Is This U.S. Dollar Move the Real Thing? 14 comments
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For the past several years, I have monitored treasuries against the dollar to confirm whether bearish dollar moves were sustainable. The treasury market foretold the lack of sustainability of the 2008 commodity boom; And it foretold the same impermanence when the Canadian dollar flew past parity. I have found no more fascinating and useful an economic indicator than the price of the 30 year treasury bond against the US dollar.
For the first time in recent years, universal dollar weakness, including weakness versus the Yen, is being confirmed by a little mini-flight on long maturity treasuries. This is worrisome as it obviously does not bode well for treasury bulls, and ultimately the Fed is placed into a little tighter corner than it has had to deal with recently. Either it turns the on faucet to increase the rate of debt monetization (as latest minutes reveal) via outright treasury purchases, accelerating dollar overshoot, or it shows restraint, letting the free market decide where the long term yield shall be. My flip flop between being a treasury bull and assumption of the more consensus reflationary scenario has come full circle.
The little bit of irony is that the more the Fed targets longer rates, the more control it forgoes of future monetary tightening with disastrous consequences. This bodes poorly for the dollar, and serves as an effective devaluation by proxy. Investors may require a greater risk premium than before to buy treasury assets even in the face of a guaranteed treasury bid, as dollar exchange rates fall. This points to an environment where amidst Fed price supports and interest rate targeting, they end up being the only holder of long maturity treasuries. Upon commencement of monetary tightening policy, we will see sudden sharp moves on the long end. At that point, a mere removal of the Fed bid will see a several hundred basis point move on the long end. Central bank asset liquidation will be another story. For this reason, it will be a terribly politically difficult effort for the Fed to actually tighten this time around. It points to a replay of the Volcker scenario.
In the end, this (increasing QE) is unbelievably the right thing for the Fed to do if it is to successfully prevent liquidationists from taking assets from the current generation of capital holders. The dollar needs to be weaker to stimulate our export economy, end dollar hoarding and resume investment appetite. Inflation is a gift to the debt holders, and will stop bank insolvency in its tracks. The long run circumstances are an obvious one-off inflationary move the Fed is unable to neutralize unless it is willing to sell its agency MBS assets into an open market, once again shooting the mortgage market in the head. To me, this points to a permanent move to a higher price level.
The contrary argument of course is that no matter how much the Fed prints (within the under 10 trillion dollar range, of course), it will be impotent against the wealth destruction we've already seen, itself in the many trillions. I find it easy to challenge that assumption, especially now that the Fed has so flexibly responded in its program creation. In this week's most important unnoticed headline, the Fed has finally activated the TALF, making the Fed's trillion dollar pledge actually useful to enable banks to offload old CMBS assets. PPIP is coming. And all of this several trillion dollars of treasury supply that is driving yields up will be spending into the economy that would not have otherwise happened so quickly. Government spending is directly augmented into GDP 1:1.
The multiplier effect of the impending monetary flood we are about to see in the next 6 months has a great chance of successfully offsetting the wealth destruction of the late crash of 08. Unlike the six hundred billion of monetary base currently sitting in excess reserves not being multiplied into the money supply, TALF, PPIP, QE, and treasury supply (stimulus) will be another story. That money will be multiplied, in a way Americans have never seen before.
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This article has 14 comments:
If you really want to know where this is going, all I can suggest is rent "The Sorcerer's Apprentice".
Am I correct in my interpretation of this article, that the author is trying to support the belief that we will see much inflation in the near future?
If the extra cash just fills a hole left by no consumer spending, then maybe it wouldn't be so inflationary.
However, is he saying that the extra money supply will devalue the dollar and cause import prices to rise?
Or is he saying both will result?
If the US continues to remain in recession (as it seems it will for some time) ...then buying commodities now will be for naught....as the entire world will remain in a recessionary environment and demand for all commodities will drop...including oil... buying commodities may in fact be premature at this time. Supply is up, and not a lot of true demand.
As far as buying emerging markets...they need developed markets to purchase their goods...I don't see that happening until the recession that we are experiencing begins to fade....
On May 23 06:07 PM Mad Hedge Fund Trader wrote:
> Real Enough. The prospective US rating cut is also cutting the legs
> out from the US dollar, which is hitting fresh 2009 lows against
> everything. It turns out that if the world is not going to zero,
> you don’t need a safe haven like the dollar any more. And safe havens
> with a zero yield were not that great anyway. The New Zealand dollar
> has rocketed 30%, and the Euro has gapped through to a new yearly
> of $1.40. A lower dollar is one of the few certainties of life. The
> only question is how far, how fast. This further underlines my arguments
> to buy emerging markets and commodity producing countries.
The author is right. Production is not growing, just money supply. The Fed and Treasury should understand this relationship or they should look for another job and another currency to ruin.
The gap between the Dow and the TSX did not widen significantly during the same period, both having posted about equal percentage gains in the last 10 weeks. But it is clear where you would have gotten more performance with the same basket of goods and a little extra icing on the cake. The future looks bright for the TSX with it's heavier weighting in commodities, mining stocks and gold, especially so if the US goes inflationary.
This in spite the fact that Canada is so dependent on the US as a trading partner. Logic dictates it should follow the US experience. The ace card for the Canadian economy I think though is that so much of what it produces in resources is inelastic on the demand side. Despite wide price fluctuations in key resources, production levels remain constant. Think Uranium, Gas, Oil, Potash and Wheat. So yes, commodity based nations with strengthening currencies are a good investment. Even better when that country is on the same continent and is politically stable.
Now that's a good bet indeed.
Cam
On May 23 06:07 PM Mad Hedge Fund Trader wrote:
A lower dollar is one of the few certainties of life.
> The only question is how far, how fast. This further underlines my
> arguments to buy emerging markets and commodity producing countries.
>
Furthermore, the impact of doing no monetary stimulus on real output is disastrous as well. We will see layoffs and unemployment of epic proportions if we do not both monetarily and fiscally stimulate. Look to early Great Depression for evidence.
On May 23 09:28 PM altaman wrote:
> Your enthusiastic endorsement of quantitative easing and high inflation
> shows your total lack of concern for the disasterous effects these
> insidious policies will have on millions of innocent americans of
> all ages and wealth levels. Have you no shame sir?
What we need is simple honest accountling of where we are. We then need to say that we can or can not pay for everyone's dishonesty. We then let the chips fall where they may. This will be a hard time, a very hard time, but we will emerge richer and with our honest head held high.