Getting Frantic? A New 3 Act Play for Current Economic Times

Includes: SDS, UDN, UUP
by: Fritz Hottinger

Act I

Can you recall the last time, if ever, that a U.S. Secretary of the Treasury went to the Middle East to jawbone the local potentates, trying to convince them that the dollars they receive for their oil are really worth holding?

He was urging them (begging is perhaps a more honest word) not to follow Kuwait's action of last May, when, in order to stem inflation, the Kuwaitis stopped linking their currency to our dollar.  If the other oil sheiks follow their neighbor, a multitude of U.S. dollars will be dumped, their value will decline further, and absent a return to the gold standard, the only hope of a rescue would be an inflationary increase in interest rates.

Act II

Paulson's hat in hand act of June 1 was quickly followed by a similar performance yesterday: Mr. Bernanke, our Federal Reserve Chairman, broadcast to a world monetary conference a similar message of "hopeful strength" for our dollar, and for our economy. To quote some key phrases:

"Conditions remained strained, but the Fed will do whatever it takes."

"The dollar remains strong and stable because of Fed policy and U.S. strength".

The futility of these two performances makes evermore evident the continuing weakness of the dollar, and the parallel weakness of our government agencies to do anything about it.  There are just too many negative forces still arrayed against it:

  • a housing slump, which has not yet bottomed;
  • continuing credit problems, both here and abroad;
  • fragile financial markets,  with volatility up and disposable income declining;
  • pricing of oil beyond our control, adding the daily risk that any market gains may not be permanent.

More rate cuts are highly unlikely. GM (NYSE:GM)'s closing of 4 plants adds further fuel to a domestic economy already in decline.  Astute investors will be taking money off the table, and putting out anchors to deflect losses with defensive stocks such as SDS.  Traders can be expected to continue Long on Oil, and Short on the U.S. Dollar.

You are not alone in wondering what the Act III will be.

Disclosure: Long SDS