Sell the U.S. Dollar into Strength

When I listen to so many innocent people talking about the renewed “strength” of the U.S. dollar, I cannot help but chuckle a bit, even though it is upsetting to see that they are so easily fooled. It would be nice to believe democracy works, but how can you when people are so gullible? Here is a chart of the ICE U.S. dollar futures index. You can create your own variations by going to: www.fxstreet.com.

Note the aberrant spike, starting in July, 2008. It represents a coordinated currency intervention by several central banks, including the U.S. Treasury exchange stabilization fund. Note the very similar spike, in 2005. That represented a more open intervention. It involved simply raising interest rates. The rates went up and so did the value of the dollar. But, even though the federal funds rate continued up until mid-2006, the dollar did not. U.S. dollar moved up for about 9 months. After 9 months, it didn’t matter anymore. The dollar began tanking, again, when rates in the euro-zone began inching up.

The dollar’s ascent, this time, is not based on a longer term strength arising out of raising rates. The Federal Reserve cannot raise rates because doing so would force numerous big banks into insolvency. It is very likely to be forced to lower interest rates further, or at least hold them, at present levels, for a very long time. The spread between high rates to borrowers and low rates charged to banks by the Fed is what is keeping most big American banks afloat, right now. Take it away, and they will fail, taking the economy with them.

Now, we have a stealth intervention, whose success is predicated on the hope that they can alter perceptions, as they succeeded in doing during the September 2000 intervention on behalf of the euro. It won’t work. The dollar strength we are now seeing will abruptly end as soon as the intervention ends, and the money supply is returned to its normal state of being. The idea that the current upward spike in the dollar, in relation to the euro/pound/yen is a result of "strength" in the U.S. economy is laughable. When we compare the USA to the supposed "weakness" overseas, it is clear that the U.K., EU and Japanese economies are far stronger than the U.S. economy, right now. People who believe this nonsense, therefore, are very naïve, and easily brainwashed. They are not seeing the truth and this will eventually cause them to suffer deep financial losses, when the manipulators end the intervention.

Should I spell it out for you? The USA is a basket case economy. Its biggest, most prestigious banks and financial institutions are going under, one after another. First, it was Bear Stearns, now Fannie (FNM)/Freddie (FRE). Over $6.65 trillion dollars of shaky debts have been been forced from private hands, onto the combined balance sheets of the U.S. Treasury and Federal Reserve. Lehman Brothers (LEH) is on life support, maintained as a working unit only by a lifeline consisting of handouts from the Fed's dealer discount window. Lehman will soon be history, as Bear Stearns and the GSEs already are. WaMu (WM), Wachovia (WB), Key Bank (KEY), National City (NCC), and a host of other banks, big and small, are tottering, and close to failure.

What in the world causes people to accept this obvious lie to the effect that the U.S. economy is doing comparatively “well” compared to the U.K, Europe and Japan? America is only one misstep away from a new Great Depression. The current dollar manipulation, if carried on for more than a few more days, may well be the event that tips the balance.

As much as I disagree with Ben Bernanke’s conclusion that the money supply is a stronger influence on human behavior than human behavior is on the money supply, he has studied the Great Depression. Therefore, he knows that this dollar intervention, if continued much longer, will tip the balance, and through us into a new one. I am not too fond of Uncle Ben, but, for all his failings, I think he is smart enough to know this. For more understanding of the causes of the Great Depression, see my earlier article titled, Stagflation or Deflation. Many books on the subject can also be easily found in your public library, as well as on the internet.

The U.S. economy is NOT showing "strength" compared to Europe, the UK or Japan, nor will it in the foreseeable future, at least for the next 3-5 years. It is very likely that the U.S. economy will continue to deteriorate.

Avoiding a second Great Depression will be the most important policy goal of the next administration. Succeeding means insuring that the money supply is ample, even at the cost of high levels of inflation, at least until new work can generate genuine money (stored work value) to replace the money that was permanently destroyed in this credit crisis. The possibility of a normal recession in the U.K., Europe and Japan doesn't compare to the problems faced by America. If we do sink into a new Great Depression, we will drag all three, plus China, India, Russia and the Middle East in with us, of course, but the brunt of the economic destruction will be felt inside the USA, this time, just as it was in the 1930s.

