As a general rule of thumb, anytime a politician (especially a finance minister or central banker) comes forward to assure investors that his country’s currency is sound, you better believe the currency is in BIG trouble.
So it’s with some serious concern that I noted not one but multiple world leader touting the dollar’s quality over the weekend. On Friday, the Wall Street Journal ran an article saying that the US Federal Reserve wouldn’t perform much more quantitative easing.
Then, on Saturday, Japan’s Finance Minister Kaoru Yosano stated, “our trust in U.S. treasuries is absolutely unshakable.” World leaders echoed this sentiment at the G8 summit (a meeting of the eight most powerful world economies) in Southern Italy. They also began discussions on how to unwind the massive stimulus programs once the world economy regains its footing.
However, the most bizarre comments came on Monday when Russia’s Finance Minister commented the US dollar is in “good shape.” Bear in mind that Russia, along with China, was one of the loudest dollar bears even going so far as to suggest dropping the dollar standard.
What does this tell us?
The dollar is in SERIOUS trouble.
The dollar is now not only the base currency for the world, it’s also THE most critical investment to watch. It is the linchpin, the keystone, the one piece of the puzzle that will dictate everything that is to come. It is the reason stocks and rallied, lead by commodities in the last three months (the dollar was weakening so investors sought higher returns from riskier assets. It’s also the reason why oil has doubled from its bottom. And it’s the reason why gold nearly tested $1,000 again.
Make no mistake, the dollar is a seriously flawed currency. And the US Federal Reserve has bet the farm by printing dollars around the clock to support the financial system. With $65 trillion in liabilities (counting social security and Medicare) the US financial system was already a rickety house of cards. The Fed’s money binge may actually be what brings this whole mess down in the coming months.
However, in today’s market of “trade first, think later,” the pro-dollar statements made by politicians over the weekend will mark a temporary top for commodities and a temporary bottom for the dollar. Commodities across the board are up between 30% and 100% in the last three months. They’re due for a cooling off period of correction. Ditto for stocks.
So if you’re sitting on commodities now, it may be time to take some profits off the table. If you’re long stocks you may also want to consider opening up some shorts to profit from the correction that will grab equities markets in the coming weeks.
Bottom line: I think stocks are headed for a truly horrific performance in the second half of this year. We’re certainly due for a 2-3 week correction now. I’ll detail why in tomorrow’s essay. Until then…
Good Investing!
