Key Reasons to Be a Dollar Bull

Bailout news and fear of a growing money supply drives the dollar lower and real assets, such as precious metals and oil, higher. Talk of a bust in treasury markets, and coming inflation, is rampant. It certainly is possible that inflation may resurface at some time in the future, driving the dollar lower. That, however, is not the current reality. Since mid December the dollar has steadily tracked higher, Click here to see the chart of UUP (the US dollar bullish ETF). Following are reasons to be bullish on the dollar:

Deflation Despite dire predictions of hyper-inflation due to bailouts and other rescue attempts, that is not happening now. Prices of most assets continue to decline, real estate, commodities, autos, consumer goods etc. Yes, the US government could print lots of money, but there are many constraints. Congress, foreign (Chinese) treasury redemption concerns and popular opinion are but a few. Washington cannot and will not pay off everyone's bad debts, they can't afford it. It will be interesting to see the congressional reaction when the US automakers show up in a month or two asking for more money, as they most surely will.

Least ugly belle at the ball It is true the US has major economic problems. Worldwide, however, the situation is even worse. The perception is that the US led the world into the recession and now will lead the world out. Unrest in Greece may be just a harbinger of things to come. Excepting the Japanese Yen, the US Dollar is among the strongest worldwide.

Euro problems The European union (and the Euro) have problems with the PIGS (Portugal, Italy, Greece and Spain) who are in a weaker situation than the Germans and the Dutch. Eastern European members are hurting badly. There is some question as to if the Euro can survive this crisis.

US Bailouts stalling Washington is running out of the will to do bailouts. Even now, Obama's stimulus bill is running into strong headwinds in a squabbling congress. Something will probably be passed, but government wheels turn slow, and it will be too little, too late, for many companies. Without bailout money bankruptcies will rise, weeding out the inefficient. This is bullish for the dollar and best for the US in the long run.

Deleveraging Global deleveraging of dollar-based credit is sending dollars back to the US.

In order to resolve the economic crisis Washington has to pick between two extremes. The US government can monetize the debt (The Zimbabwe Solution) or take a path such as the Japanese took in the 1990s, keeping zombie corporations and banks alive (The Japanese Solution). My guess is we will be closer to the Japanese solution than the Zimbabwe solution and the dollar will continue to strengthen.

Disclosures: Long UUP and DRR.

Comments

[prairiedog555:]

That is be a dollar bull for the time being, I agree. But the spending will have to lead to inflation in the long run.

Feb 06 08:32 AM

[SW Richmond:]

Thanks for volunteering to be the dollar bull. I am searching (so far in vain) for answers to some questions; maybe you could help me out? I'm not bashing your article or your premise, I genuinely want to know how you think these issues can be resolved.

Here's a cut-and-paste of a previous reply to another SA dollar-bull article. I would truly appreciate your thoughts.

"Maybe I can get this author to explain why they will stop trying to reflate? In the face of vastly reduced tax revenues, many US states are beginning to flirt with BK. States cannot print. The US is similarly faced with both mounting debt (and the mounting debt service to go along with it) and reduced tax revenues.

Someone please offer me a rational explanation as to why this situation will be allowed to continue, why at some point the central banks and treasuries of the world will say 'it's not working, so screw it' and how it will be resolved in a deflationary environment.

What will happen to the debt?

How will it be paid?

If it is not paid, what happens to currencies in national defaults?

If you believe there will be a deflationary spiral and still no default, how will the defaults be avoided? Where will money come from to service debt?"

Feb 06 09:13 AM

[Sargasso:]

I'd love to see some analysis why you consider the USD the "Least ugly belle at the ball ". USD debt to GDP is expected to escalate much more rapidly than othe AAA rated countries over the next 3 yrs. It is will be much higher than an aggregate EU figure.

I'm certainly not bullish on the US dollar and will probably hide in the Can $. Its already taken the hit and only stands to gain as energy and commodity prices recover. It also has the lowest debt to GDP ration of the G20.

I don't predict armaggedon for US$ but its hard to be bullish.

Feb 06 09:45 AM

[Prudent Man...:]

Printing more money is deflationary? Another ridiculous concept. Must have been proposed by some Ive League professor who never had a real job, thinks econometrics is not a lagging indicator, and doesn't have his own skin in the game.

The economy over-expanded due to easy credit which resulted on low interest rates and over building because leverage was profitable. Now the government wants to expand and over-expanded economy. Just the opposite of what the Free Market is telling us to do. Bad policy by greedy politicians at the cost to taxpayers.