The first Great Depression was limited to gold standard countries who had lied about the tie with gold, and printed far too much paper than they had gold that could be redeemed. During the first Great Depression, China was on the silver standard, and Russia was communist and divorced from the rest of the world. Now, they are both fiat money players with economies patterned after those of the West. They will sink into the same malaise as the rest of the world.

This dollar boom is being created artificially. It is a foolish policy choice, designed to temporarily placate a public that is distressed by high prices, at a time when America desperately needs a dollar with lower valuation in order for its industries to remain competitive. When the intervention ends, the dollar will be toast, once again. The main accomplishment of the central banks will have been to allow well connected people to escape from the U.S. dollar, by selling it into temporary strength. This will allow them to escape from the coming deep devaluation of the U.S. dollar. The wise will use this excellent opportunity to sell the dollar into central bank driven strength before the intervention ends.
 

Comments

[Eagle-Chief:]

James - An excellent article ! I would have given you an A+, but you messed up on the last paragrathph, so you walk away with an A-.

A weaker dollar is not answer for America, nor for Americans. What does a weaker dollar do to our wealth and our retirements ? - Yes it makes us all poorer, it robs us of our wealth.

Instead America immediately needs to STOP IMPORTING GOODS from China and other third world nations. We need to bring back America's manufacturing base. And we need a strong, REAL dollar that will not change value from day to day. WHAT WE HAVE NOW IS NOT MONEY, IT IS TOILET PAPER THAT OTHER NATIONS TRADE THEIR GOODS AND OIL FOR. This will not last forever. The printing press "makes" (ie-magically) money and it weakens our currency and makes us all poorer.

Great article James, until the end. A minus. : )

2008 Sep 11 05:13 AM

[Alan von Al...:]

Two thoughts on this. Selling the USD implies trading it for something else, and it is not immediately clear what else one should buy and hold. Secondly, the money supply is contracting, no matter what the Fed and US Treasury do to inject liquidity. When banks stop making new loans and tighten revolving credit, as they have, there are fewer credit dollars in circulation. That explains dollar appreciation vis a vis commodities, I think. Whether monetary or fiscal policy can reverse the dollar boom is an open question. What matters first and most, I believe is war risk and thus the price of crude. All goods are priced in energy AFAIK.

2008 Sep 11 05:15 AM

[phdinsuntan...:]

Conrad, I must recognize your analysis is improving day by day and you are a good thinker. I found a good analysis yesterday that can complement your views in a more positive way:

We have no proof that the Fed and Treasury acted in concert to boost financials and sink commodities, but it looks like the Fed's ultimate goal was to trigger a rally in financial stocks, which would, in theory, help banks hammered by the credit crisis raise fresh capital and repair their balance sheets. To accomplish this, the decision to support Fannie and Freddie was deliberately announced on a Sunday, which had the effect of maximizing the reaction from thinly traded financial stocks on overseas markets. Because many hedge funds were using massive leverage to short financials and go long on commodities, when North American markets opened and banks initially rallied, the funds were forced to cover their short positions. At the same time, the U.S. dollar was rallying because the risk of holding Fannie and Freddie paper had diminished. The rising dollar, in turn, made commodities less attractive, giving funds that were already scrambling to cover their financial shorts another reason to dump oil, grains and other commodities. The losses were swift and dramatic. On the Friday before the July 11 announcement, crude oil closed at $145.18 a barrel. Over the following five days, it plunged 11 per cent. Leverage was being unwound dramatically and all had a true panic.
As oil and other commodities were tumbling, fears about the slowing global economy were mounting, giving resources another push downhill. This was also in keeping with the Fed's wishes, because lower commodity prices would help quell fears about inflation. Looks like they are very smart. I got these ideas from other smart guy: Donald Coxe, cited by Journalist JOHN HEINZL yesterday September 10, 2008 at 6:00 AM EDT

Mr. Coxe has no proof that the Fed and Treasury acted in concert to boost financials and sink commodities.

2008 Sep 11 05:20 AM

[Credit Crun...:]

Yes, a good article, and containing much I can agree with - but, fundamentally wrong, I think, for the next few months. I believe that we will see sustained US dollar strength for a while, at least against the euro and sterling, because, while the Fed cannot raise rates, the ECB and MPC will shortly be forced to lower them. I agree that the US economy is a basket-case, but, as such, it is further along the road than other economies, which will now feel the impact of declining export orders (as domestic recession causes the US trade deficit to shrink). Oh, and if you want to see an economy that is a REAL basket-case, take a look at the U.K., which has no industry left other than selling houses to one another (I should know, I live there).

