The Credit Crisis and the U.S. Dollar 17 comments
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First it was the Japanese financial crisis in 1991, and then came the Asian financial crisis in 1997 and the Russian crisis in 1998; now it’s Wall Street’s turn. The financial debacle in the US is no longer only a subprime mortgage issue; instead, the drying liquidity has spread the problem to many corners of the financial world including auction rate securities, bond insurers, and collateralized debt obligations.
On March 13, 2008 Standard & Poor’s reported that write-downs on subprime debt have likely hit the halfway mark and that the end was in sight. Yet, Bear Stearns (BSC) announced the following day that it had turned to J.P. Morgan Chase and the Federal Reserve for an emergency bailout sending the stock down by 47 percentage points. Exactly when the credit freeze will end is a question that no economist or financial analyst can answer at this point. A few analysts have reported the notion that this is the worst set of macroeconomic conditions since the Great Depression.
As a long-short trend trader, I invest where the market moves. It is important to realize that the market is not static; reversals can occur very quickly and an astute trader must be alert at all times and always be ready to get in or cash out. My trading style is based on a fundamental first, technical second philosophy. I fist analyze the fundamentals of the industry I’m interested in order to understand where the industry is headed, its performance versus the overall economy and a general understanding of its strengths and weaknesses. I then conduct technical analysis on companies within the sector to determine when to trade, based on my trading plan.
In this paper, I will discuss some of my trading ideas for the next few quarters in 2008, specifically taking a macroeconomic viewpoint. The discussion will aim to dissect the major trends with the economy, and a discussion of where I think some of the cyclical plays are within these sectors.
The markets for discussion include the US dollar, Precious Metals, Financial Services, Retail & Consumer Packaged Goods and Real Estate.
Weakness In The US Dollar
The US Dollar has been in a secular bear market for several years - it has depreciated by over 35% versus the Euro over the last five years. The government controlled media is finally beginning to raise voices over the economic problems that alternative media have been talking about for years. The United States is facing an inflationary depression, and this trend will likely not ease any time soon. Independent studies have shown that the M3 money supply – the entire money within an economy, has been seeing annual increases of around 16-17%. The Fed stopped publishing M3 numbers in March 2006, around the time when the numbers began skyrocketing.
The increase in money supply is one of the underlying reasons for the devalued currency. The US dollar index – a benchmark of the USD to a basket of foreign currencies, has decreased from the 80’s to the low 70’s over the past year.
Global Confidence In the USD Eroding
It is becoming increasingly clear that the world’s reserve currency is shifting from the USD to the Euro and commodities. The question on the minds of most investors is if the US dollar will continue to decline and if so for how long. Weakness in the US Dollar has been accelerated due to poor economic data. According to recent data released by the Federal Reserve and the US government, home owner equity is at its lowest levels since 1945, consumer debt has grown to $2.52 trillion and unemployment levels are at its highest levels since 2003. Furthermore, it is rather disturbing to know generally that statistics published by the Federal Reserve and the US government understates economic problems; so the recent economic data may indeed be worse than what was published by these two parties.
This economic data has created much fear in the economy, which has sent many investors seeking safe havens in other currencies and commodities such as the Euro, oil and gold. The Consumer Sentiment Index from Michigan University and a leading indicator of economic recessions has been declining since early 2007. As consumer and investor confidence in the United States continue to weaken, more investment will pour out of the country, causing the dollar to slide even more.
In addition, as the value of the real estate asset base that was used as collateral to support the massive issuance of credit over the past few years becomes further destroyed, the lack of credit will continue to cause the Federal Reserve to cut interest rates and print more money which will send the economy into a hyper-inflationary state. It is scary to think that it was only 15 years ago, that Japan underwent a very similar real estate bubble, financial crisis and economic recession that the United States is going through now.
However, what seems to be forming in the US economy is a vicious cycle, forcing the value of the US Dollar to decline:
1. US dollar declines
2. Investor confidence drops
3. Housing declines further
4. Investments are pulled out of the country
5. Banks go insolvent
6. Widespread job losses
7. Decreased consumer spending
8. Fed cuts interest rates
9. Monetary easing as the central reserve prints more money
10. Increase in inflation
11. Us dollar declines
As the economy continues to weaken, interest rates continue to decline, inflation continue to skyrocket and the money supply continue to increase, it seems inevitable that this perfect storm will continue to drive down the value of the US Dollar. What this means for investors is in the coming months, there will be plenty of opportunities to short the US dollar, long foreign currencies and long commodities such as oil and gold.
