Dollar Tsunami: The Wave May Be about to Crest

We live in oceanic times.  Headwinds have led to uncharted waters which have created economic Tsunamis and 100 year credit storms etc.  Metaphor abuse runs rampant. 

The Tsunami metaphor may be more apt than many give it credit for in the context of the US dollar. 

A Tsunami is a collected energy shock that travels through the ocean as a small and sometimes barely visible wave.  Upon reaching the shore, the wave energy is forced into a massive wall of water piling up.  Before the wave hits at maximum height the water actually recedes from the shoreline before the oncoming killer waves. 

The receding water lures many into venturing into the exposed beach to see what has happened (pity the investor who goes to look at the exposed shell).  All to soon the full might of the Tsunami crashes upon them. 

The reason I mention this is that the metaphor of the $ credit Tsunami may be a full blown allegory in which case one might suggest that the current rise in the dollar driven by a global flight to perceived quality might not be the full story. 

Once the "quality" of a US economy with significant fiscal and consumer deficits is fully appreciated, we might see the fuller picture and act 2 of the Tsunami.  If you thought watching oil lose 60% of its value over a few months was interesting, ponder for a moment the same potential for the dollar in the coming 6-12 months. 

Consider the following:

• There are going to be many more dollars around due to current fiscal policy which is trying correctly to counteract the credit contraction.
• The faith in the $ as a reserve currency is just that, faith which is currently residing the "least worst option".
• The US economy's Main Street impact hasn't shown its teeth yet.
• Many of the recent moves to $ based assets are short term trades not investments, it doesn't matter where they jump to next, just assume they will jump.

Thoughts anyone, comments? 

I am still sticking with my Norwegian Krone recommendation and I am sure the gold bugs will chime in.

Comments

[Steven Hansen:]

i'll tell you about the dollar if you tell me:
- how deep the usa recession will be and how long it will last
- whether any swiss bank will fail
- if china goes into a recession
- will there be insurrection in Pakistan
- how low commodity prices will go
- what natural disasters lay ahead.

really.....

2008 Nov 04 05:01 AM

[bosun.j:]

Excellent Nick! Keep writing like this and you'll be banned and branded unacceptable to the Banksters! Hope you can get out of there before the collapse!

2008 Nov 04 06:44 AM

[gemonk21:]

gold bug. chiming in.

2008 Nov 04 07:55 AM

[dionysos:]

The metaphor works for me: this run up in the dollar is a knee jerk reaction to market turmoil and asset deflation brought on by so much easy credit and the yen carry trade. Once we all wise up that the only answer to this asset deflation is massive inflation, gold and the commodities will rocket up as the dollar falls. We have seen massive injections of money supply over the last month and the dollar rally is going to fail as soon as the trading community realizes this. When a tsunami hits, run for the hills. Im running for gold and commodity stocks.

2008 Nov 04 08:13 AM

[Asbytec:]

I disagree. The dollar is gaining strength relative to the majors, but also on it's own accord.

Credit is harder to come by (thank God) so purchasing and imports are down, or will be. Less dollars in the forex. The money supply is winding down, regardless of Bernanke's attempts to inject liquidity...our "soft landing" gear. I.e., stronger dollar.

If P/E ratios fall due to asset deflation, there goes the remaining 75% of global liquidity, including the (approx) 10% generated by the yen carry (which is already drying up.) Less money, stronger value.

There is the real tsunami...when the global liquidity tied up in fiat money winds down. It will make the housing crash tsunami look like a kid's wading pool in comparison. No one will have money.

Better hope we have our fingers in the right holes in that dam.

2008 Nov 04 09:18 AM

[Fabien Hug:]

If you sell your dollars what do you buy? Gold OK but you can't put all your money in gold. What else? EUR same problems, JPY nobody knows what they are cooking. CHF so little available. NKR same as CHF. Furthermore, problems in the States just anticipate problems elsewhere.

2008 Nov 04 09:30 AM

[doubleguns:]

@Fabien- buy gold, basic materials, gas, solar over wind and bullets. Have you priced bullets lately they are going crazy and if nobama gets in he proproses a tax increase of 500% on them. Could get a quick return just from that tax increase. If nobama is elected buy assult rifles they will appreciate in value and if you buy bullets and rifles of the same calibre you can defend you gold.

As a more serious note this tsunami is going to wipe a lot of companies out and break a lot of countries. A lot of banks are still going to get slapped down into the sand by this wave when the credit card bills start piling up and the car payments are not getting paid and then the mother of all problems the derivatives begining to deflate. Dollar smack down looks certain but with governments playing in this market there can be no accurate prediction on anything. No one can out invest the government. They have a lot more money than we do. Anything can be manipulated until you cant stand the fire anymore, you bail and then your bright idea pays off but you arent in the game. Until the governments quit clouding up the water everything has risk of intervention cutting your throat and bleeding you out of your fiat money and inflation IS one of those threats that may or may not happen BECAUSE of the intervention. My bet is it will happen. I suggest you make your bet and see where the marble stops on this roulette wheel.

2008 Nov 04 02:42 PM