How Will Markets React to a Dollar Rise? 49 comments
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As the G20 concludes and the U.S. equity markets decline, the U.S. dollar is playing a pivotal role in both the foreign currency markets and geo-political posturing. Last fall, during the height of the economic crisis the U.S. dollar index broke a 6 year downtrend which began in 2002. As the dollar peaked in March 2009, the U.S. equity markets began to find firmer footing and the year long relationship between the dollar and equities blossomed.
U.S. Dollar Index (Cash) – Monthly Chart (Click to enlarge)
Over the last 6 months the U.S. dollar index has declined in what may turn out to be a correction. Furthermore, over the last 6 months both the implied volatility and historic volatility have been cut in half from above 20% to below 10%.
Implied Volatility and Historic Volatility on U.S. Dollar Index Futures Options (Click to enlarge)
We also note that since the beginning of September the implied volatility index has climbed substantially above the historic volatility. The implication is option traders have been expecting a big move in the dollar index.
While implied volatility tells us what the market is expecting it does not tell us the direction of the expected volatility. In the U.S. dollar index, the implied volatility on both the puts and the calls have been rising in tandem, which means they offer little information for directional analysis.
Combining the technical and volatility analysis we deduce the likelihood of a dollar reversal has increased significantly. Adding the weakness in the U.S. equity markets fortifies our conclusion. Just as the weak dollar fueled the rise in the equity markets it is possible that the strong dollar fuels a decline.
The two markets can form a vicious circle that mirrors the action we have seen over the last 6 months. The stronger the dollar gets the weaker the equity markets become, this weakness in turn causes a flight to safety and the dollar becomes stronger.
But what is the fundamental fuel for a rising dollar? Glad you asked. To complete this analysis we must distinguish between a benevolent dollar rise and a malevolent rise.
Benevolent Fundamental Reason for Dollar Strength
Under the benevolent scenario, the dollar strengthens because the U.S. economy is improving and the Fed begins to drain liquidity. The markets anticipate the “tightening” and begin to bet a rate increase is next, thus making the dollar a higher yielding currency. We have seen this type of reaction to the Fed’s most recent statements on reverse repos.
For the last few days, stories have “leaked” that the Fed will conduct reverse repos to drain liquidity from the system. First it was leaked that these actions would be conducted with primary dealers. Then, money market funds were targeted as the object of the Fed’s affection. Conveniently, the “leaked” stories also mentioned the Fed may want to conduct a few tests but were afraid of spooking the markets. Now that the news has been released we expect to see a few “tests” conducted which may be the first catalyst for significant dollar strength.
In this case the equity markets will fall initially as investors digest the new paradigm. Once investors realize the rising dollar is due to improved economic conditions they will once again purchase equities and we can begin a new phase of the bull run.
Malevolent Fundamental Reason for Dollar Strength
The other side of the coin is the unhappy reasons for a strong dollar. We see the catalyst for this to be a weak economic event. It could come from commercial mortgages, it could come from increased taxes, and it could come from protectionism. Sadly, we can find more malevolent reasons the dollar could strengthen than benevolent.
Regardless of the reason, under the malevolent scenario the rising dollar reduces the profit margins of U.S. multinationals which get a majority of their revenue from overseas. The reduced margins results in further layoffs and the economy suffers a double dip recession. In this scenario, the U.S. equity markets would continue to decline and likely trade well below the March 2009 lows.
The U.S. equity markets and the U.S. dollar are still attached at the hip. The real question that investors must ask themselves is whether or not a stronger dollar is a signal of fear or economic improvement.
Disclosure: Long UUP
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This article has 49 comments:
The only way the Dollar is going to rise is if the US Nukes everyone else out of existence. I think that is probably an unlikely scenario under this President, but I must say I had my doubts about the last one.
Think about it, give free money (0% rates) to institutions. Gee I wonder what they would do with it? No, they would never take it and over lever and invest into other asset classes.
Look out below, JMHO
This would be a temporary reversal to the dollars longer term downward trend.
In the US it's not clear but if the dollar strength were to result from either implicitly or explicitly higher rates, I think the market would go down and not look back; there would be no recovery. Much of the 56% bounce off the lows of March have taken place amid a falling dollar, rising bond prices, rising equities and rising commodities.
With things this tightly correlated and the market believing the bar will remain open through much of 2010, an abrupt removal the kool aid would likely inspire the revelers are to go home and sleep off the effects of the binge. Recent parabolic increases are all about liquidity and the promise of low rates; it will be difficult to replace this with a new paradigm.
> I don't think this a scenario we need be overly concerned about.
>
>
> The only way the Dollar is going to rise is if the US Nukes everyone
> else out of existence. I think that is probably an unlikely scenario
> under this President, but I must say I had my doubts about the last
> one.
