Lou Thomas

Inflation Is in Our Future...Not Deflation

You need to re-title this article. The title indicates the opposite of what the article states.

Currency ETFs: The Euro is 'So' Yesterday

seekingalpha.com/artic...

Your statement that the U.S. is not heading for the bread lines is a bald assertion, and I certainly do not agree. In a way, you are begging the question, since U.S. economic weakness is at the heart of the dollar's weakness. Some evidence, please!

The article argues that a steepening Treasury yield curve (happening at the time the article was written) is a sign that the market expects a recovery. But as of this writing, just a day or so later, the curve has flattened, which shows just what a fickle indicator that is. And even if it had not, a steepening curve is an ambiguous signal; could it not just as easily mean that a lack of confidence in the dollar is expected to force the Treasury to increase yields to attract fleeing foreign investors so that the massive U.S. debt can be financed, *despite* a continuing economic need for more interest-rate relief? Such circumstances, even though they include an interest rate increase, would not be a net positive for the dollar.

And besides, since when are Treasury investors such oracles about what is going to happen next to the dollar? They have an opinion, expressed collectively as a number, and as a columnist you really ought to be performing your own analysis rather than tapping into their "group mind," because it might just be the group mind of a bunch of confused sheep reading columns like yours.

Then there is the pure speculation that the ECB will have to cut rates. How long have dollar apologists been predicting this, only to be slapped in the face by Trichet? But they love to take a beating, and keep reciting the same old line, even though Trichet says very clearly and consistently that inflation is his main concern. As for the Fed stopping cuts, we are already at a differential of 2 percent - is that not enough for you? Already the dollar is becoming a funding currency for a carry trade. And will the Fed actually stop when the economy is continuing to slide?

And then there is the claim that because gold is taking a breather the dollar must be safe. Wrong. Your own chart, taken as a whole, shows that gold is down over the interval shown, and so is the dollar! So, how is gold going down an indicator that the dollar is about to rise? And once again you are relying upon the group mind of a gaggle of investors instead of making an original analysis from your own data. Gold is extremely volatile, and therefore not a good predictor over the short term. By contrast, the price of oil usually moves inversely to the value of the dollar - have you noticed what *that* is doing lately?

Why do you ignore that the U.S. trade deficit is still 5.5 percent of GDP? The IMF World Economic Outlook Report for April, 2008 indicates that the deficit is not sustainable at levels about 2-3 percent. It was at 7 percent in 2005. Since then, the dollar has declined almost 20 percent, and we have only lost 1.5 percent of GDP from the deficit as a result. That would indicate (by my rough logic) that we have at least 30 percent more to hack from the dollar's value before the deficit can stabilize.

Still plenty of ARMs to reset. Still a huge and growing unsold inventory of foreclosed homes. Citicorpse is selling potentially 400 BILLION in assets! Just how broke do you think they are to sell that much stuff? How much lending to the real economy do you think they will be doing under those circumstances?

Oil producers are considering unpegging from the dollar. 6 trillion dollars are in foreign hands waiting to slurp our portable commodities out of the country, driving up prices, and to dump the rest on foreign exchange markets to get the currencies of nations possessing viable exports.

You have cherry-picked the data, or simply made claims with no data, to support the dollar-positive thesis that you seem to have written on a blank piece of paper when you first conceived of this article.

U.S. Dollar Signaling a Changing Tide?

Oh, and bearfund has a bad attitude. It's one thing to think you are right, but quite another to gloat over everyone else's imagined misfortune. The great mass of people did not create this crisis, even though they may be ignorant of its causes. It was created by an elite investing class that has a lot more in common with you than it does with them, and when they figure out what has happened, they will regard you accordingly.

When the hard times hit, you will need other people more than ever, and whether you know it or not, you need them even now.

U.S. Dollar Signaling a Changing Tide?

Other than precious metals, almost nobody holds actual commodities and waits for them to appreciate. Instead, they place bets on future prices using derivative contracts. And such bets involve counterparty risk.

The present environment is practically screaming with counterparty risk. For a conservative investor, non-dollar sovereign debt would seem to provide a better hedge against the dollar's decline. So, the 80 percent the author says in his comment should go to currency hedges and commodities combined I would say should go straight to the (non-derivative-based) dollar hedges themselves (sans commodities) if one is worried about such risks.

Fading Glory: The Dollar as the World's Reserve Currency

Interesting premise that China could be angling to make the yuan the new world reserve currency. Certainly I agree about the weakness of the dollar, and the article's prediction that the vast foreign holdings of dollars might finally demand their due in U.S. commodities, sparking horrific inflation, is already in progress.

However, in terms of current reserves, the Euro is the obvious runner-up and therefore, I would have thought, the main contender for the reserve currency mantle. The E.U. is now the largest economy on the planet, with the U.S. second and China a close third.

In terms of stability and openness to the outside world, the E.U. is second to none. The Chinese middle class is still at a nascent stage, and this makes China highly dependent upon exports, while Europe has well-developed internal markets, providing for less instability as U.S. consumption through borrowing finally encounters the end of its tether. Note that one sign of this is the willingness of the ECB to allow the Euro to appreciate vs. the dollar (as if they were actively, rather than passively, pursuing that reserve status advantage), while China has only very reluctantly allowed its currency to float upward within a limited range vs. the dollar.

The U.S. problem, by contrast, is that its internal markets are over-developed through the extension of foreign credit, while its productive capacity has been cored out through the export of the U.S. industrial base to unregulated foreign cheap labor havens for the past several decades. Not to mention continued unmitigated borrowing for the misconduct of two endless wars.

Politically, also, we see the E.U. demanding and getting more influence on the IMF and World Bank in particular. China is not well-positioned in that regard.

As for precious metals, I always think back to the tale of King Midas. When people need food, housing or clothing, a shiny yellow metal isn't ultimately of very great value as compared to a diverse economy that produces all of those things. Seventy percent of demand for gold is for jewelry, and at present prices people are rushing to turn in their gold pendants for cash, so ask yourself the extent to which the actual use-value of gold is determining its value under those circumstances.

For the above reasons, I see the Euro as the most likely new world reserve currency. And, in my opinion, the technical problems of transitioning settlement systems to the Euro are overrated, and will be addressed in a flurry of computer reprogramming as soon as the political issues come to a head and work themselves out.

Disclosure: 90 percent of my money is invested in canned wild Alaskan Sockeye Salmon, which makes a terrible lump in my mattress. The rest is invested in German bunds.