Is a Weak Dollar Creating a Bubble?

1:15PM ET: With the equities markets forging ahead into new yearly highs yesterday, is it possible we are witnessing one of those hated, nefarious bubbles? Nouriel Roubini, one of the current ranking bears and a professional worrywart, has provided us with ample warnings about the consequences of a cheap dollar.

Bubbles, like bombs, need to be dffused, or like bombs, they will make a big mess when they break. In the UK, Gordon Brown wants to enact the Tobin tax, a financial transaction tax of trading activity. He would also set up a special tax for banks and others that engage in risky behavior. We have yet to receive word that Washington is going to have a new czar to regulate and discourage bubbles.

The weak dollar was the most frequently cited reason for yesterday's rally, but there is more to it than that simple explanation. Slack US economic activity has prompted the Fed to keep short term rates low, and the money supply ample in hopes of causing increased economic activity. The cheap rates also provide funding for the carry trade. With the carry trade, speculators and entrepreneurs alike have funding to invest in the assets they choose. Recovery will take a very long time if we tax and regulate the job creating entrepreneurs.

So far today the stock market has paused, and the Euro has sold off from the 1.50 level, currently trading at 1.4950. A ZEW index of German business sentiment came in at 51.1% under the estimated 55.2 and down from the 56 in the October period. A ZEW index of German business sentiment came in at 51.1% under the estimated 55.2 and down from the 56 in the October period. In the US the IBD/TIPP Economic Optimism report came in at less than expectations, 47.9 versus 53.1, and 52.5 in the previous period.

The Euro's lumbering behavior is typical, advancing, and then backing and filling.

In the 4H chart shown above, the RSI is working lower out of the overbought area. The MACD may be suggesting a market that is going to work a little lower. The inability of the pair to spend much time above the 1.50 level, perhaps because of heavy selling at that handle is a disappointment for the bulls. The trend remains higher, however, so let's look to buy the euro in the 1.49 area.

Comments

[bob adamson:]

Ralph Shell may be right to imply that there is a danger that new bubbles will form at some time in the next couple of years but this must be seen in context. The world faced a clear and present danger of rapid descent into profound deflationary depression chaos during the September 2008 to March 2009 period and the epicenter of the crisis in October of 2008 was the beginning of collapse of the secularized debt instrument and derivative debt bubble of colossal proportions that had accumulated within the investment banking industry. Paradoxical as it may seem to some, a necessary ingredient in the efforts to forestall this deflationary collapse was the stabilization and even moderate re-inflation of that debt bubble. This was necessary to give the world’s central banks and governments time to devise, among other measures, and implement a controlled ending of that bubble over time.

In short, it is arguable that Shell and others are confusing the necessary efforts to support the underpinnings of the 2008 debt bubble with profligate measures that would gratuitously create new asset bubbles. It is true that the stabilization efforts described above may at some stage overshoot their mark as the government and central bank authorities try to time their transition from stimulus to institutional reform mode. This is not an exact science and it is better to risk some modest inflation arising (it is questionable whether this is yet occurring despite what Mr. Shell implies) than risk return to deflation by ending stimulus too soon.

Nov 10 03:49 PM

[Dapples:]

Well, another bubble. Seems like everything is a bubble these days.

Nov 10 04:20 PM

[Tranen Capital:]

It is very true that dollar changes have to be taken into context. But still the deep erosion of savings will eventually make the dollar weaker over the long run. The youth cannot save due to the current debt, social security and college tuition. That may be the real killer in the end. Tranen Capital wishes you to make sure that you hang onto your hat for the next ten years.


On Nov 10 03:49 PM bob adamson wrote:

> Ralph Shell may be right to imply that there is a danger that new
> bubbles will form at some time in the next couple of years but this
> must be seen in context. The world faced a clear and present danger
> of rapid descent into profound deflationary depression chaos during
> the September 2008 to March 2009 period and the epicenter of the
> crisis in October of 2008 was the beginning of collapse of the secularized
> debt instrument and derivative debt bubble of colossal proportions
> that had accumulated within the investment banking industry. Paradoxical
> as it may seem to some, a necessary ingredient in the efforts to
> forestall this deflationary collapse was the stabilization and even
> moderate re-inflation of that debt bubble. This was necessary to
> give the world’s central banks and governments time to devise, among
> other measures, and implement a controlled ending of that bubble
> over time.
>
> In short, it is arguable that Shell and others are confusing the
> necessary efforts to support the underpinnings of the 2008 debt bubble
> with profligate measures that would gratuitously create new asset
> bubbles. It is true that the stabilization efforts described above
> may at some stage overshoot their mark as the government and central
> bank authorities try to time their transition from stimulus to institutional
> reform mode. This is not an exact science and it is better to risk
> some modest inflation arising (it is questionable whether this is
> yet occurring despite what Mr. Shell implies) than risk return to
> deflation by ending stimulus too soon.