Chris Marteson's recent instablog* has some interesting info on how the US has been using currency swaps to cause spikes in the value of the dollar. But spikes are by definition temporary and I think you are right that over the long run, the dollar is headed down.
Currency Swaps, The Dollar, and a Tilted Playing Field
seekingalpha.com/insta...
That means that probably the dollar will be officially devalued and debt will go to default in 2011. They won’t be alone. There will be another Smithsonian or Plaza type meeting and all currencies will be officially devalued or revalued against one another and all debt will be reduced by 2/3’s. A new international trading unit will be formed and three old dollars will be replaced by one new dollar. Do not ask how domestic debt will be settled because I do not know. Logically it should be on the same basis as international settlements, but who knows what these criminals will do. Not only is the US financial structure doomed but also so is that of the entire world.
The Fed is staggering the dollar's decline so there is no absolute rout, but down it will go nevertheless because there is no other way out of this mess for the US economy.
If the Fed wanted a stronger dollar they could make it happen easily by engineering small financial shocks and not providing an ultimate backstop to the whole system. But they havent which sort of indicates they arent worried about a dollar decline.
However they clearly are pouring fuel into the system through QE in order to reflate the economy so they are looking for a slow dollar devaluation, so that servicing US debt will be more manageable.
And for the so-called global rebalancing to occur, the world needs a weak dollar from a systematic point of view, though its understandble that sentiment is not felt on a local national level by large exporters into the US. But the Chinese, Japanese and Germans will have to learn to live with stronger currencies relative to the US dollar.
I see no other option other than the dollar must fall.
These are all possible.
I don't believe the FED has control of the Clydesdales pulling the beer wagon; even with Timmy riding shotgun and Ben at the reigns. Obama and Barney Frank are shouting instructions from the carriage, but there's a giant fire breathing Dragon overhead.
So all you have to do is ignore all the IPO's going on which are just trying to subsitute earnings by turning investors into unsecured credit cards. Then the bankruptcies come then the dollar raises like a rocket, then it drops like a stone.
Today, the economy is seeing similarities to the Great Depression. But this time, it's happening after the war. The war in Iraq, right or wrong, good or bad, has been very costly because it did not add new infrastructure. It simply used the infrastructure already present. Many factories before the Iraq war were running at 30% capacity or less. Now they are running at 50-55%. But few new factories and industries have been built. The same factories making materiel for peacetime are now the same factories making materiel in wartime. When the war is over, those same factories will remain. This means there is little chance that the postwar economy will be more prepared to pay off war debts than was the post WWII economy. Something else must happen.
Wars no longer fix economies because wars no longer build infrastructure--at least, not for America. The dollar is going to fall, and fall fast. It will be inflated to a very high degree and will do so very quickly. The best way to cope is to own something valuable so that when the dust clears you still have something people will likely want to buy.
But one benefit from the falling dollar is that other currencies, valued higher than the dollar, will be looking to buy things cheap. And when their currency is far more valuable than the dollar, they will buy American. Countries will start looking to American factories and American suppliers for goods and exports. American exports will be cheap and American manufacturing will be incredibly busy. And busy manufacturing puts millions to work-many millions.
----------------------...
Money without intelligence is like a car without a road.
www.intelligentinvesti...
30 billion dollars didn't disappear during black friday more like 27 billion was transfered from the people who couldnt get out during the crash to the people who sold it last on the bubble. As JP Morgan, Rockefeller and most of the other extremely rich people sold right before the crash because they knew it was coming. They pulled the call money on all the speculators (1930 hedge funds) to create the crash.
the lowering of the market to a sustainable believable level to work from, could still lead, with more substance, to the good dollar strengthening scenario :
less debt, greater buying power, more trust, more stable growth...
just my decpreciated two cents worth ;-)
With all due respect, Hephy, Credit Can disappear, and can do so VERY quickly. Ask Lehman's creditors - one week they had loans with value, the next they had wallpaper.
Von Mises, the leading light of the Austrian school, opined that once a credit inflation reached saturation, Nothing could prevent its collapse. Certainly not more credit. Most of the money supply is going away.
And that includes a Lot of bank account balances. Sure they are "guaranteed", but the structures presenting said promise have no credible means of meeting that obligation in a timely manner, which means an eventual de facto default.
Those dollars remaining, in circulation or in surviving banks, will go Up in value, as there will be far, Far fewer of them to match vs. goods for sale.
There are new rumblings about the $US dollar not deserving to be the world's reserve currency coming from around the globe. We can't take the status quo for granted. If we lose reserve currency status, then the $US is not better than the Yen. With interest rates held close to zero here, the dollar denominated carry trade will continue as long as permitted, just as was the case with the Yen.
I really don't see a catalyst for a strengthening dollar unless interest rates begin rising and the carry trade begins to unwind. If that happens, US equities are likely to swoon big time. Do we really think that Bernanke is willing to let that happen going into an election year? I don't think so.
