Will The U.S. Dollar Crash? 49 comments
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The tide has turned against the U.S. Dollar. The dollar rose during the crisis as it became a refuge for investors seeking safety. Now, investors are worried that their life raft is springing leaks. And rightly so, for in Thursday’s article titled “Is the Almighty Dollar Dead?” Columnist Dan Burrows says:
It's an axiom of economics that debtors love inflation. The flip side, or course, is that creditors despise it. Why lend money today only to get paid back in devalued bucks tomorrow? That spells trouble for the almighty dollar -- and puts pressure on investors to hedge against it’s almost certain further decline, market professionals say.
I have written previously on Seeking Alpha that the US Government has borrowed massively and devalued the dollar. Over the past decade, the declining dollar has yielded foreign investors a negative real rate of interest. No wonder our foreign creditors are heading for the exits. In his Smart Money column, Burrows goes on to say:
True, the dollar is by no means dead -- but it's certainly wounded and the prognosis for the next few years looks likely to keep the world's reserve currency in the intensive care ward. It's not hard to see why. As the U.S. government goes hat in hand borrowing money to fuel unprecedented deficits, the rest of the world (our creditors) is understandably concerned.
After all, more than 50% of the world's debt is denominated in dollars. As the greenback falls, those creditors, most notably China, get paid back with something much less than they bargained for. Indeed, the U.S. Dollar Future Index, a measure of the greenback against a basket of major currencies, has crumbled nearly 11%, to less than 80, from a 52-week high of more than 89 in early March. That might not sound like much, but it has some pros feeling certain that a full-blown currency crisis is only a matter of time. [emphasis mine]
This is not merely the opinion of a financial columnist, it is Government Policy. Ben Bernanke, in his Nov. 21st 2002 address to the National Economists Club in Washington DC said:
"inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."
Burrows goes on to say:
Keith McCullough, chief executive of ResearchEdge, a New Haven, Conn., research firm, says a currency crisis is all but inevitable. "The first 10% of the correction is fine," McCullough says, "but once you get below the 81 line on the U.S. Dollar Index, I call that crashing the buck." [emphasis mine]
In the shorter term that's worked out well for equity investors -- the weaker dollar is reflating their 401(k)s, McCullough says. After all, paltry interest rates and a weak dollar make equities more attractive than cash or overpriced bonds in such a scenario. A weak dollar also boosts exports and corporate revenue generated overseas. But eventually the dollar's decline will come back to eviscerate folks' portfolios. "People don't understand the correlation between the bond market, the currency market and the equity market," he says. "You have the stunning confluence of a crashing Treasury market and a crashing currency market. This hasn't happened before. The stock market is the one market that hasn't been affected yet, but it's just a question of when."
What Does This Mean For Investors?
I agree with McCullough on most points. I agree that a declining dollar will depress the US Bond market and increase interest rates. I just don’t buy the connection that this will also crash the US equity market. A weak dollar is a plus in some ways and a negative some ways for US Equities. Certainly rising interest rates will hamper a recovery in stock prices. But, because nearly half of the S&P 500 profits are generated overseas, a weak dollar helps boosts exports profits generated overseas. As a further plus for U.S. Equities: these overseas profits are magnified when they are converted from stronger currencies into a weaker dollar.
The outlook for US Equities is a moot point. For those nervous about the near term future of U.S. Equities (including the Author), one can stay invested in equities and still hedge against a declining dollar by investing in Non-U.S. assets. Paradoxically, the decline in the dollar will have the opposite effect on foreign firms. Because their currencies are more expensive, their exports will suffer. However, their earnings and dividends will be produced in stronger currencies, which have appreciated against the dollar.
Since I don’t agree with all the recommendations made by the commentators in Dan Burrow’s article, I’m not going to repeat them here. You can read the full article “Is the Almighty Dollar Dead?”
Implementation Vehicles
It doesn’t hurt to have significant exposure to Non-US Denominated Assets. It hedges against the risk of a significant US downturn, and a significant drop in the dollar.
