bearfund

Dollar Doldrums Will Soon Be History - Barron's

Dollar bulls never cease to amaze me. They offer no fundamental underpinning for their position but expect us to believe that the dollar will rise simply because it is historically cheap today, or perhaps because they simply wish it to be so. If you want to be bullish on the dollar on a 3-month or 12-month basis, fine - I'll look at your charts and I'll listen to your arguments about the Euro. You may even be right. But I've yet to see any argument that the dollar has a long-term future

First, commodities. If commodities prices are all driven by speculation, one would see extreme contango in the spot market and 2 front-month contracts. Speculators do not want, and do not in most cases have the ability, to take physical delivery, so their only choice is to close out positions before expiration. If the price increases are caused primarily by long speculation, one would expect to see prices fall dramatically as contracts expire and speculators are forced to roll over their positions. Despite the overblown worries about lower-than-normal convergence, this is not happening. So unless stockpiles are rising rapidly as speculators are forced to accumulate assets they cannot use, the higher prices are being caused mainly by real supply and demand factors. In many markets stockpiles are at or near all-time lows, so if you want to assert that speculation is the main driver of today's prices you are effectively making a conspiracy theory argument; after all, all that metal, oil, and food that speculators bought up has to be stored somewhere (or destroyed by the people who paid for it), and it isn't in any of the places we'd normally know to look. The logic is simply too tenuous at this point, so I think it's safe to say commodities are expensive mainly because supply is tight and demand is strong.

As for the dollar, the opposite is true. Supply is abundant, especially of dollar-denominated debt. America at all levels consumes vastly more than it produces, and this is reflected in the rapid growth in its money supply and in Treasuries outstanding. There is no sign that Americans intend to reverse this multi-decade trend, even as foreign central banks talk openly about holding fewer dollars in the future. While you correctly note that there has been no panic selling, it does seem safe to say that the rate at which foreigners accumulate Treasuries will decline in the future. It doesn't take a genius to see that interest rates will have to rise just to keep the dollar near its current strength and, indeed, this is already happening. If the Fed doesn't follow up by curbing the supply of short-term money, we could only expect higher price-inflation and a weaker dollar. I agree that the euro looks overvalued right now, but the idea that the ECB will cut rates soon seems unsubstantiated. If anything, Europe is looking a bit stagflationary right now as growth falls and inflation rises. The ECB surely knows that the way to beat stagflation is to raise interest rates, triggering a recession but also resetting inflation expectations. At worst one might assume they will try to hold steady and hope inflationary pressures abate on their own. Given the ECB's history, anyone hoping for a rate cut there is whistling in the dark. No matter what happens in Europe, Asia is already saturated with dollars and continues to run large trade surpluses with America. The only way they can limit further appreciation in their own currencies is by buying more American companies. There is a limit to how well this will be tolerated and to how many companies in a weak, stagnant economy can provide the returns these SWFs will be looking for. So I can only expect the dollar to continue its decline against the RMB.

As the population continues to age and older, better-educated, more productive workers retire on state-funded and other pensions and are replaced mainly by poorly-educated immigrants, taxes and borrowing will spike as productivity tanks. This will surely happen in Europe as well as America, and indeed it will to an extent be a global problem. But the pattern continues to favour countries with younger but steady populations and strong investment in human capital and infrastructure. None of that describes America.

In short, there is no good reason to think the dollar will rise significantly from here, barring a dramatic change in America's collective values and expectations. A dead-cat bounce seems a given, but only a sustained period of higher productivity, higher savings and investment, higher exports, higher taxes, and reduced consumption, credit creation, and government borrowing could see the dollar back to 90 on the index. From my view here in the trenches, Americans simply haven't the fortitude to do it, and in any case demographics and underinvestment are going to devastate this country. 3 years out, 60 is more likely than 80. Well beyond that, history suggests that the dollar has an inescapable date with destiny at zero. Expect most if not all other fiat currencies to join it there sooner or later.