rogerk2

U.S. Dollar: The Trade of the Decade

Boy, you sure generated a lot of hate mail with that one!

I've been trying to think through the broad implications of your strong dollar/weak commodities arguments. By the way, UBS came out today with a similar projection of oil at $20 and gold at $300 next year.

My conclusion is that the whole question hinges on whether or not Uncle Ben, backed by The Fed and Treasury and our singing printing presses, can pull off a global refinancing deal. It has to be a global solution because everything is so interconnected.

The US has been the global growth engine for the rest of the world for decades. China, India, etc. may be developing their own internal demand structures, but their economic growth is still tied to exports, principally to the US. They need to keep our consumption engine going or their production engine shuts down. If demand/production falls, they lose jobs, and their unemployed population won't have money to buy cell phones or pay taxes to build roads and new factories.

The producing nations are already getting hit harder than anyone expected, due to falling consumption in the US and Europe. Look at Brazil, Australia, to see some of the impacts of falling oil and metals prices. These were very strong economies, now having to scramble.

The point is, none of these countries can survive for long economically without foreign capital coming in to buy their goods and services. That's how they keep their people employed and roads paved. Govts fear high unemployment more than anything else. They can control food prices and gas prices somewhat, but having too many people standing around with nothing to do foments riots and coups. Look at Obama's plan. Step 1 is to create 2.5 million jobs. Get people working, off the streets, and off welfare.

So, Uncle Ben needs a strong dollar to support all those foreign govts holding gigantic piles of dollars and treasuries, and they need to continue buying our low-yield debt so we don't go under. They buy our junk money so we can keep buying the junk products their huge populations produce. It's a delicate balancing act, on a global scale.

It's pretty clear that the dollar's fundamentals are crap. The only way you could get the dollar to look strong while you are creating billions more of them out of thin air is by concerted actions across the world. Nobody can afford to rock the boat too much because they all realize, if the dollar crashes, the US crashes, and every other economy in the world crashes right behind us.

Finally, you can't have a strong dollar if oil and gold are going up. We already know that oil futures are manipulated by traders (primarily the big banks who are market-makers), and I suspect Uncle Ben and the NY Fed are pulling some strings to keep the spot price low. How else could you get "demand" still falling when the price is cut by two-thirds? "Gee, I'm just gonna leave my big new SUV sitting in the driveway." Sure!

Gold is another case. Demand is surging, but the big depository banks (the same guys "fixing" oil prices) are hoarding the physical metal. Spot price $800 - here, have this certificate (IOU) for an ounce. You want actual gold? Go to a dealer. Of course, he'll charge you $1100 an ounce. The spot gold price is being artificially pressured, perhaps again to support the appearance of a strong dollar.

So, I think it is entirely reasonable for Uncle Ben and his local and global cohorts to be manipulating commodities, and many other aspects of daily life we take for granted, to support a strong and rising dollar. It's a very fine line they're walking, with global disaster hanging on every step. Can they pull it off? It seems to be working so far, but I still only give it about a 30% chance of success. Every new bailout, every new pile of money they throw at it, makes the fine line thinner and thinner.

The other 70% of me says it's all going to fall like Humpty Dumpty one of these days. I'm learning how to grow carrots in my back yard.