 2010 accompanied by rising interest rates and falling US and world markets: likelihood of about 60 to 70%.