The other possibility is that the Fed has been taking actions to help the dollar drop and is nearly finished with such action, hoping to stabilize the dollar at this lower level (I'm not sure I believe that the Fed has quite that much muscle in FX, but hey, I'm open to the concept). Without continued declines in the dollar, and US business cost cutting running out of options, where will be find additional earnings growth? Sales? That would require a significant increase in consumer spending. A rise in consumer spending at this point seems linked to the creation of new jobs at a rate faster than we are losing jobs. I don't see that happening for a few more months, either. So, where's the beef? Our economy just doesn't appear to have a catalyst for sustained growth. Green shoots? I say weeds! Maybe next spring (hopefully) we'll see the formation of a firm base from which to resume real growth (albeit at a relatively slow pace).
On Sep 27 11:36 PM Jasper M wrote:
Von Mises, the leading light of the Austrian school, opined that
> once a credit inflation reached saturation, Nothing could prevent
> its collapse. Certainly not more credit. Most of the money supply
> is going away.
> And that includes a Lot of bank account balances. Sure they are "guaranteed",
> but the structures presenting said promise have no credible means
> of meeting that obligation in a timely manner, which means an eventual
> de facto default.
> Those dollars remaining, in circulation or in surviving banks, will
> go Up in value, as there will be far, Far fewer of them to match
> vs. goods for sale.
THE WAR will probably still be religious, Christian and Muslim. But Europe will get involved more directly in the next one.
We still have a long ways to go before we get through this depression.
On Sep 27 10:21 PM BucketofOnions wrote:
> In times past, the bubbles popped with great force and resulted in
> terrible consequences. On Black Thursday in 1929, thirty billion
> dollars disappeared in a single afternoon leading to what is commonly
> known as the Great Depression. Today, that would be a trillion dollars
> or more. Imagine that, a trillion dollars gone in six hours. After
> this event transpired, the economy slumped for ten years until World
> War II began to demand more from America. The economy then rebounded
> suddenly as thousands of factories with millions of new jobs emerged
> with the help of national debt. After the war, the economy was still
> booming and continued to boom for quite some time. Because factories
> and infrastructure resulting from the war could crank out products
> like never before, debtors paid off their debts both publicly and
> privately.
>
> Today, the economy is seeing similarities to the Great Depression.
> But this time, it's happening after the war. The war in Iraq, right
> or wrong, good or bad, has been very costly because it did not add
> new infrastructure. It simply used the infrastructure already present.
> Many factories before the Iraq war were running at 30% capacity or
> less. Now they are running at 50-55%. But few new factories and industries
> have been built. The same factories making materiel for peacetime
> are now the same factories making materiel in wartime. When the war
> is over, those same factories will remain. This means there is little
> chance that the postwar economy will be more prepared to pay off
> war debts than was the post WWII economy. Something else must happen.
>
>
> Wars no longer fix economies because wars no longer build infrastructure--at
> least, not for America. The dollar is going to fall, and fall fast.
> It will be inflated to a very high degree and will do so very quickly.
> The best way to cope is to own something valuable so that when the
> dust clears you still have something people will likely want to buy.
>
>
> But one benefit from the falling dollar is that other currencies,
> valued higher than the dollar, will be looking to buy things cheap.
> And when their currency is far more valuable than the dollar, they
> will buy American. Countries will start looking to American factories
> and American suppliers for goods and exports. American exports will
> be cheap and American manufacturing will be incredibly busy. And
> busy manufacturing puts millions to work-many millions.
> ----------------------...
> Money without intelligence is like a car without a road.
> www.intelligentinvesti...
But credit disappearing doesn't make money disappear it just makes it disappear from that one perspective. The stock market is a fairly divorced entity but it's connected to the real economy so minor losses of anything real just before a crash. The people who run fractional reserve systems know when they are going to crash. They can see it horn out into a hyperbolic expansion that can't be services by the fixed number of dollars inside the system. The only to fix it is to entirely liquidate everything and revalue everything which people in the system find a tad bit iinconvienient. The system just doesn't match to the underlying assests and just has to break because it's a mathematical lie paradox whatever you want to call it. The faster indebtedness mounts up the faster it gets to the breaking point. The entire system breaks when the government debt becomes completely unserviceable. The american system would have busted completely by 1985 ish if it weren't for foreign involvement in the system with saving cultures giving it a stay of execution.
The one thing that could really cause the dollar to go up is the collapse of the Japanese economy.
From then on, U.S. has kept Dollars high in value contrary to it's real economic strength by floating rate in order of IMF obligation for the smooth international trade in tact.
U.S. printed Dollars currency to fight the world free in politics and make her people happy with cheap foreign goods, by having buttressed strong Dollars.
