Bye Bye Greenback 15 comments
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It appears the ruse is over. After an approximately 20% rally in the U.S $ INDEX [NYBOT:DX] from August 1st to mid November (which quite honestly simply baffled the author), the US dollar has dropped some 7% in the last 5 trading days alone. This is an unprecedented move in the US currency. I swear CNBC contributor Rick Santelli almost fell over while watching the currency market's response to the Fed move yesterday. That move, a decision to target rates between 0-0.25%, was in effect an admission of the Fed's desire to devalue the US dollar in an attempt to re-inflate the US economy back to life and thus fend off deflation. The US $ INDEX chart below shows the results of that decision.
I cannot really fault the Fed's decision. I wrote years ago that the country would pay dearly for the Bush administration's huge fiscal deficits and irresponsible economic policies. Cutting taxes on the uber-wealthy while fighting two wars and spending tax-payer money like a drunken sailor (no offense to the sailor) was and is simply an unsustainable economic strategy. The lack of a sane energy policy, the associated outflow of US dollars to foreign oil producing countries, all combined with an unregulated financial system and we've got ourselves a category 5 economic crisis. So, the Fed simply had no choice. The ultimate result will be continued weakness in the US dollar and a reduction in the standard of living for middle class Americans.
So, what's a US investor to do here? As before, I continue to recommend US investors park a portion of their portfolio in GOLD. You could participate by investing in the GLD ETF, but I prefer holding the coins in my hot little hands. Go for standard American gold eagles or Canadian maple leafs in the 1oz, 1/2oz, and 1/4 oz variety. Take physical delivery and bury them in the backyard.
I earlier recommended Fidelity Select Gold and Vanguard Precious Metals as a play against a weak dollar. Unfortunately, these funds simply got whacked with everything else in the market collapse. No more funds for me...I want the gold in my hands. With all the corruption in the US financial industry these days, I don't even trust ETFs who store the gold in some vault somewhere, leaving the stockholder with a piece of paper. Poppycock. My new mantra is don't trust anyone and its every man for himself. Don't you just love Republican financial market deregulation while the SEC is on permanent holiday?
Here is a 30 day GOLD chart:
Note that December 6th was both the beginning of the US dollar downdraft as well as the beginning of the current leg up in GOLD.
Two addition ways to play a falling US dollar are the Merk Hard Currency Fund (MERKX) as well as the Prudent Global Income Fund (PSFAX) recently taken over by Federated Investments. Neither of these funds has done particularly well so far this year, but both are beginning to perk up as of late as gold strengthens and the US dollar weakens. This is a trend that could be with us for sometime to come. If the US does not adopt a long-term strategic comprehensive energy policy. (Constructive criticism is welcome.)
The trend will continue until the dollar is completely worthless. Do not let the short term drop in oil and gasoline prices fool you. They are only the result of rapid demand destruction, not of plentiful oil. When and if the economy comes back to life, we'll again be faced with our old nemesis: worldwide oil supply will not keep up with worldwide oil demand. In fact, the next encounter with adversary will be even worse than this year as current oil production projects and drilling are being scaled back or canceled due to the deteriorating price of crude. So, don't be fooled again! Be patriotic and fight for a strong economy and currency by sending a link to my energy policy to your elected government officials and demand action.
Disclosure: The author holds all recommended assets mentioned in the article.
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This article has 15 comments:
I agree with you that the misguided Iraq war is a key component of the current weak US dollar. You can blame that part on Bush 43.
However, things do not happen in isolation. Another equally destructive policy that contributed to the weak US dollar happened in Bill Clinton's reign. Clinton gave China most favored nation status in 2000 with no conditions and this started the avalanche of cheap Chinese goods into the United States. He allowed them to keep their currency fixed which created a huge trade imbalance causing imports into China to be expensive and exports out of China to be cheap. This is why China holds trillions in US T-Bills and in return the US has landfills full of cheap Chinese goods.
Our national dance with the oil cartel(s) will jig to a different tune when Congress passes hefty use tax on personal transportation.... metro center parking should cost in the thousands per sq. meter/month. Tag/permit to drive in concentrated zones would foster innovations in mini-buses, car-pooling and general mass transportation modes. The open road should be left more to the family car.
Here is some more interesting information from cia.gov
Reagan & Bush 41 championed NAFTA and look at the trade flow of goods between Canada, USA and Mexico.