2008 Sep 11 05:49 AM

[Lou Thomas:]

In its fundamentals, this article is an excellent dose of reality. Sometimes the obvious needs to be stated, especially on a site whose other writers have often taken exactly the positions debunked by this author.

I would disagree, however, that the dollar intervention was primarily intended to placate a (U.S.) public that is tired of inflation. That would not explain the participation of other central banks in the intervention, and the Fed could not have done this without a lot of help, or at least the tolerance of China and other major holders of dollars.

The reality is more complex. The U.S. owes more money than it can pay. Creditor nations have allowed the U.S. to run up a huge tab in order to build their own export industries, and possibly, if we can imagine them as being a bit diabolical, to put the U.S. into a weaker position. But in the process they have accumulated our moldy green scrip, which they've invested into our mortgage and equity bubbles, inflating them in the process, and thereby furthering a cycle of unsustainable consumption.

Now, it has become clear that the U.S. can never pay its debts. Even more importantly, the bubbles are popping, and the U.S. consumer is dying, and that is reducing the incentive that China and others have to keep propping up the U.S. economy and dollar in order to support exports to our (formerly) profligate consuming class. But if they pull the plug, then all of that green paper falls to its true value, and they have quite a lot of it. So, it is kind of a dilemma for everyone. And that is why so much energy is going into the various mechanisms of denial (e.g., bailouts, special lending windows, and so on) that postpone, and make worse, the final cataclysm.

The GSE bailout is the most recent and trenchant example. Here, the Federal government is "guaranteeing" the debts of foreign investors. But, the Federal government already borrows a large percentage of its budget each day from those same foreign investors. So, who will be asked to invest even more money to pay for this Federal guarantee? Those same foreigners, of course! You could say that it is a Ponzi scheme, except for the fact that there are no new suckers to be added - it is borrowing from Peter to pay...Peter! So, Peter had better be a schizophrenic if you want that scheme to work out for very long.

Somebody asked where they should put their money if they take it out of the dollar. This is a good question, as there is no safe place in a world that is falling apart. But there are many things that will probably be better than the dollar! So, look around and see what you can find. I'm leaning toward German sovereign debt, myself, but the analysis on which that is based is complicated and tenuous, and I am just an amateur, not someone who does this for a living. But anyway:

It's clear that the main U.S. trade imbalance is with Asia and the oil producing nations. However, Asia in particular is very export-oriented, and so its economy will suffer a serious blow when the U.S. consumption machine finally succumbs. It will probably not be able to grow its middle classes quickly enough to take up the slack. Therefore, it will need to look for ways to expand in areas of the world that do have significant consuming classes. I see Europe as one of the main such areas other than the U.S. So, my thought is that China will sell U.S. Treasuries and GSE bonds and buy European bonds to push the Euro in particular up relative to the yuan so that they can sell some of the exports that used to go to the U.S. (that they can't absorb internally) there.

Also, I'm a bit more afraid of currency controls and other forms of intervention affecting foreign investors in China in particular than in Europe, although that's not based on a good understanding of China, but rather, just a lack of information and general uneasiness. But China has tended toward insularity in the past.

As for gold, once again, probably better than the dollar, but gold is a commodity, and we're headed into a worldwide recession - possibly a depression. Commodities tend to lose value as demand drops. How much agreement will there be that gold is a reasonable store of value, when what people really need is food. Ask King Midas about gold - you can't eat it. A fiat currency such as the Euro that is tied to a real economy that makes stuff that people really want might actually do better - but then again, maybe not!

Good luck, if you deserve it! If you don't, you know who you are - focus on human relationships to get you through the coming difficulties.

2008 Sep 11 06:15 AM

[Coelacanth:]

I love it when I find posters (one's who have Phd at the end of their names are an extra bonus) that I can use as contrarain indicators when I trade. LOL.

By doing the exact opposite of what you're saying I've profited by buying dollars on dips and selling almost everything else. Do we have systemic structural financial problems that if not fixed will weigh on the dollar long term if not fixed? Sure.