U.S. Multinational corporations have been double-dipping in both foreign and domestic markets using falsely strong currency only to have built-up Trillions debt and ruined domestic industries and ordinary jobs dearly. The powerful in politics as well did not care for the poor, who paid dearly for all these ideal principles in reality.
Now at Pittsburgh G20 acknowledges US Dollars is no longer dominant currency in foreign trade. Japan and China is to keep their money high against cheap Dollars so as to strengthen their domestic consumption by importing more U.S. goods, because they realized that their decade long export drive to America has produced unwittingly U.S. economy to the brink of bankruptcy.
Of course, U.S. should behave right to confront the reality by admitting the truth that she cannot lead the world any more with debtor's empty talk for the worldly freedom and liberty. What the people in power have done for the last 65 years for our nation will have to be paid by our next generation.
In conclusion, U.S. will devalue Dollars, export more in cheap money to the world, industries will come back alive and U.S. equity price will rise eventually. I do not know when it will happen. But it will.
china is already dumping their precious dollars into commodities.
On Sep 28 08:22 AM Quaker wrote:
> The dollar should strenghten against the Euro now that the election
> is over. It will stay the same against the Yuan. That makes the yuan
> a defacto dollar. If the dollar weakens and commodities rise it'll
> collapse the Chinese ecconomy. Like the USA in 1931, China is far
> more affected by a commodity shortage than anyone else.
>
> The one thing that could really cause the dollar to go up is the
> collapse of the Japanese economy.
1)The Sentiment on the Dollar is overbearish (more then 95% bears) and this would generally lead to a strong counter move. So in my opinion the Dollar should go up in the near term.
2)In the long term, even the US wants the Dollar to go down. This is one way in which they can make their huge Debt look small. So a relatively easy long term call would be weak Dollar and Strong Equities and Commodities.
It only remains to be seen if Equities go up in real terms or only in nominal terms.
What drives equities down more than most thnig is high interest rates just as low interest rates cause bubbles. Currencies respond to interest rates, but because that is inevitably the case central banks have to respond to currency movements.
What is obvious is that the dollar is fundamentally weak because it ultimate guarantor of dollar debt (Uncle Sam) is on the brink of insolvency. If interest rates rise too much the US will default on its debt. Even a modest increase in interest rates is going to drastically reduce Obama's wish list.
Sentiment means very little. What mattes is whether foreign holders of Government bonds start to sell or at least stop buying. The US Debt requirement is so great that current purchasing rates are far too low for its needs. Chinas acquistion of Treasuries needs to increase almost exponentially. However, China overseas earning have shrunk and their focus has switched to developing their domestic market. There just is not going to be enough support for the Treasury market to keep Uncle Sam solvent.
On Sep 28 09:12 AM Faisal Humayun wrote:
> Taking a short term call on the Dollar is difficult. But the following
> needs to be considered:
>
> 1)The Sentiment on the Dollar is overbearish (more then 95% bears)
> and this would generally lead to a strong counter move. So in my
> opinion the Dollar should go up in the near term.
>
> 2)In the long term, even the US wants the Dollar to go down. This
> is one way in which they can make their huge Debt look small. So
> a relatively easy long term call would be weak Dollar and Strong
> Equities and Commodities.
>
> It only remains to be seen if Equities go up in real terms or only
> in nominal terms.
> Wars no longer fix economies because wars no longer build infrastructure--at least, not for America. >
But wars are not generally good for economies. In fact they are quite destructive and produce things just to destroy other things and kill people.
From what I've read, the reason the war helped our economy so much -- after the war ended -- was because the infrastructure of so many other countries around the world were destroyed. We were in a unique position to meet the demand from other countries as they tried to rebuild their destroyed infrastructure.
Even if we have tremendous infrastructure but there is not enough demand for what is produced, it does little good and in some cases could even be a hindrance. There are unfortunately examples of infrastructure that is in the way of better uses of land needs to be torn down.
Check out this example of how our stimulus money is going to pay for extremely wasteful infrastructure:
www.youtube.com/watch?...
That was the Murtha Airport which has some 3 flights a day, but has government funded state of the art facilities. It's the 21st century version of make work projects. I'm not so sure it's much better than paying workers to dig holes and paying another crew to follow behind and fill them in.
One major currency without changing name.
Interest rate stable/invariable; +/- .25%
Out on a limb?..James E Gambrell
Overplaying a hand will introduce you to the Fed's version of "messin' with sasquatch".
To address several of the comments being made: when you combine the dramatic reduction in DEMAND for U.S. dollars as the world rapidly diversifies AWAY from it (and into other currencies, or "hard assets" like precious metals and commodities) PLUS the insane level of money-creation, this MUST overwhelm the contraction of the money supply from the collapse in credit - leading to a dramatic devaluation of the USD (along with the flip-side of the coin: sky-high inflation).