I am a fan of ETFs, because of their lower expenses and their superb tax efficiency. If you are new to international investing, the first place to start is with broadly diversified low-cost index funds with low turnover and rock-bottom fees. The following market-cap weighted funds are well-diversified and some of the least risky ways to invest overseas:
Index Funds Of Equities Throughout The Developed World
- iShares MSCI EAFE Index (EFA)
- Vanguard FTSE All-World ex-US ETF (VEU)
- Vanguard FTSE All-World ex-US Sm-Cap ETF (VSS)
Index Funds Of Equities Throughout Emerging Markets
Disclosure: Author holds none of the positions mentioned above. Author is long U.S. Equities & Real Estate, Foreign Developed Equities & Emerging Markets Equities, TIPs and WIP.
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This article has 49 comments:
Sorry, that's absolutely untrue. A stock price is the present value of dividends or cash flows to be paid in the future. The present value is determined by the prevailing interest rate. BY DEFINITION stock prices fall if interest rates rise. A fall in the dollar is irrelevant because higher interest rates will prop it back up; the fall is short term and will not rescue the stock market. You can't escape the basic math of corporate finance.
In today's environment, only a moron could describe the dollar as "safe haven". As for World Reserve Currency status, that is a privilege that comes with a requirement for discipline and that privilege has been grossly abused. The huge holdings of dollars around the World will just severe to make its inevitable implosion impossible to counter and much more severe. Oh, yes, and you can forget the World Reserve Currency status, the American Dream is about to turn into you worst nightmare. Unfortunately, the so called Green Shoots are just a false dawn, but they will lead many lambs to the slaughter. In the UK, mortgage rates are rising. They are going up regardless of what the Bank of England says. They are being determined by the money markets. It is a consequence of Government debt. It may take a little longer for most of the numpties to start trashing the dollar big time, but it will surely come, unless Obama really can walk on water. It has been 2000 years since that trick was last reported and frankly I don't believe those reports either.
On Jun 13 11:39 PM Sulu wrote:
> "I agree with McCullough on most points. I agree that a declining
> dollar will depress the US Bond market and increase interest rates.
> I just don’t buy the connection that this will also crash the US
> equity market."
>
> Sorry, that's absolutely untrue. A stock price is the present value
> of dividends or cash flows to be paid in the future. The present
> value is determined by the prevailing interest rate. BY DEFINITION
> stock prices fall if interest rates rise. A fall in the dollar is
> irrelevant because higher interest rates will prop it back up; the
> fall is short term and will not rescue the stock market. You can't
> escape the basic math of corporate finance.
1. Socialize the debt (put it on the backs of the taxpayer)
2. Privatize the profits (the banks get to keep all the money)
This fourth side completes the cycle. Next comes asset deflation - has and is still occuring, price inflation - food and energy which is happening now and will increase in velocity, supply shortages - as inventories shrink and the dollar losses more value manufacturers will not want to fulfill orders for devalued currency, causing more shortages, which causes higher demand with higher prices and increased devaluation of the currency. We are now back to square one and the circle continues until the currency self destructs.
ALL DEBT WILL BE PAID. Either by the debtor or by the lender. Either with pennies on the dollar or with dollars that are worth pennies.
- Ludwig von Mises
arabianmoney.net/2009/.../
"It doesn’t hurt to have significant exposure to Non-US Denominated Assets. It hedges against the risk of a significant US downturn, and a significant drop in the dollar."
1. Is the asset domiciled in the US?
2. Is the asset denominated in US dollars?
US domiciled multi-national companies will use the US dollar as their final basis currency but will carry assets and earnings that are non US dollar denominated. As some of the biggest global corporations they are very much reflections of the global economy. Holding positions in US domiciled companies which have a very large percentage of business outside the US does not pose greater risk than it would to say a European based multi-national which uses the euro as its base currency for accounting.
Much larger currency risks are to paper/contractual assets (i.e. Treasury bonds, derivatives) which are pure plays on the US currency.
If Americans reject more debt and save,how does this help China's export economy?IMO all this talk about a Chinese currency for the world are nonsense,and Russia's talk of a new world currency are nuts.
> If Americans reject more debt and save,how does this help China's
> export economy?