With Gold bugs currently puking their guts out seeing their beloved ore hovering around $750.00 an oz. after seeing it above $1000.00 an oz. only 7 months ago, it's not surprising Mr. Conrad "Phd" (who has an "exclusive" newletter one is only privvy to if their recommened to him....LOL) would be feeling some frustration.

That you would minimize the problems in the U.K. & Europe makes it painfully clear you don't trade currencies and are simply making a sojourn in to a subject matter you know less about than you think.

2008 Sep 11 06:48 AM

[Lou Thomas:]

Coelacanth: There is no substance to your post. You adopt a mocking tone, but where is the content of your argument?

First paragraph: insult, no information.

Second paragraph: Gloating about unsupported claims of your success, without saying on what basis you made your decisions, or how your criteria differed from those presented by the article.

Third paragraph: Telling us what we all know already, that gold is presently down. Well, the dollar is presently up, too. Does that mean that gold will remain down and the dollar will remain up? Where is the analysis?

Fourth paragraph: OK, you kind of make a claim here that the problems in Europe are comparable to or worse than those of the U.S., but you don't even exactly say that, and you certainly don't say why you think this is the case. It is not a credible premise, for so many obvious reasons, but why should I bother to list them, since you haven't listed a single reason for believing that Europe is in anywhere near the terrible shape that the U.S. is?

I felt compelled to respond to you because of the especially arrogant attitude with which you made your unsupported assertions. Arrogance is only bearable if it is backed up by something of intellectual interest.

2008 Sep 11 08:28 AM

[NOWHEREMAN:]

You Tell him Lou, I don't bother reading coel's posts anymore because they are about the same regardless of topic.


The chart suggests 82 as the top before resumption of the slide. The question is whether the next stop will be 62 or will the drop be equal to the first leg to the downside or 44?

2008 Sep 11 09:57 AM

[inthemoney:]

Dollar strenght makes no sense, I write it off to concerted intervention. However, as they say, don't step in fron of a freight train. Do not short dollar unless there is a clear sign of reversal, like 3% reversal.
Market is 100% irrational these days from too mucgh intervention and systems trading purely on technicals, these technical systems get fooled by government intervnetion moves.
This is why you see quality equities go down and bad ones like retailers go up, it is because for a day trader fundamentals don't matter, they trade purely on momentum.
If you are not a day trader, buy at huge 50-60% discount and sit tight with your blue chip equities.

2008 Sep 11 10:36 AM

[Coelacanth:]

Paul & Pete,

I could easily refute most if not all of what Mr. James Conrad "Phd" (that still cracks me up....I love typing that. LOL) says.

If you look at some of my past comments, you'll see I've expanded on my opinions on several occasions and have been spot on in many cases. That I haven't done that here only means I've been too busy trading. It's revealing that didn't occur to either of you

It's very instructive for someone like me to read what the erstwhile James Conrad Phd has to say week after week.....and then see the markets do the exact opposite of what he says they'll do....week after week.

I'm actually quite grateful.....he's currently one of my best contrarian indicators. I truly hope he continues posting for a while.

2008 Sep 11 11:08 AM

[Philman:]

Coelacanth, I think he is a "contrarian indicator" because you are a day trader, and he is talking about long term investing, not day trading. You will eventually lose a fortune, in my opinion, if you actually act on what you apparently believe, in the longer term. It is obvious to anyone rational that fundamentals indicate that the USA has the most delicate and deep economic downturn situation in the world, and, also, it will get worse. Unless you are an insider, you will eventually lose everything if you try to day trade.

2008 Sep 11 11:54 AM

[Philman:]

If you trade only for today, the manipulators will tear you apart, tomorrow. For example, I think the dollar might go up a little more, then, tomorrow, or Monday, or Tuesday -- impossible to know -- it will start falling again. Rates are not going down in the EU. In all likelihood, given the sequential collapse of our financial institutions, the Fed will probably cut again, to help the banks stay afloat. That's my view anyway.

2008 Sep 11 11:56 AM

[DaveW:]

Philman, I second your comment to the lung fish guy (a.k.a. Coelacanth). I don't know how many posters I read who miss the underlying point of so many articles. Some articles benefit traders and some investors, some benefit both. I think the author is absolutely spot on and is NOT picking a top here (go traders! but beware investors....)