The reason I use the word "must" is because there is NO ALTERNATIVE for the U.S. government. With a larger mountain of debt than any economy in history, a TRUE deflationary episode (more than just the six months of genuine deflation we just experienced) guarantees a Soviet-style debt-implosion.
The fact that the NOMINAL prices of U.S. houses has at least momentarily stabilized is strong evidence that a new high inflation/hyperinflation episode is about to begin.
With MASSIVE "shadow inventories" of unsold housing units, there is ZERO possibility of the REAL value of U.S. homes stabilizing at current (real) prices. Thus, if nominal prices stabilize or actually RISE, this could only occur as a consequence of the rapid drop in the purchasing-power of the dollars used to buy those homes. A rapid drop in the value of a currency is the exact same thing as saying a rapid rise in inflation.
Along with this, we have soaring prices for most categories of food - another classic sign of a high-inflation environment.
A warning to the stock-jockeys here. In any/every episode of hyperinflation, the NOMINAL price of stocks also goes sky-high - even though the REAL value of those holdings steadily FALLS in value.
You need to have ACCURATE data on inflation to know whether there is any REAL money to be made in the market, or whether you are simply playing a fools' game of gloating over paper "profits" which don't come close to keeping up with inflation.
The only such source I'm aware of is John Williams "shadowstats.com".
I personally am heavily invested in the precious metals sector. Precious metals are the only REAL "money" our species has every created, and by definition they can never lose value versus paper currencies.
And forget all the phony deflation talk from the deflationists that the dollar will move higher - a FIAT currency has never gained in value over the long term.
On Sep 27 03:43 PM conceptwizard wrote:
> The dollar is being dumped wholesale, something that should have
> happened ten years ago. It didn’t happen because of massive US pressure
> on all nations not to jump and play along within the game. During
> the first six months of next year 71.18 will be broken. First to
> 65, then 60, then 55, then to 50 and perhaps to 40 giving new and
> greater impetus to higher and higher gold and silver prices as the
> dollar carry trade goes wild.
>
> That means that probably the dollar will be officially devalued and
> debt will go to default in 2011. They won’t be alone. There will
> be another Smithsonian or Plaza type meeting and all currencies will
> be officially devalued or revalued against one another and all debt
> will be reduced by 2/3’s. A new international trading unit will be
> formed and three old dollars will be replaced by one new dollar.
> Do not ask how domestic debt will be settled because I do not know.
> Logically it should be on the same basis as international settlements,
> but who knows what these criminals will do. Not only is the US financial
> structure doomed but also so is that of the entire world.
> Well jasper you are talking about the mathematical impossibilities
> of fractional reserve systems . . . When the federal reserve was created it changes the dynamic.
I dispute this. It TRied to change that dynamic.
I have lived plenty long enough to watch Fed market ops get run over. The Fed just does not have the levers they pretend to.
Remember that fractional reserve multiplier only works If the banks are lending - They won't be.
That excessive debt get's aggregated into
> the government's balance sheet. So it's all or nothing. The entire
> country must go broke before the "system" will go broke.
Depends what you mean by "country".
Sure, the National Treasury will be broke. But since a credit deflation utterly defangs their capacity to create money faster than they can print physical reserve notes (=not Near fast enough to save them), holders of cash will see the value of their cash preserved, and expanded.
The only to fix it is
> to entirely liquidate everything and revalue everything which people
> in the system find a tad bit iinconvienient.
Not so. Partial liquidations revalue assets every hour of every day.
The system just doesn't
> match to the underlying assests and just has to break
Not exactly- it has to Bend. Current government policy is trying to prevent the necessary bending, so there will certainly be failure. But it needn't be total, in fact can't be, unless All participants make the same mistakes.
> The entire system breaks when the government debt becomes completely unserviceable.
"Break" is a loaded word.
Certainly many, Many participants, who have bet heavily on the status quo, will be unsustainable when the Treasury defaults. As they should. But those who are holding actual cash will do just fine.
On Sep 27 10:21 PM BucketofOnions wrote:
> In times past, the bubbles popped with great force and resulted in
> terrible consequences. On Black Thursday in 1929, thirty billion
> dollars disappeared in a single afternoon leading to what is commonly
> known as the Great Depression. Today, that would be a trillion dollars
> or more. Imagine that, a trillion dollars gone in six hours. After
> this event transpired, the economy slumped for ten years until World
> War II began to demand more from America. The economy then rebounded
> suddenly as thousands of factories with millions of new jobs emerged
> with the help of national debt. After the war, the economy was still
> booming and continued to boom for quite some time. Because factories
> and infrastructure resulting from the war could crank out products
> like never before, debtors paid off their debts both publicly and
> privately.
>
> Today, the economy is seeing similarities to the Great Depression.