First, China has 1.3 billion citizens, many of which save 40% of their earnings. In the longer term, it doesn't need export-led growth. The sooner the Chinese understand this and allow the yuan to appreciate, the more their own middle class consumers will be able to afford.
> IMO all this talk about a Chinese currency for the
> world are nonsense,and Russia's talk of a new world currency are
> nuts.
Why is it nuts? If you were being paid a wage in a depreciating currency, wouldn't you try to change the arrangement so that your pay's purchasing power wasn't declining too fast? Makes logical sense to me.
"Next comes asset deflation - has and is still occuring, price inflation "
Is this a typo? Do you mean "asset inflation" instead of "asset deflation"???
Thank you
On Jun 14 12:02 AM Donald Ingram wrote:
> What we see occuring is the fourth side of the fiat pyramid.
> 1. Socialize the debt (put it on the backs of the taxpayer)
> 2. Privatize the profits (the banks get to keep all the money)<br/>This
> fourth side completes the cycle. Next comes asset deflation - has
> and is still occuring, price inflation - food and energy which is
> happening now and will increase in velocity, supply shortages - as
> inventories shrink and the dollar losses more value manufacturers
> will not want to fulfill orders for devalued currency, causing more
> shortages, which causes higher demand with higher prices and increased
> devaluation of the currency. We are now back to square one and the
> circle continues until the currency self destructs.
> ALL DEBT WILL BE PAID. Either by the debtor or by the lender. Either
> with pennies on the dollar or with dollars that are worth pennies.
A strong Chinese currency will accomplish this.
For the next 20 years, while the western world "reorganizes", China will expand through internal growth. They will build stuff for each other for a change.
www.wealthalchemist.co.../
US Dollar is definitely in trouble
Because education, healthcare & pension provision are very poor & if they don't they run huge risks. Possibly at the back of their minds they also fear political instability too.
"In the longer term, it doesn't need export-led growth."
Perhaps not - *if* the government can resolve the education, healthcare & pension provision issues. But it probably doesn't because that would involve socialising wealth concentrated in the hands of the ruling elite. & what's the point of being part of that if it doesn't make you wealthy?
"The sooner the Chinese understand this and allow the yuan to appreciate, the more their own middle class consumers will be able to afford."
Au contraire - the sooner they do this, the sooner the exporting entrepreneurs of Shanghai, Guangzhou & Shenzhen lose their (remaining) shirts.
On the one hand, there's no denying that from a fundamental standpoint, the dollar's in trouble. Counteracting that fact, is that the dollar is still seen as a "safe haven" currency (let's leave talk of gold out of the discussion, for now). Currently, North Korea is still engaged in increasingly belligerent rhetoric, and in Iran, there's been civil unrest after the election there. And lets not forget the on-going currency crisis in the Baltics. If any of these (or some other "problem" I've not mentioned) flares up, it wouldn't be unreasonable to see continued dollar strength, vis a vis other currencies.
Having said that, for the intermediate to long term, I'm bearish on the dollar.
On Jun 14 11:47 AM Old Trader wrote:
> I'm thinking the dollar, in the short term, at least, might be torn
> between 2 conflicting forces, just as the price of oil is, currently.
>
>
> On the one hand, there's no denying that from a fundamental standpoint,
> the dollar's in trouble. Counteracting that fact, is that the dollar
> is still seen as a "safe haven" currency (let's leave talk of gold
> out of the discussion, for now). Currently, North Korea is still
> engaged in increasingly belligerent rhetoric, and in Iran, there's
> been civil unrest after the election there. And lets not forget the
> on-going currency crisis in the Baltics. If any of these (or some
> other "problem" I've not mentioned) flares up, it wouldn't be unreasonable
> to see continued dollar strength, vis a vis other currencies.
>
> Having said that, for the intermediate to long term, I'm bearish
> on the dollar.
On Jun 14 11:40 AM rick12345 wrote:
> China's exports to the rest of the world account for about 2-3% of
> their GDP, with the remainder helping to fuel a self sufficient economy.
> A rising Yuan would therefore help them purchase commodities at
> a cheaper price. Ergo, a strong US currency is in no way beneficial
> to the Chinese economy, don't kid yourself otherwise.