Obama claims to want to reduce entitlements while he is heavy handedly increasing them. As Obama has prove in his short presidency, don't believe a word he so eloquently delivers.

Feb 06 11:57 AM

[Bruce Vande...:]

Here are two more reasons why I think the US will stop trying to re-inflate after a certain point:

1) Unlike Zimbabwe we do not have a dictatorship. Congress will hem, haw, debate and delay the bailouts. They will reluctantly agree to some, delay and turn down others. Priority will go to keeping the banking system functional, Others? Good luck! 2) The more the US prints money the greater we risk a sovereign credit collapse. The Chinese and others will stop buying and start selling US treasuries. Long term interest rates will rocket up. That will really kill the economy!.

I am trusting that we can see that the economic consequences of collapsing companies is far less horrendous than the economic collapse of the US itself. No one wants a Zimbabwe like experience. The liquidation of debts by bankruptcy is the better, though hard, choice.


On Feb 06 09:13 AM SW Richmond wrote:

> Thanks for volunteering to be the dollar bull. I am searching (so
> far in vain) for answers to some questions; maybe you could help
> me out? I'm not bashing your article or your premise, I genuinely
> want to know how you think these issues can be resolved.
>
> Here's a cut-and-paste of a previous reply to another SA dollar-bull
> article. I would truly appreciate your thoughts.
>
> "Maybe I can get this author to explain why they will stop trying
> to reflate? In the face of vastly reduced tax revenues, many US states
> are beginning to flirt with BK. States cannot print. The US is similarly
> faced with both mounting debt (and the mounting debt service to go
> along with it) and reduced tax revenues.
>
> Someone please offer me a rational explanation as to why this situation
> will be allowed to continue, why at some point the central banks
> and treasuries of the world will say 'it's not working, so screw
> it' and how it will be resolved in a deflationary environment.<br/>...
>
> What will happen to the debt?
>
> How will it be paid?
>
> If it is not paid, what happens to currencies in national defaults?
>
>
> If you believe there will be a deflationary spiral and still no default,
> how will the defaults be avoided? Where will money come from to service
> debt?"

Feb 06 04:43 PM

[Dave Wrixon:]

Could I add Dementia to the list?

Feb 07 05:02 AM

[patio:]

Those are reasonable questions, but none of problems noted are unknown. The world has "priced in "current US debt and intentions going forward of increasing that debt. And yet, the T-Bill has not crashed, the dollar has strengthed, as Bruce pointed out. All common metrics point to deflation for some time, but the inflationista's only argument is Fed printing.
But the worlds biggest players are not shunning the dollar, quite the opposite. Is the argument that China, Japan, and Saudis going to wake up some Sunday morning, and be suddenly alerted, "Gosh, the US is really quite the debtor nation, what were we thinking".
I don't have a crystal ball. IMO this thing is unknowable, its an unprecedented crisis. But I do think anyone who references Zimbabwe has zero creibility. Yes, we have issues, big ones. But the US is still the only true superpower, militarily, politically, and yes even financially.
The entire global commerce structure goes through the US, every country would be severly affected by our demise.





On Feb 06 09:13 AM SW Richmond wrote:

> Thanks for volunteering to be the dollar bull. I am searching (so
> far in vain) for answers to some questions; maybe you could help
> me out? I'm not bashing your article or your premise, I genuinely
> want to know how you think these issues can be resolved.
>
> Here's a cut-and-paste of a previous reply to another SA dollar-bull
> article. I would truly appreciate your thoughts.
>
> "Maybe I can get this author to explain why they will stop trying
> to reflate? In the face of vastly reduced tax revenues, many US states
> are beginning to flirt with BK. States cannot print. The US is similarly
> faced with both mounting debt (and the mounting debt service to go
> along with it) and reduced tax revenues.
>
> Someone please offer me a rational explanation as to why this situation
> will be allowed to continue, why at some point the central banks
> and treasuries of the world will say 'it's not working, so screw
> it' and how it will be resolved in a deflationary environment.<br/>...
>
> What will happen to the debt?
>
> How will it be paid?
>
> If it is not paid, what happens to currencies in national defaults?
>
>
> If you believe there will be a deflationary spiral and still no default,
> how will the defaults be avoided? Where will money come from to service
> debt?"

Feb 07 09:05 AM

[EUARTE:]

Just because our economy could bring down the world economy does not mean it will not happen.

Feb 07 09:15 AM

[dcb:]

my long term plan was to buy cheap corporate debt during the credit crisis, and muni bonds, then use the money flow to purchase foreign stocks and commodities. if the dollar goes up, my corporates maintain an income, and as it drops I'm buying into things that should gain. one could also hedge with a foreign bond fund unhedged by pimco.