> But this time, it's happening after the war. The war in Iraq, right
> or wrong, good or bad, has been very costly because it did not add
> new infrastructure. It simply used the infrastructure already present.
> Many factories before the Iraq war were running at 30% capacity or
> less. Now they are running at 50-55%. But few new factories and industries
> have been built. The same factories making materiel for peacetime
> are now the same factories making materiel in wartime. When the war
> is over, those same factories will remain. This means there is little
> chance that the postwar economy will be more prepared to pay off
> war debts than was the post WWII economy. Something else must happen.
>
>
> Wars no longer fix economies because wars no longer build infrastructure--at
> least, not for America. The dollar is going to fall, and fall fast.
> It will be inflated to a very high degree and will do so very quickly.
> The best way to cope is to own something valuable so that when the
> dust clears you still have something people will likely want to buy.
>
>
> But one benefit from the falling dollar is that other currencies,
> valued higher than the dollar, will be looking to buy things cheap.
> And when their currency is far more valuable than the dollar, they
> will buy American. Countries will start looking to American factories
> and American suppliers for goods and exports. American exports will
> be cheap and American manufacturing will be incredibly busy. And
> busy manufacturing puts millions to work-many millions.
> ----------------------...
> Money without intelligence is like a car without a road.
> www.intelligentinvesti...
> You call the main stream media "market pumpers" but you are nothing
> but a "Metal Pumper" from start to finish. So from your prospective
> if "We" the world were to discover a new illuminant's maroon metal
> that was "Shiny", irresistible and in finite amounts around the globe
> does that mean we could build a new monetary/currency system based
> on it? No intelligent person would say yes. You might!
>
> Name one reason GOLD has any value what so ever? The value you and
> all like you put on it is Archaic! FIAT currencies at least have
> economies,people, businesses and countries behind them even if the
> economies and govt themselves are flawed there is still some sort
> of tangible backing. GOLD HAS NOTHING!
>
> GOLD is "Shiny" useless fricking metal!
>
> Go push it some where else!
>
> Nick KrahS
That's a good set of points. The problem is that as I've said in my other posts fractional reserve fiat systems are inherently unstable things. They eventually create so much debt that it's unable to be serviced by the economy. The system begins having no future because to have a future you have to have an income. It has to revaluate and needs something "real" to anchor to during revalutation. You could anchor to real estate except real estate is actually a negative asset as it requires upkeep and has property taxes etc. So the people who know the system is about to break and know that it must be revaluated know EXACTLY what component of the real world is used during that revaluation. gold and silver. You could hang out in stocks also as most corporations are essentially unkillable vampires with limited liability armor. But many people are begining to understand that there's just not much room for merging any more. Any further aggregation of entities makes them too cumbersome to be effective. So it's both an end to a money cycle and an end to the creation of the monsterous corporations that grow up around those money cycles. One effective monopoly in oil can bleed a society dry. Having even 2 or 3 of those monsters running around is game over.
Inflation and hyper inflation are two different things. One is more due to internal demand and U.S. government policies, and the economy and economic policies, etc.
Hyperinflation occurs from the loss of faith in the government and is usually accompanied by other nations refusing to accept the currency. It doesn't matter what the demand is in the nation with hyperinflation.
The fact you can't buy copper or food or oil or gold for less than thousands of percent more than you could previously from the world, is what puts you into hyperinflation or the effects of it. Even if the government doesn't print anymore money, if it isn't accepted by other nations that we depend on, even for some of our food (greatest breadbasket in the world that we are) and that we can export that food and get global prices for it, creates a huge problem.
Some say, then ban exports. Then how do you grow it if you can't export it. If you can't export it and get the global price you can't buy the fuel for the tractors and you can't buy the seed and you can't buy the fertilizer and you can't pay for electricity you need for the storage bins to control humidity and you can't buy the tires or equipment you need.
But, if you are getting global prices, then the citizens here can't pay for it.
The other thing is that because we went global, the 2.5 billion people that control 2/3 of the global economy will determine demand and fortunately, for us, they are holding back because I don't think they believe the global recovery is for real yet and they are saving all the can and only buying basics. The culture of most of those 2.5 billion is frugality but, when a global economic recovery is really happening, just a small rise in their spending will send prices much higher. Even if it takes five of them to equal one of the consumers we use to have, they will drive demand and prices up.
But, the world is leaving the dollar. Some nations in S.A. have just formally created a new financial system to avoid using the dollar in much of the trade they do. They are also making non-dollar trade deals with China and China is making more non-dollar trade deals with other nations.
The IMF that always loaned nations 100% in dollars is now making at least one $300 billion dollar loan is SDRs and some smaller ones and selling IMF bonds that BRIC nations are spending dollars on to buy. They are buying gold (or ending exports of it and is interested at least, in buying the 400 tonnes the IMF is selling) and asking there citizens to buy gold in China.