The point to all this is that all this worthless junk paper has to be written off. Inventing new money won't work because the amount of money that needs to be invented staggers the imagination; it just cannot be done and I think people on the hill are beginning to recon with that fact...perhaps not Obama just yet.
Thus, in the deleveraging prospect, one needs dollars and a lot of them and thus we will see continuing strength in the dollar despite the current run down due to unprecedented "printing". As the sun rises, new vision as to the real size of this mess will dawn even on to the mentally challenged congress. Thus asset prices will suffer and the deflation will pick up more momentum. And for safe havens, certainly not "other currencies" as they will be devalued to match the devaluation effort on the dollar, except in the short term.
A safe haven? Lots of luck as I am not too confident that gold and silver will fare well either. Equities? I think the run is about over as the company thrift measures to the bottom line are all cooked into the current prices...it looks like a down hill ride from here no matter how you look at it.
Am I wrong to conclude that if the dollar crashes then people flock to equities because they represent a more tangible asset or service.
Thus, if the DOW goes to, say, 26,000 in terms of deflated dollars that might reflect a 66 percent drop in the value of the dollar.
But a holder of equities would not have more buying power, but would sell three times as much stock as before to buy something.
But he would have more buying power than someone who just held on to the fiat credits that dollars represent.
I wonder if people would be more aware if we did call dollars credits instead of dollars, which is skillful doublespeak.
Most of the posters on this topic should replace Summers and Geithner, who represent the banksters.
So far everyone is sitting tight, but they are all eying each other, watching to see who is the first to make a wholesale trade of dollars (and/or US debt) for "something else". The first one to break and attempt to cash in their dollar holdings will start the stampede for the exits, and the eventual demise of the dollar. Nobody wants to start the stampede because the sudden drop in the dollar will reduce the value of their holdings to near nothing.
The first steps are underway however. Excess foreign reserves are being used to purchase assets other than dollar based paper. China is roaming the world making deals left and right with foreign governments in their local currencies or in Yuan in an attempt to reduce the impact of holding dollars. Foreign purchases of US debt are declining, if not reversing slightly. They are also buying shorter term issues, so they will be paid back sooner and have the opportunity to move into other assets if they wish.
When the day arrives that barrels of OIL start trading in currencies other than the dollar, you can bet the beginning of the end is near.
We are in a tenuous position now. Dollar stability may last for a while, but as long as the Treasury and FED keep issuing gobs of new debt, the odds continue increasing for really bad news.
The 'solution' to our problem is to let "bad stuff" happen. It will be painful for some. The alternative, if current borrow and spend policies continue, will be widespread disaster.
We are not in an enviable position.
As long as the Mullahs rule Iran, don't expect changes there. Religion and Politics, Obama sure put both of his feet in his mouth by quoting from the Koran.
The future lower standard of living in the U.S. is relative: Americans have been consuming beyond their means for years and have lived at a level that was neither sustainable, nor rightfully earned.
On Jun 14 09:14 PM The Recusant wrote:
> OK, here's a scenario. The dollar drops, the Yuan skyrockets and
> after a few years the world discovers that it's as cheap to manufacture
> things in the US as in Asia or Mexico. Foreign and US companies begin
> building plants in the US to save money, the workers here go back
> to work. Eventually, the BRIC and US are in equilibrium in worker
> compensation after decades of this monetary see-saw. Yahoo, a new
> world order.
I guess it’s too early to speak of an "alternative” to the dollar.
the $USD Dollar index is also showing signs of a higher lows pattern.
I posted the chart here ;
gicharts.blogspot.com/...
It terms of the near term, a new currency can not come to prominence fast enough to remove the dominence of the dollar. Previous commentors are correct in saying there isn't any good alternative at the moment. However, a string of failed Treasury sales and continued monetization of the debt by the Fed will send US inflation rates through the roof and seriously devalue the dollar. That might not "crash" the dollar, but it will crash the US economy and cause problems for international commodity trading.
ConceptWizard - Thank You! You hit the nail on the head. I agree with your comment.