USA imports $309 billion from Canada and $208 billion from Mexico
USA exports $245 billion to Canada and $134 billion to Mexico
Bear in mind there is some imbalance, but a substantial part of US imports are oil, gas and raw materials used to grow the US GDP.
Thanks to Bill Clinton's lack of a proper trade agreement with China look at the numbers for the flow of goods between the USA and China
USA imports $332 billion from China
USA exports $64 billion to China
That is a 5 to 1 trade imbalance !
On Dec 18 08:00 AM Bill James wrote:
> We will start to recover the dollar's value as soon as we start replacing
> oil-base transportation with Personal Rapid Transit. Within 10-12
> years we can be operating within US domestic oil production.
I find it valuable to read your commentaries, and agree with most of what you say. An exception to this is your partisanship. When I was younger, I thought all wars were republican affairs, until later when I learned that Vietnam was a Kennedy/Johnson creation, including the Gulf of Tonkin fabrication. That was far more agregious (sp?) than Bushs fiasco with ?intelligence. When it comes to irresponsible spending and poor economic performance, there are hundreds of examples of how both parties have failed miserably.
I have become anti-partisan, and with this mental filter in place, both parties look very bad. The biggest problem is self-serving and party-serving behavior, which favors the short term and results in poor policies, poor performance, and poor leadership.
In sum, I feel that you greatly diminish yourself with partisanship. Its kind of like believing that there is only one path to God, and those with eyes open know how utterly foolish that is.
With repect,
Isaac
PS Check out this vehicle as a Dollar bear fund-
DXDDX Dollar Bear 2.5x Fund
Direxion- www.direxionshares.com...
bill james: so long as it is non-gasoline fueled personal rapid transit....
long john: yeah, i know what you mean! i wrote an earlier article about the lack of american eagles available on kitco.com and apmex.com when gold was below $800. now that it is over $800...some are starting to become available on those sights. otherwise, it's ebay or whatever.
longoil: yes, he did give them most favored nation's status, but that in itself isn't a bad thing. i DO think we should be inspecting food and other imports for safety. they are sending some seriously dangerous stuff our way these days. as far as the currency goes, i don't think anyone has the power to tell the chinese what to do with respect to their currency...in fact, when they buy and own the second largest position of US treasury notes (second only to japan, but gaining...) it seems like they have alot more to say about OUR currency then we do about THEIRs. as far as buying cheap goods from china, this is not clinton's fault...it's any american who purchases the crap. here's the economic facts:
under 8 years of clinton:
- median family income rose $7500
- 23.7 million new jobs were created
- the fiscal budget was balanced
- the US dollar was strong
under 8 years of bush
- median family income declined
- 3.8 million new jobs were created
- the fiscal budget deficit doubled (quadrupled if you count the bailout)
and where were the jobs? i.e. we have nothing to show for the debt
- the US dollar has fallen quite dramatically
those numbers speak volumes to me, but i suppose someone could blame it all on the previous administration..and i guess that's what ideologues have to do in order to rational the disaster we are currently in.
bluesmoke: thanks.
tropicat: what congress should do now, especially since gasoline is so cheap, is start raising taxes on gasoline (by $0.02/gallon every year for 10 years) and use the money to fund building out the natural gas and electric infrastructures for NGV and electric cars.
longoil: sure, but we have lots of trade imbalances. they all pale compared to the bill for oil imports ($700 billion outflow). this is why the oil-centric bush administration has been such a strategic disaster. we've made very little progress (and in fact are going in the opposite direction!) in reducing this bill. of course, this year and next that bill will be down because, you guessed it, we are currently experiencing economic ruin. besides, you act like the republicans aren't the "free trade" champions of the world..which they are. it is under bush that US import inspection teams were gutted and laid off due to his budget cuts, which is why we dangerous food from china comes in every day. be sure to look into that issue as well.
anarchist: we can only hope obama can change the power of the oil and auto lobbies...we'll find out soon.
issac the terrible: hm....well, actually, i am a *real* conservative republican, which is why i criticize bush so much...he is not. he's just a hypocrit, and that is what most "conservative republicans" these days dont understand. bush is a radical fascist - just look at his policies, not what he says: huge fiscal deficits, grew the size of government larger than its ever been, taking away individual freedoms and liberties, unilateral foreign policy that undid american policy since WW2, outing CIA agenst...what is "conservative republican" about these policies?? then, add to that the federalization of the banking, insurance, and financial industries and you have witnessed, in 2008 under bush, the biggest move toward socialism (i call it fascism) in the entire history of the United States to date. bush is NOT a conservative republican. when you look at the results of his policies, there is only one conclusion: he's a radical fascist.