Nov 10 05:24 PM

[buyitcheap:]

The correlations are very high and can't be ignored.

Nov 10 08:24 PM

[bob adamson:]

I hear you, Tranen Capital . No one, certainly not me, is suggesting that the route out of this mess will be quick, easy, cheap, painless or clear.


On Nov 10 05:24 PM Tranen Capital wrote:

> It is very true that dollar changes have to be taken into context.
> But still the deep erosion of savings will eventually make the dollar
> weaker over the long run. The youth cannot save due to the current
> debt, social security and college tuition. That may be the real killer
> in the end. Tranen Capital wishes you to make sure that you hang
> onto your hat for the next ten years.

Nov 10 10:06 PM

[User 509655:]

Pure gobbledegook! Try running your VISA up extrodinarily and see what impact it has on spending vs. saving/investing. How can the $'s value be sustained over time? I just don't see it. But the real question is the degree to which US irresponsible spending compares with others. My conclusion....signific... worse and that suggests (to me) Shell is correct and Adamson, though quite interesting, is seeking to make sense of the US' fundamental lack of faith in free market forces and regulatory controls such as bankruptcy.


On Nov 10 03:49 PM bob adamson wrote:

> Ralph Shell may be right to imply that there is a danger that new
> bubbles will form at some time in the next couple of years but this
> must be seen in context. The world faced a clear and present danger
> of rapid descent into profound deflationary depression chaos during
> the September 2008 to March 2009 period and the epicenter of the
> crisis in October of 2008 was the beginning of collapse of the secularized
> debt instrument and derivative debt bubble of colossal proportions
> that had accumulated within the investment banking industry. Paradoxical
> as it may seem to some, a necessary ingredient in the efforts to
> forestall this deflationary collapse was the stabilization and even
> moderate re-inflation of that debt bubble. This was necessary to
> give the world’s central banks and governments time to devise, among
> other measures, and implement a controlled ending of that bubble
> over time.
>
> In short, it is arguable that Shell and others are confusing the
> necessary efforts to support the underpinnings of the 2008 debt bubble
> with profligate measures that would gratuitously create new asset
> bubbles. It is true that the stabilization efforts described above
> may at some stage overshoot their mark as the government and central
> bank authorities try to time their transition from stimulus to institutional
> reform mode. This is not an exact science and it is better to risk
> some modest inflation arising (it is questionable whether this is
> yet occurring despite what Mr. Shell implies) than risk return to
> deflation by ending stimulus too soon.

Nov 11 08:46 AM

[Gary A:]

They are selling houses at no money down again. Tell me Bob what bubble they are not in love with. Asset bubbles will take the consumer down. But the Fed continues to think the consumer can defy gravity. I don't get it.


On Nov 10 03:49 PM bob adamson wrote:

> Ralph Shell may be right to imply that there is a danger that new
> bubbles will form at some time in the next couple of years but this
> must be seen in context. The world faced a clear and present danger
> of rapid descent into profound deflationary depression chaos during
> the September 2008 to March 2009 period and the epicenter of the
> crisis in October of 2008 was the beginning of collapse of the secularized
> debt instrument and derivative debt bubble of colossal proportions
> that had accumulated within the investment banking industry. Paradoxical
> as it may seem to some, a necessary ingredient in the efforts to
> forestall this deflationary collapse was the stabilization and even
> moderate re-inflation of that debt bubble. This was necessary to
> give the world’s central banks and governments time to devise, among
> other measures, and implement a controlled ending of that bubble
> over time.
>
> In short, it is arguable that Shell and others are confusing the
> necessary efforts to support the underpinnings of the 2008 debt bubble
> with profligate measures that would gratuitously create new asset
> bubbles. It is true that the stabilization efforts described above
> may at some stage overshoot their mark as the government and central
> bank authorities try to time their transition from stimulus to institutional
> reform mode. This is not an exact science and it is better to risk
> some modest inflation arising (it is questionable whether this is
> yet occurring despite what Mr. Shell implies) than risk return to
> deflation by ending stimulus too soon.

Nov 11 11:59 AM

[arkady:]

Well this is just nonsense, you sound just like our policy makers who think we can inflate our way out of any problem. This has been the ticket since 1987 and it has run it's course, because you can only expand credit to a certain point. Ultimately it will all come crashing down, because the banks are leveraged to the hilt and the consumer is completely tapped out due to crushing debt.

This irrational fear of deflation is precisely the same exact pattern that was seen in 1929-1932 when the massive inflationary campaign of 1921-1929 ran it's course.

Please snap out of this Keynesian fog and understand that until we liquidate every single rotten loan and end government intervention, we will prolong our agony.

The logic you are presenting is equivalent to: We have been drinking for 20 years and sobering up is very painful, in order to avoid withdrawal we need to drink more. Ok, drink more, until your liver shuts down.

Nov 11 03:48 PM