Disclosure: None
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This article has 17 comments:
Sorry Mr. Sun, but if you have something of interest to me, you have to start with credibility.
ha.
Sun, expect to get burned when you come with some truth.
But what are you proposing? What can be done?
Exposing the Fed and the complete lack of needing a fiat currency....is i guess in part what you're trying to do...you could satiate locke with some references.
Probably the best bet for anyone interested in maintaining wealth currently held in dollars and certain sectors is to get out of the USD and into essentials, yep. I agree.
...What would happen if we just burned 1/2 the money in print? Massive depression... although the economy can self-correct following this; we could carry it out over several years...?
We are being made into techno-serfs while simultaneously being told and believing everyday we somehow have more freedom. We are told we have capitalism when in fact we do not. Likewise for democracy.
If it wasn't for years of conditioning desperately clung to, i'd like to believe the other two prior commenters could read and digest what you wrote here.
Nice article.
Secondly you are correct to point the fall in the value of the dollar as an important sympton of the monetary demise but rather than extrapolate an ever lower dollar think of it from a Euro/Gold investor's point of view. Atrractive US assets are becoming historically very cheap. Evidence of this is the willingness of foreign soverign wealth funds to buy into stricken US Investment Banks, high risk but historically very profitable trades. Sooner or later foreign capital is going to be attracted back into the US economy and the dollar slide will at least halt if not actually reverse.
So instead of being gloomy about the future look to the upside, improving terms of trade should make US exports comparatively cheap. Import substitution should be back on the table, look to bring some production back onshore. The Japanese are actually now building new car plants in Japan for the first time in 20 odd years! Higher food and commodity prices are much more of an issue for the developing world as they are a larger slice of input costs compared to wages. So don't knock inflation you do actually need some in order to continue to grow the economy. If the dollar does pause in it's decline the long commodities trade might not be so profitable for you for a bit.
;)
Yea, right, Uncle Sam. We all know the serious consequences of paying government retirees and SS recipients their real cost of living increases.
Batten down the hatches. It’s going to be rough for a while.
He may as well be selling a position with some listing on Pink Sheets.
I agree with the author and he has my sympathy!
It is not popular to be a prophet!
In Bible days, the prophets were always killed!
Watch your back, the bulls have no mercy in trying along with the big media to prop up the market. How else do you explain the sharp pops on the smallest trace of positive news, while ignoring the trends in stock indexes all over the world that are trending lower and have been for the last 6 months? They are all below their 200 day moving average. The market is so foolish. Now the media is insisting on making the China-emerging market bubble even bigger than it already is! I keep hearing they need to put 20% in these declining markets, simply because they don't know what to do with their cash. Better try bank accounts with $100,000 insurance or else be short and own GLD.
I invest in ultra short Dow Jones Real Estate index (IYR) using the ProShares: SRS an exchange traded fund that is 2:1 up/down. I am "all-in" on the short side, but may do some trading on the bull side dead cat bounces like we recently endured for short term profits. The big picture will be bleak for the next few years. Better to protect yourself as suggested by the "Prophet."
As for your sequence, I see it as:
1: Subprime lossses threaten banks.
2: Bernanke devalues currency to socialize bank losses.
3: Commodities rise.
4: Discretionary income is constricted.
5: Congress passes more tax deferments and bailouts.
6: Dollar devalues.
7: Commodities rise.
8: Etc.
I like commodities long and see short term trading opportunities in currencies, but would be careful with the Euro, as ECB is also devaluing. Gold and the other metals are real money, fiat currencies are no more than raffle tickets.
Devaluing the dollar is NOT a cure. If we don't sell higher quality and lower cost, goods & services, the dollar will continue to slide. We will eventually operate within a command economy and be driven into a totalitarian mold. It is inevitable.
See the political will to do the above? I don't and that means we must likely see a giant wave of Socialism (see recent financial bailouts whether 'necessary' is another question) and the entire system failing and then Patriots run for office.