2008 Sep 11 12:45 PM

[Fabien Hug:]

Too early. These trends last longer than a few weeks. Furthermore, what about the theory that others currencies are dropping; it is not the buck that is raising. Re the economy, a lot of people made a lot of money during the last expansion phase. That money is still here and will be invested. Mess for mess, I prefer the American mess (I am not American).

2008 Sep 11 01:03 PM

[Coelacanth:]

Philman & Dave,

I don't day trade....when I enter the market it's typically anywhere from a couple of weeks to a couple of months so I can take advantage of geo-political & macro-economic trends.

Can't believe I'm getting caught up in this conversation but, no guys, it's not lost on me that our beloved stars & stripes has systemic financial structural problems that, if not dealth with, will weigh on our currency long-term. That said I'm not an "extreme doom & gloomer" and believe Warren Buffet when he says "Don't bet against America long-term".

Like Fabian Hug says....."mess for mess, I prefer America's"

Be well gentleman.

2008 Sep 11 01:43 PM

[Philman:]

It has already lasted two months. Even a real differential in interest rates propelled the dollar only for 9 months. Now, it is just pumping. So, I think it ends next week. As the article points out, Bernanke is aware that if he does too much of this, he will tip the U.S.A. into a new Great Depression, so I assume he will order an end to it soon.

2008 Sep 11 02:34 PM

[mikebrah:]

I've been reading every well reasoned, viable economic article I can get my hands on the past few weeks. From what I can gather, there is pretty much a 50/50 split on both the inflation vs. deflation issue and the debate whether the US is first-in, first-out of a recession, or the epicenter of a global economic earthquake and therefore the worst-off.

It seems to me that in a global fiat economy, the country with the weakest (but still valued and accepted) currency wins. For this simple reason, I think the US was, is, and will continue to be the most desirbale investment opportunity for years to come. If we are able to succesfully trade "toilet paper for oil" as one poster suggested, thats fantastic! We have unlimited toilet paper at our disposal.

The one caveat is that a country's currency must remain accepted as "legitimate." For example, Zimbabwe has something like a 20,000% inflation rate and is the best example of an unvalued, non-legimate currency.

Thats the main philosophical issue most people miss when they talk about "exporting our wealth" and you see the Boone Pickens talking about the greatest transfer of wealth in history. IT'S NOT TRUE! We are trading worthless paper for the most desirable hard asset known to man (at the present). We then use this imported asset to fuel our entire way of life. Yes, if we can ultimately pay ourselves for this product in the form of alternative energy that would be great. But only if/when it becomes more profitable than importing.

But it is NOT necessary anymore than it is to stop exporting all our wealth to Vietnam, China, etc. for all the cheap clothing they manufacture. The more we import of everything the better off we are. Importing with a fiat currency is trading toilet paper for actual assets, and that benefits all US citizens. Importing oil from another country is the equivalent of "importing" food from the grocery store to your household. It is advantageous to you to "import" your food because it is cheaper than the time and labor it would cost you to provide all your own food. This same relationship applies on a global scale. The one opposing argument that one could make is that we are relying on countries who hate us for our energy.

But it works for both sides, because OPEC has absolutely NO USE for all their own oil. They are a one trick pony, and if not for our insatiable desire for their "pony" they would still be riding camels to the local marketplace. Iran would wipe itself out of existence if it did anything to truly hamper its oil exchanges with the US. The entire Middle East's economy would collapse if OPEC ever decided to shut off its pumps.

The same is true with Vietnam's and China's labor market. Currently they have no use for all the available labor within their respective societies, so they essentially export their labor to us in the form of Nike clothing. This is good for both sides.

Once the gold standard was universally dropped, the whole landscape became inverted. Currency strength is almost entirely undesirable in today's fiat economy. Look at how long the dollar has been in a long-term decline against all major currencies, this is not some recent development. And yet we remain the most innovative and wealthy place on the planet (for the most part.. in no way am I suggesting the US is anywhere NEAR ideal, but thats a whole other topic). It is the intentional strategy of US policymakers, the Fed, Treasury, etc.

The only time a country's weak currency truly hampers its citizens is when they travel abroad. But anyone able to afford traveling abroad can afford this "tax."

2008 Sep 11 03:13 PM

[NOWHEREMAN:]

Okay, okay.

