The question isn’t how low can we go, but rather, how high can the Dollar bounce?
With our manipulated joke of a currency, the knee-jerk response is "not very" but I was at the Economist’s Buttonwood Gathering yesterday (see my write-up of Day 1 here) and taking the pulse of the audience of movers and shakers and I was not very encouraged by what I saw and heard. Even less encouraging, was the Treasury’s 5-year TIP sale going off yesterday with a negative yield. As David Fry points out over at the ETF Digest (chart on right), "Who would buy a bond with a negative yield? What’s the message for investors? Hyperinflation and soon!"
Dave goes on to lament that "the USA is rapidly becoming the World’s laughing stock" and I’ll have to agree with him as the international crowd at Buttonwood made many a joke at the expense of our economy and master bond pimp, Mohamed El-Erian summed it up nicely by saying "We won the war against global depression but we are losing the peace… QE2 is putting money into a system that is structurally deficient," it forms bubbles and something will break when the other side says they refuse to play the game (extend and pretend).
Well the audience was full of those game players and you can tell by the way they were eyeing each other as El-Erian spoke that they were wondering who was going to flinch first like gunfighters circling each other at the "economy is not at all OK corral." Phillippa Malmgren of the Canonbury Group was on one of the Buttonwood panels yesterday and she pointed out that Quantitative Easing in the West is simply shoving inflation into emerging markets, raising the probability of structural defaults down the road.
On the part of the West (especially the US) she called it "inflation as a mechanism for defaulting." In other words, by causing massive global inflation, the US shrinks the relative size of their debt in relation to GDP and is better able to fulfill its obligations to lenders - at .50 copper pennies or less to the inflated Dollar, of course.
No one was shocked by this statement. In fact, I daresay that no one even shifted uncomfortably in their chair. "They" know what game is being played and "They" know how it’s going to end but accepting a US payment restructuring masked as full payment in worthless currency is considered better than setting the precedent that International bond holders should ever be willing to take a haircut when they make foolish loans to struggling countries.
Imagine if debtor nations (or debtor people and businesses for that matter) were not enabled by the lenders? Imagine if funds were only lent to people with responsible payment plans who were able to meet their obligations within fairly wide risk parameters. Would civilization as we know it grind to a halt or just the Financial sector and the culture of fee-jackers that have spawned around it? Citigroup’s Vikram Pandit physically recoiled from repeated questions about whether the bank would support a 10% cap on credit card rates. That would mean that only people who are good credit risks would be given credit, Pandit said. Oh the horror!
Why should banks worry about who they lend to when they have accomplices in Government who are willing to whitewash their failures? Barry Ritholtz reports that the US Treasury "concealed $40 billion in likely taxpayer losses on the bailout of the American International Group earlier this month, when it abandoned its usual method for valuing investments, according to a report by the special inspector general for the Troubled Asset Relief Program." Come on, you can’t even pretend to be surprised this is going on, can you?
So, dollar bounce? Fuggeddaboudit! We’re on a one-way trip to Zipville and our "leaders" are loving it as inflation washes away their problems. This morning we got Case-Shiller with a 1.7% rise in the 20-city index for August, that was a disappointment to the 2.1% expected and a big pullback from July’s 3.18% but in July the Dollar dropped from 86 to 81 (5.8%) and we finished August at 82 so C-S is actually holding up better than expected and September’s Dollar fell from 82 to 78, another 4.8% decline so a good housing report is in the bag for next month already!
Hey, if we can get the Dollar Index down to 38 (down 50% at 40 Yen to the Dollar and .69 to the Euro and .80 to the Pound) then home prices should double and won’t that make everyone feel better? Market prices should double too and I’m sure the commodity pushers can get themselves a triple out of a move like that in our currency so that would give us the $200 per barrel oil and $4,000 gold all those bulls have been wishing for (maybe we’ll even crack $4 on natural gas!).
Does that make commodities a good defensive play? Not if the hyperinflation investors are betting on isn’t matched by wage inflation. If wages don’t keep up with prices, all we accomplish is bankrupting the World’s largest consumer base, consumers that make up 70% of the United State’s GDP. That’s why it’s a very dangerous game we are playing as top-down Quantitative Easing can be a one-way ticket to total economic disaster.
Let’s be careful out there!