Feb 07 09:46 AM

[capt Brian:]

I keep wondering when "the world" including the writer of this article will simply look at the real world out there and admit, that, for whatever reasons one cares to list, and there are many, the world's economy has been shattered. [to put it mildly] There are many problems that led to it, and other than time, there are few 'ways' to fix it. Throwing money at poorly run companies, which survived simply due to the spending habits of the world are now 'somewhat changed', just ain't gonna work pilgrim. I am not proposing a solution to this, because no one will listen anyway, but I will propose that the results of the folly of governments is leading to more expensive products. People will eat, marry, have children and so on. The price of these things has to rise to pay for the economic mistakes. This, my dear investor friends, is simply known as inflation. Deleveraging, disinflation, deflation and indecision are having their day, but demand will come surging back at some point, and inflation will have its day also. Have fun trying to figure how to fight inflation yourself. I am storing silver and gold nuts in holes. Good luck.

Feb 07 10:40 AM

[iyamwutiam:]

The fact that the US does not have a dictatorship and Congress will not endorse ridiculous sums of money is patently false from the facts. The only thing that is saving the US dollar is that it is a reserve currency. Case in point -Russia- having to pay only 110 billion in debts due is being rapidly devalued via the ruble. If they were a reserve currency such a paltry sum is meaningless.

The US -is hiding the true extent of its liabilities which total near 50 trillion (public and private) -which is close to 500 times GDP. It has been widely acknowledged that these financial services added to the GDP and now that the bubble has burst -we do see a net decrease in GDP -probably from 14 trillion to around 10 trillion.

So we have 500 times GDP/debt ratio -and no end in site for atleast two years where we will spend atleast an additional two trillion more , the need for the fed to buy treasuries as foreign investors wll be reluctant, a spiraling upward of deficits -to reduce or mitigate the building anger of millions of americans who have lost a substantial amount of wealth, and the continual financing of incompetent US states, corporations and federal government agencies.

One may look at the short term context of global panic and see that it is 'good' for the dollar. However, in the long term -3-5 years - it seems that it would be implausible for people notto lookat the rising deficit, prolonged recession etc in any other view than one with trepidation. Perhaps the US will survive on carry trade as did Japan ?

Feb 07 10:44 AM

[capt Brian:]

PS: on the above: The Dollar, (in relation to other currencies) has been in a bull phase, but do you really believe that our dollar in any terms is 'strong'? I don't think so. If you really want to see what a dollar is worth, find some real money and compare it. F'rinstance, divide the current price of gold by the US$ or an ounce of silver, and unless you have some other device for measuring the actual value of a currency, then use that. Divide the dollar into it, and there is your real value. Hmmm... 911(one oz of gold) into 1 ($)... well go look it up on line, your dollar is really worth about 0.0011 oz of gold... finance.yahoo.com/curr...;to=XAU;amt=1

Ain't the media grand? Have you ever heard anyone show you the real value of the US$. go to the above site and play to your hearts content, listen to all the gurus, and tell me the dollar is strong. Yeah buddy. Compared to what?

Again go store some nuts,reality will pop up like an air bubble under the ice, and spring is just around the corner. BTW, this smelly ole sea capt. says it will happen this spring, and the ice is melting now.

Feb 07 10:59 AM

[SW Richmond:]

Bruce,

Thanks for your reply. I still hold out a small measure of 'hope' that US authorities will stop the reflation effort at some point short of currency destruction, but I have lost confidence that they will. My US senators are both democrats, who favor the bailout, and my congressman is a big-government republican. They clearly demonstrated their unwillingness to listen to us when they passed TARP, over objections running 100:1. We no longer have representative government, and arguably have not for some time. The hemming and hawing is merely a delaying tactic to get their own pork included in the bill.

Next week Treasury is coming with what appears to be $124 Billion of new issues. Speculation has been running for some weeks now that this level of supply will force the Fed's hand, and that next week will mark the beginning of monetizing the long bond, precisely because of the impact on rates you point out that would be experienced otherwise. I'm sure they have some kind of a plan, and I'm sure I don't know what it is, but it should be an interesting show. If I was a SWF I wouldn't be answering my phone this weekend.

Thanks again for your views.

Feb 07 11:18 AM

[David Roskoph:]

You are right for some of the right reasons. The bailout/reflation parade is only getting started, it will not only not stall, it will reach well past a trillion. Huge deficit spending is the only thing that can stop deflation from felling the republic. That is baked into the recipe and understood by the world. That is why the dollar is rising.