wrt kennedy, one reason they took kennedy out was he wanted to get OUT of vietnam, not turn up the gas!! hell, first thing johnson did when he got in office was poor money into vietnam. he was overheard saying "i'll give you your damn war, just get me re-elected". so, i don't agree at all with your perspective there. that said, i am not saying that both parties are not bad, i just look at "relative goodness"...i don't even look at parties usually..except this republican crew has been unusaully so horrible i do lump them together.under bush, i cannot name a *single* policy that was successful. all we have is mountains of debt and a middle class that has simply been annihilated. one thing you can bet your socks on, if obama tries to pull the same bs that bush did, i'll be all over his ass too! this is not partianship, this is keeping an eye on who is in charge of the country and calling them out when they screw up. with bush, it is just one disaster after another, and yeah, compared to clinton in my mind it's no contest. not even close. i mean, speaking of "eyes open", are yours and are you looking around and are we better off now than 8 years ago?
thanks for the investment advice, i'll check it out!
You and T. Boone Pickens are 100% right on the $700 billion outflow.
My problem is with the UAW and Obama who want to renegotiate beneficial trade agreements (like NAFTA). Of that $700 billion outflow, $127 billion buys Canadian oil and $80 billion buys Mexican oil. Thanks to NAFTA, Canada in turn spends $108 billion and Mexico spends $52 billion (of the outgoing oil revenue) back on American goods like autos, heavy machinery, pharmaceuticals, telecommunications, etc. Obama and the UAW don't see this obvious return of oil revenue back into the USA.
Compare this with the remaining $493 billion that never returns to the USA and is used to furnish lavish royal palaces, indoor ski hills in the desert and fund terrorism.
I am a big supporter of Republican free trade practices for the reasons I stated previously. But, I want to believe the Democrats will deliver all the alternative energy promises they made prior to Nov 4.
The US should make the key investments now and become the premier exporter of alternative energy (instead a junkie addicted to oil) like they are in other fields like high tech and pharmaceuticals.
Since I can remember about trade balances from US and Canada. Canada received always more. It is not due to Nafta or else.
But with such a large trade deficit with Canada from maybe 40 years, We canadians should a whole lot richier, our currency should roof top.
And it is not the case.
US has trade deficit with Canada, Yes. But they have mainly trade deficit with US company doing business in Canada.
When GM Oshawa, Ontario send a car to Detroit, Michigan. It is a trade deficit for the US. But it is still GM.
Same for Oil, Exxon is Imperial oil, afterall.
The majority of big companies in Canada are in fact american ones.
All these profits going back to american shareholders, then balance trade deficit could be seen in a different perspective.
Unfortunately the take over by Federated Investments results in the funds now becoming front-end load funds which is very disappointing for folks that are not current shareholders -- current no-load shareholders as of date of conversion are grandfathered into the no-load shares even for additional purchases ... at least as I understand it.
I hear you, and just want to point out that I don't consider myself either R or D, rather I consider myself an independent thinker and an equal oppurtunity skeptic. And I am no appologist for Bush.
Anyway, back to the topic of your article, I'd be real curious about your feedback on that Direxion fund- DXDDX
Keep up the good work.
Isaac
gilbertA: my gut feel is that the canadian currency, in the long run, will be stronger than the US dollar. i base opinion on canadian fiscal policy, and canadian oil, gold, timber, and other resources. canada appears, at least from down south, to be a more efficiently run enterprise. that said, if the US catches a cold (and right now we have the flu) canada will suffer. however...china will still be knocking on canada's door for resources...and the gold deposits will keep rising.
fatpitch: yeah, i could kick myself in the arse for not buying into BEARX as i sat there and saw the quote in barrons right next to PSAFX...grrrrr. what, PSAFX now has a load??? jeeez...i should have read all that stuff they sent me in the mail...all i read was that the fund wasn't changing. i should have known better. now i feel bad for recommending it. thanks for telling me. jeez.
issac: on DXDDX, it seems it is a straight 2.5x negative play on US dollar performance, which is a caffenated version of PSAFX. the initial minimum of $25k is a bit stiff...but the expense ration not too bad considering the short and currency positions involved. it's had a tough time this year, but in the last couple weeks it has bounded back nicely hasn't it? i am still amazed the US dollar is holding up as well as it is. i'm going to keep my eye on this one...it's a nice leveraged play on a weak US dollar.