The G-8 has turned its back on the U.S. and created the G-20 and has promised to give those nations (the ones calling for SDR's the most) to have a greater voice in economic and financial issues. Also, they are talking about removing the U.S. as the "veto power" (how do you do that if the U.S. can veto?) in global financial issues.
Then add this.
If the FED creates a situation where the dollar rises, then asset prices fall and destroy bank balance sheets and banks are the only thing the FED is really interested in saving because in their view, if the banks aren't saved, everything falls apart.
Fractional Reserve banking requires inflation in asset prices to cover up defaults and currently, they need a lot with Alt-A and ARM's and Commercial loans all coming in higher default mode. That is one reason banks aren't lending. They have huge write downs coming they will have to cover with the capital they are building up.
But, the market will at some point, overrule the FED. It could be short term to the upside with a demand for dollars (not bonds) happens with a sell off and most of the cash moves to the sidelines or foreign bonds or some other things besides our bonds.
Or if you have the global recovery continue, then more selling of the dollar takes place to buy securities, gold, oil, and other commodities and the FED has to monetize more debt. They have to try and thread a needle with the market and bonds both, neither too hot or too cold.
But, always remember it won't be our demand, our economy or our moves that determine our fate. It will be the 2.5 billion people in other nations and other nation's buying or not buying our debt.
If we audit the FED which I agree has to happen, then what will nations do that support the dollar when the FED's game playing is revealed? What would their citizens expect their government do when they find the FED lent money as zero rates to banks so they could buy Treasuries and get interest instead of lend to businesses and people and buy munies?
What will they do if they find that the $500 billion that went to 14 central banks was done so they could buy our debt so it wouldn't look like the FED was?
I believe their citizens and legislative bodies would demand they stop lending and stop accepting dollars for trade.
The FED needs to be audited but like almost all reforms the U.S. government needs, it will first cause a huge problem that will last for years before we can use the reforms to rebuild the nation and trust in our government globally.
Each day we continue to run the deficits we run, we lose a little more faith in our government and that is all that backs the dollar, faith that our government will honor its debts. Do you believe it will with dollars of value equal to what it has today (95% less than it had in 1913)?
I don't and neither do nations that see our deficits rising. It is the trillions of dollars ready to be spent by other nations, not what we have that will cause inflation or hyperinflation and currently inflation from those 2.5 billion people isn't a problem but, hyperinflation could be if we make too many mistakes.
I'm afraid I have to side with those who see the dollar wending its way lower. I'm not saying it'll happen overnight, or that there won't be "corrections" along the way.
Perhaps there're enough citizens that have the fortitude and desire to make the substantiative changes needed to turn things around, but I doubt the poltical powers that be on EITHER side are up to the task.
The other thought to consider, is that most "money" is held in computer databases versus tangible assets.
It would be possible to move "money" somewhere else then destroy the database, destroying any evidence it was supposed to exist somewhere else.
Ass Bill S. Friend notes above, many American citizens may choose to cash out and leave the country before they are taxed to death or the system collapses.
The U.S. would then become a coroporate farm, and labor base for developing economies with real savings and not simply debt and spending.
On Sep 28 02:00 PM Jeff Nielson wrote:
> A really interesting debate here. Even though the author has expressed
> an unpopular (and unlikely opinion), it was done in an "academic"
> manner - rather than just being some inane market-pumper.
>
> To address several of the comments being made: when you combine the
> dramatic reduction in DEMAND for U.S. dollars as the world rapidly
> diversifies AWAY from it (and into other currencies, or "hard assets"
> like precious metals and commodities) PLUS the insane level of money-creation,
> this MUST overwhelm the contraction of the money supply from the
> collapse in credit - leading to a dramatic devaluation of the USD
> (along with the flip-side of the coin: sky-high inflation).
>
> The reason I use the word "must" is because there is NO ALTERNATIVE
> for the U.S. government. With a larger mountain of debt than any
> economy in history, a TRUE deflationary episode (more than just the
> six months of genuine deflation we just experienced) guarantees a
> Soviet-style debt-implosion.
>
> The fact that the NOMINAL prices of U.S. houses has at least momentarily
> stabilized is strong evidence that a new high inflation/hyperinflation
> episode is about to begin.
>
> With MASSIVE "shadow inventories" of unsold housing units, there
> is ZERO possibility of the REAL value of U.S. homes stabilizing at
> current (real) prices. Thus, if nominal prices stabilize or actually
> RISE, this could only occur as a consequence of the rapid drop in
> the purchasing-power of the dollars used to buy those homes. A rapid
> drop in the value of a currency is the exact same thing as saying
> a rapid rise in inflation.
>
> Along with this, we have soaring prices for most categories of food
> - another classic sign of a high-inflation environment.