Coel, I apologize, we think in different time frames. Mine are rarely less than 5 years down the road and may include historical inclusions from the Industrial Revolution in the US.

I was weaned away from day trading in 1987. I had a career changing experience that year. I studied for and passed my Series 7 in 1988. (home study, no outside prep, 2nd try) I was determined to find out what stockbrokers knew about the system. It turned out that it wasn't "what you knew" but "who you knew".

The best analysts were those who feted the corporate insiders and received more info than others. They worked in conjunction with the Specialists who knew all of the buy/sell order prices of the market leaders beforehand or in their "Book". Analysis was based on Inside knowledge and projections based on that knowledge. Sell side was very limited because they did not want to sever their sources of info.

The Tech crash and analyst involved prior knowledge were revealed, dissemination of info to all at the same time with severe penalties ended that very lucrative business, but it also created havoc because without Insider Knowledge Analyst were forced into actually doing research. Thats why the Consensus is rarely right. Meanwhile, the Specialist system eventually sucumbed to electronic trading.

Day/Night trading could finally compete. But now, you have to anticipate Gov. intervention. If you can do so, I would love to read more.

PS I have been known to get Bent out of Shape occcasionally myself, but do read your posts.

2008 Sep 11 04:04 PM

[User 243404:]

I still look at my window in the GCC and see the crazy frenetic building of glass towers - and no care at all on who may eventually pay for all this "luxury "space. One has to wonder reading these blogs if we all live in the same world.
The logic of the crude price supply/ demand bets by Opec is (I speculate) driven by the very personal investment strategy of the oil ministers and their advisors - who it seems are all heavily invested into local real estate, rather than global (or even local) equities. Consequently the human behaviour at these times has largely been a) first denial of any possible problem, local or global, b) gentle awareness that all is not well in the back yard( Dubai real estate ?, cash requirements to run highly subsidised countries (food, fuel, housing) to keep the population remaining subserviant, imported inflation (everything is imported here !!) etc., and c) a sharp very recent awareness that oil and chemical customers are no longer willing to pay more and take more (bad memories of late 90"s come to mind when China simply stopped importing chemicals).
Peak oil is still an issue, but its day of reckoning has been pushed out a few years again with slowing demand, as well as new sourcing (both crude and alternate based).
In conclusion for the investment minded:
- Yes, GCC will continue to support the US$ - they have no choice actually due to the value of the sovreign investment funds being very close to the hearts and possibly own personal pockets,
- Those OPEC members who highly subsidise their countries operating expenses will continue to scream for production cuts ( not by themselves of course, but by those who allow their people to suffer anyway- read Saudi). Saudi will continue to do whatever is asked of them by those in the US government who keep the House of Saud in power - and keep the Shiite problem "managed" on their behalf.
- My conclusion (also I think supported by most IOC and NOC's) being is that oil will stay long on supply for at least the short term ( $80//bbl) , but long term (3-5) years we will be back to the same supply problems again
- And because demand of oil/chemicals will be seen to fall (crater) short term, you can bet that projects will fall out of the sky until steel and concrete become reasonably priced again.
- So - yes - the people who do make things are going to be in even more trouble than those who just used to sell houses to each other, and conjure ever more exotic instruments to play pass the parcel on risk and debt. They tend to live closer to break even, and have huge populations to keep actively engaged and eating ( rather than fighting).
My bets short term are watching a global race for the bottom - and the day traders will have a tough time, as governement agencies will do all they can to catch them out whenever they can. Hard times will fall on the hedge funds - and they deserve it as well.
Long term I remainb long on energy and commodities - as when demand returns it will be the first area to pick up again, hopefully this time without the overly creative banks and finance houses. I guess thats why they get called "cyclicals" !!!
Can't help myself that I was brought up on buy-and-hold, and I know it will hurt short term, but at least you do not have to worry about the short term traps, catching falling knives etc., but I would love to be sure there will be enough to retire on .
My apologies in advance for the amateur note - but I thought you guys could use a different perspective.

2008 Sep 12 06:10 AM

[Alan von Al...:]

Thank you, 243404

2008 Sep 12 07:26 AM

[Philman:]

Looks like this article was timely even for day traders. The day after it was published, the U.S. dollar has started to drop like a stone! Coelacanth, is this how lungfish went extinct? :-)

2008 Sep 12 12:07 PM