On Jun 13 11:03 PM conceptwizard wrote:
> The Fed has been creating money out of thin air and monetizing a
> good part of it. This new money has gone to the Treasury and the
> financial sector. It is not being lent. It is being used to bolster
> balance sheets. It is not reaching consumers in the form of increasing
> employment, raising wages to restore fallen demand or to enhance
> economic recovery. Buying power is falling fast as underlying inflation
> persists reducing demand, which you are now seeing in falling retail
> sales. These funds from the Fed at the same time support an overpriced
> stock market. Lenders are opportuning the markets with public loans
> as they lay off workers to cut operational costs. That perhaps brings
> financial profit inflation and tends to cost price deflation. The
> result is financial profit inflation on a temporary bases, which
> misleads people into thinking there is a recovery underway when no
> such economic recovery is at hand. This leads to stock market corrections
> of the bubble variety in the context of a bear market rally. All
> this is the result of intervention by the Treasury and the privately
> owned Federal Reserve, the result of which is inflation, which destroys
> wealth, except for those who own gold and silver related assets.
> This production of current money and credit degrades wealth and money
> as a store of value. Most of the loss of purchasing power is borne
> by the poor and the lower middle class.
I said in my article: "The outlook for US Equities is a moot point."
I said this because the main thesis of my article was the dismal future of the dollar, not the future direction of US Equities.
I do NOT agree that "US Equities will DEFINETLY fall". No one has a crystal ball. In these last couple of years we've seen correlations turned upside down.
As I said in the article, I have concerns about the direction of US Equities, and I recommend holding significant chunks of foregin equities:
"For those nervous about the near term future of U.S. Equities (including the Author) ... <snip> ... It doesn’t hurt to have significant exposure to Non-US Denominated Assets. It hedges against the risk of a significant US downturn, and a significant drop in the dollar."
On Jun 13 11:54 PM Dave Wrixon wrote:
> The stock market will crash due to falling earnings. Earnings will
> be crushed by higher interest rates. Earnings are generally still
> falling except where they have been falsified by ridiculous changes
> in the accounting rules. But these apparent improvement are one off
> "improvements". It won't be long before the real rates of default
> become apparent and no amount of deceit will conceal the truth.<br/>
Thanks
On Jun 14 01:17 PM Bull Run wrote:
> What the the US does or doesn't do is immaterial.. The fate of the
> US and the US dollar is in the hands of the creditor nations and
> what they decide. Will they seek a partial replacement of the US
> dollar as world currency or a full blown change? Will they continue
> to lend the US endless amounts of money to support American and it's
> "lifestyles"? Spain, then England dominated the world with their
> armies and their currencies for a time, but the world passed them
> by. Is the world about to pass by the US? Is China to become the
> next big consumer nation? If the the Chinese float the yuan, many
> Chinese that have saved a lifetime, will now instantly have a new
> found wealth, with the Yuan appreciating against the dollar, this
> woud allow the Chinese to afford comsumption. I think we are standing
> on a point in history, that many will remember as a "world changing
> event".
On Jun 14 08:59 AM yellowhoard wrote:
> China will have to depend on the development of their own middle
> class to maintain stability.
>
> A strong Chinese currency will accomplish this.
>
> For the next 20 years, while the western world "reorganizes", China
> will expand through internal growth. They will build stuff for each
> other for a change.
> Perhaps not - *if* the government can resolve the education, healthcare
> & pension provision issues. But it probably doesn't because that
> would involve socialising wealth concentrated in the hands of the
> ruling elite. & what's the point of being part of that if it
> doesn't make you wealthy?
Hmmm...we've gotten gov't involved in "education, healthcare
& pension provision issues" & our economy is in the tank. The Chinese have gotten gov't off the backs of their entrepreneurs & their economy is on an upward trajectory. Why get gov't involved in "education, healthcare & pension provision issues" when we're the perfect example of why government SHOULDN'T be involved in those areas?
> OK, here's a scenario. The dollar drops, the Yuan skyrockets and
> after a few years the world discovers that it's as cheap to manufacture
> things in the US as in Asia or Mexico. Foreign and US companies begin
> building plants in the US to save money, the workers here go back
> to work.