Logically all that new debt would be inflationary, except we are teetering on the precipice and the fall would be felt in every corner of the civilized world. Warts and all, we remain the best model for a standard of living in the world - we are the leader.

The value of our franchise alone will keep the dollar strong as the rest of the world copes with the rising tide of fiat coming into the system. We have stumbled but will nto be crushed by other nations trying to work their way up because without us, they will only go backward.

Feb 07 01:21 PM

[patio:]

"The US -is hiding the true extent of its liabilities which total near 50 trillion (public and private) -which is close to 500 times GDP. It has been widely acknowledged that these financial services added to the GDP and now that the bubble has burst -we do see a net decrease in GDP -probably from 14 trillion to around 10 trillion.

So we have 500 times GDP/debt ratio -and no end in site for atleast two years where we will spend atleast an additional two trillion more , the need for the fed to buy treasuries as foreign investors wll be reluctant, a spiraling upward of deficits -to reduce or mitigate the building anger of millions of americans who have lost a substantial amount of wealth, and the continual financing of incompetent US states, corporations and federal government agencies."

You see, again, this is all known, the US isn't hiding anything that hasn't been discussed ad nauseum in tons of blogs and in published articles.
Every thing you said is old news.


On Feb 07 10:44 AM iyamwutiam wrote:

> The fact that the US does not have a dictatorship and Congress will
> not endorse ridiculous sums of money is patently false from the facts.
> The only thing that is saving the US dollar is that it is a reserve
> currency. Case in point -Russia- having to pay only 110 billion in
> debts due is being rapidly devalued via the ruble. If they were a
> reserve currency such a paltry sum is meaningless.
>
> The US -is hiding the true extent of its liabilities which total
> near 50 trillion (public and private) -which is close to 500 times
> GDP. It has been widely acknowledged that these financial services
> added to the GDP and now that the bubble has burst -we do see a net
> decrease in GDP -probably from 14 trillion to around 10 trillion.
>
>
> So we have 500 times GDP/debt ratio -and no end in site for atleast
> two years where we will spend atleast an additional two trillion
> more , the need for the fed to buy treasuries as foreign investors
> wll be reluctant, a spiraling upward of deficits -to reduce or mitigate
> the building anger of millions of americans who have lost a substantial
> amount of wealth, and the continual financing of incompetent US states,
> corporations and federal government agencies.
>
> One may look at the short term context of global panic and see that
> it is 'good' for the dollar. However, in the long term -3-5 years
> - it seems that it would be implausible for people notto lookat the
> rising deficit, prolonged recession etc in any other view than one
> with trepidation. Perhaps the US will survive on carry trade as did
> Japan ?

Feb 07 01:43 PM

[Tony Daltorio:]

This article shows what happens when so-called investors focus on the short-term. Within a year, both deflation and de-leveraging will be yesterday's news. And what do think would happen if the US government stops the bailouts. Right or wrong, the perception will be that the US has thrown in the towel. This will cause overseas investors to panic and cause a major dollar selloff. One of the current main props for the US dollar at the moment is the hope that all the bailouts will "solve" the problem.

Feb 07 01:54 PM

[auto44:]

One of the reasons the dollar is going up relative to the euro is that european banks have made worse loans to the emerging markets than american banks did and they are heavily involved in the same mortgauge mess that american banks are.

Feb 07 03:36 PM

[Duude:]

Additionally, European banks were every bit as leveraged 40-1 as the worse American banks. Now add to that the greater proportion of savings in these same banks when compared to GDP of the country and we're talking about a very serious problem. No wonder at all as to why the Euro smells like a 3 month old dead fish.


On Feb 07 03:36 PM auto44 wrote:

> One of the reasons the dollar is going up relative to the euro is
> that european banks have made worse loans to the emerging markets
> than american banks did and they are heavily involved in the same
> mortgauge mess that american banks are.

Feb 07 05:51 PM

[Fairway Jack:]

The top 3 articles at Seeking Alpha are predicting disaster of armaggedian proportions. This means "go contrarian". Oil is a more prudent investment than treasuries or gold at the present time. When the govt finds a way to print a barrel of oil...I'll bail out

Feb 07 09:54 PM

[JBond:]

Things are not expected to be as horrible as the Great Depression (25% unemp vs. 9-10%max)....Huge budget deficits after WW2....sure industry was building armaments that were not in great need after victory...but we produced our way to prosperity...
we can again...
and we'll go on and prosper again after some tough years....as long as we are free and gov provides the fertile environment for growth.
Don't waste your breath...deflation now...inflation later...
invest in oil for the next 5yrs..then get out!

Feb 09 03:58 AM