>
> A warning to the stock-jockeys here. In any/every episode of hyperinflation,
> the NOMINAL price of stocks also goes sky-high - even though the
> REAL value of those holdings steadily FALLS in value.
>
> You need to have ACCURATE data on inflation to know whether there
> is any REAL money to be made in the market, or whether you are simply
> playing a fools' game of gloating over paper "profits" which don't
> come close to keeping up with inflation.
>
> The only such source I'm aware of is John Williams "shadowstats.com".
>
>
> I personally am heavily invested in the precious metals sector. Precious
> metals are the only REAL "money" our species has every created, and
> by definition they can never lose value versus paper currencies.
"As Bill S. said" is what I meant.
Sorry!
On Sep 28 10:30 PM ebworthen wrote:
> Well said.
>
> The other thought to consider, is that most "money" is held in computer
> databases versus tangible assets.
>
> It would be possible to move "money" somewhere else then destroy
> the database, destroying any evidence it was supposed to exist somewhere
> else.
>
> Ass Bill S. Friend notes above, many American citizens may choose
> to cash out and leave the country before they are taxed to death
> or the system collapses.
>
> The U.S. would then become a coroporate farm, and labor base for
> developing economies with real savings and not simply debt and spending.
>
I like Polywell Fusion. However, we will see no results on that front (production for market use) for 7 to 10 years. If it works.
How does your narcissistic comment (the last administration vs. the present one with their respective proclivities to "nuke everyone...") contribute to the thoughtful discourse many of us would like to have in discussing markets and the economy?
Stay off the line if that's all you can offer.
On Sep 27 12:34 PM Dave Wrixon wrote:
> I don't think this a scenario we need be overly concerned about.
>
>
> The only way the Dollar is going to rise is if the US Nukes everyone
> else out of existence. I think that is probably an unlikely scenario
> under this President, but I must say I had my doubts about the last
> one.
The $US is continuing to enjoy the fact that most world currencies exchange is made through their compared value to the $US – but not for very long!
Eventually, another common denominator will be established and our dollar will be on its own. The illusion will be over.
Before other countries built their own industrial base, and because the US was ahead of the rest of the world in that respect, the rest of the world needed our products and was willing to pay for its cost at our rates.
As important, we were willing to pay the cost – domestically. We bought American!
Look at what has happened in the last 25 years: We exported our technology to other countries, so they can beat us in our own game. They produce the same products with labor wages as low as 1/10 of our wages, low fringe benefits (if any) and no environmental control regulations.
And guess who the customers are? – It makes me sick when most items I touch have on their label: “Made in China”!
“The main functions of money are distinguished as: a medium of exchange…” (Wikipedia)
Money is used to facilitate the exchange of equal perceived value.
Value is established by the content of a product – labor and material.
How can we match values with people who are earning wages that would be considered below poverty level in the US?
The two competitive commodities we still have are weapons and food. We already import some inferior food from countries like China (!) because it is cheaper, so what is left? – America?
It may be heresy, but we have two choices:
1. Lower our standard of living to match with those in the countries from where we buy our goods, which means a dramatic devaluation of the dollar,
or
2. Not participate in the “global economy”. Restricting imports will incentivize local manufacturing but also limit us from participating in the world economy. Other countries will impose similar restrictions on our products, not to mention that they would be cost prohibitive for them.
Yes, we will have to pay more for our domestically produced products - so we will have less but at better quality.
This may cause economic distress that would “heat up” our relations with countries that built their economy on export to the US. China is already starting to redirect its economy toward their domestic markets.
Does anyone have another solution?
In the abscence of long term value add, wealth creation, and earnings indicators that anchor most stocks towards the long term positive gain, there is no underlying benchmark measure of performance for a currency that will even begin to hint at its future movements. I've made alot of money trading currency, but I cannot tell you where any currency is going in the short or medium term. Long term, the currencies of developed nations will tend to revert to the mean, and even then thats finely balanced odds.
In the abscence of long term value add, wealth creation, and earnings indicators that anchor most stocks towards the long term positive gain, there is no underlying benchmark measure of performance for a currency that will even begin to hint at its future movements. I've made alot of money trading currency, but I cannot tell you where any currency is going in the short or medium term. Long term, the currencies of developed nations will tend to revert to the mean, and even then thats finely balanced odds.
On Sep 28 09:12 AM Faisal Humayun wrote:
>The Sentiment on the Dollar is overbearish (more then 95% bears)
> and this would generally lead to a strong counter move.
This analysis works if the folks sampled own most of the assets,
both long and short are berars. The idea is, when their sentiment changes, there will be a counter move. But the dollar is different. It could slide for a decade, trader sentiment could be bearish all the way down, but any sucker with a dollar in his pocket -- main street -- is implicitly long. When they get tired of losing, the game doesn't reverse, rather we start a new game.
I'm not saying the dollar can't go up, just that it isn't guaranteed.