This is plausible. However, American workers are going to have to accept lower wages. There is no way that we will be able to re-industrialize if we are still seeking $30+ per hour for regular manufacturing work. Additionally, manufacturing today is much less labor-intensive and much more capital-intensive than it used to be; we could get a lot of manufacturing plants back but not necessarily as many jobs as we think we can.
Although manufacturing is less labor intensive than in the past, in one way or another employment will rise. Service oriented jobs, another victim of out-sourcing to foreign lands, will also return to the US. Additionally, employment has a way of finding its ballast point, whether by shortening work week hours to increase employment, duplicating positions by breaking up mega companies, creating startup companies, or some other means. But, of course, it will take a great deal of time to manifest.
On Jun 18 11:35 AM Carlos Lam wrote:
> On Jun 14 09:14 PM The Recusant wrote:
I visited a friend who owns a motorcycle/boat/snowmo... dealership and he is still selling out everything he has. On sunny days the roads are full (no matter what time of day) with Harleys.
Yeah, I'd say American workers are in for a "slight" reduction in wages.
Maybe Congress will decide motorcycle ownership is too vital to getting re-elected and make it part of health care. THAT is the American can-do spirit!
On Jun 15 02:18 PM WS1835 wrote:
> There have been numerous articles lately regarding the efforts of
> China (in specific) and BRIC (in general) to develop a new trading
> currency backed by a basket of commodities. China is spearheading
> the effort and is expanding on its experience in establishing a regional
> credit swap system with the SE Asia countries. It will take time,
> but the move away from the dollar to a semi-independent, commodity
> backed trading currency is already underway. The days of the dollar
> are numbered.
>
> It terms of the near term, a new currency can not come to prominence
> fast enough to remove the dominence of the dollar. Previous commentors
> are correct in saying there isn't any good alternative at the moment.
> However, a string of failed Treasury sales and continued monetization
> of the debt by the Fed will send US inflation rates through the roof
> and seriously devalue the dollar. That might not "crash" the dollar,
> but it will crash the US economy and cause problems for international
> commodity trading.
There is One area in which China IS intervening - they are promoting export industries thru keeping the Yuan artificially low.
On Jun 18 11:24 AM Carlos Lam wrote:
> On Jun 14 10:12 AM onebir wrote:
> Carlos - interesting and valid points - that are outside the scope
> of the article.
> There is One area in which China IS intervening - they are promoting
> export industries thru keeping the Yuan artificially low.
Yes, the Chinese are keeping the value of the Yuan low. While this helps their exports, it hurts the purchasing power of their consumers. The best thing that China could do for everyone is to allow the Yuan to rise. This would result in:
* More expensive imports for the US, which would decrease consumer spending and increase our savings
* Increase the purchasing power of the Chinese people, which would allow them to purchase consumer goods, education, and technology more easily
On Jun 14 03:50 PM swaps wrote:
> I agree. Great post and great comments.
> Am I wrong to conclude that if the dollar crashes then people flock
> to equities because they represent a more tangible asset or service.
>
On Jun 19 10:19 AM Carlos Lam wrote:
<snip> The best thing that China could do for everyone is to allow the Yuan to rise. This would result in:
* More expensive imports for the US, which would decrease consumer spending and increase our savings
* Increase the purchasing power of the Chinese people, which would allow them to purchase consumer goods, education, and technology more easily
the us has the money to pay back its debt we just have to quit giving it to you ingreats that do nothing but run your freaken mouths
> you people are so stupid all these countries are dollar holdiers
> if the dollar tanks then they loose thier money so give it up and
> quite runnining your mouths start doing something about the economy.
1. If we keep borrowing, spending, and printing, the dollar's going to collapse anyway. The less they lend us, the less gov't can borrow.
2. Your unspoken premise is that somebody should "do something" about the economy. THAT is the problem. Nobody should DO anything: banks, automakers, and homeowners who are broke should fail. Only then will the bad investments stop causing us headaches.
> the us has the money to pay back its debt we just have to quit giving
> it to you ingreats that do nothing but run your freaken mouths
Ummm...where does the US have this money? The federal government is borrowing trillions this year. I'll admit that the feds have assets that can be sold: they have vast landholdings in the west that could possibly be sold or leased to miners or loggers or possibly given to creditors in satisfaction of debt.