The Unstoppable Dollar Rally; Gold & Treasury Snapshot; The Great Depression 2.0 in Full Swing
June 5, 2010 · Posted in Investing
The Dollar Rally
I will be focusing on the Euro/Dollar, but what I will be saying is not necessarily limited to the Euro, but applies many other currencies (except maybe the Yen).
The Dollar has now reached a 4 year high against the Euro:
Those who kept on talking about a Dollar crash from 2008 on where a bit late in the game. The Dollar crash, that was a result of expansive and inflationary government induced credit and monetary expansion with the naturally ensuing business cycle, has already happened through the 2000s. The Dollar has essentially bottomed out in April 2008.
Since then it has moved up and down, but up on the net. A trading range seems to be emerging that I expect we will continue to stay within for years to come.
Thus, my (and other people’s) predictions of a coming Dollar rally were essentially nothing but an expectation that the fundamental long term trend that began in 2008 will continue:
Here is another thing from January this year that I dug up from my Campaign for Liberty inbox, it’s a response I gave to John Dennis who asked me why I expect the Dollar to go up (, and who by the way is running for Congress against Nancy Pelosi in San Francisco this year):
I am sorry I haven’t been checking my C4L inbox regularly. I will follow it more closely now. Keep me posted about upcoming meetings if possible.
Reasons why I think the Dollar won’t collapse (against the other major currencies, that is):
- The debt load in the US is rather crushing, the general direction of credit is currently a net contraction with upticks from time to time which by no means are changing the general trend
- The major Dollar crash HAS ALREADY happened from 2001 through 2008, years of massive credit and money expansion, but now we are on the other side of peak credit
- The true money supply growth rate is now coming down in spite of massive and futile attempts to reflate and to destroy the Dollar
- The global debt pyramid is one that builds on the dollar, that means that in an environment of global delevaraging, people divest from foreign currencies and need to get back in the dollar before doing anything else
- China is inflating to the tune of 30% money supply growth, I believe that were China to depeg the Yuan might crash
- Bullish sentiment on the Dollar is at an all time low, I believe a few months ago it was at 3%! Everyone and their mother are predicting a Dollar collapse; this is a strong indicator for a massively oversold asset …
- On a side note: All paper currencies move toward zero in the long run when measured against gold, but they fluctuate amongst each other on their way down, the US currency is a bad one, but that doesn’t mean all other currencies are being printed by saints
Time will tell what to expect.
I think is far as politics and this matter are concerned, Libertarians are opening themselves up to attack when they continue to predict a Dollar crash that may not happen anytime soon. On top of that, People can’t relate to the argument that says “what they are doing is destroying the Dollar”. Most people don’t get all the intricacies that are involved and tune out I believe.
We have so many better things to talk about that visibly affect everyone in their day to day lives.
Thanks for the interest.
By the way: Good luck, John! Even though political action is futile, it would sure be nice not to have to see this pompous and terribly arrogant witch in the news anymore. :)
The Gold Rally
Those who predicted a dollar crash, thought it would coincide with a gold and soft commodity rally. And then there were those who said that a strengthening Dollar would make the gold price fall.
I have been saying again and again that I think strength in the Dollar may actually coincide with strength in gold and silver, while soft commodities and stocks will tank. Thus I responded to an article on Minyanville whose author predicted the Dollar rally but also expected gold to fall at the same time:
I agree with his bullishness on the dollar. I don’t necessarily agree with his conclusions on gold. I think gold may actually do OK during a dollar rally. Maybe it will drop a little, maybe rise a little, but it will most definitely outstrip other commodities. In fact, I think a smarter play when betting on a dollar rally would be to short any other commodity BUT gold.
Here’s gold over the past year:
And here is gold VS oil (an example for a soft commodity) since the Dollar rally resumed:
This is important to understand: All fiat currencies move down against gold in the long run. This is completely inevitable. However, they fall at differing rates.
The Treasury Rally
What about Treasury yields?
Flat since Dollar rally resumed. I expect the support to give way sooner or later. The way down is pretty much wide open then. On December 18th 2008 they dropped as low as 2.04% as the reality of Deflation was all to visible to everyone. Since then we have seen numerous efforts to bailout businesses and all the wildly unimaginative interventionist measures that already caused the Great Depression in the 30s.
People have been outdoing each other in calling an end to the recession and bureaucrats and central bankers have been lauding themselves about successfully preventing another depression. The funny irony is that they have in fact beautifully set the stage for The Great Depression 2.0 with all its unsurprising and predictable side effects …
Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.
At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.
Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.
If it was our dear government’s objective to repeat the playbook from the Great Depression one by one, then they have indeed succeeded phenomenally.
A similar argument is used to justify fiscal austerity. Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts. And the O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year.
Hmmm, I thought the government has solved the crisis with its heroic spending intervention? Why don’t we all just lean back and let that magic Keynesian multiplier do its work in getting us back on track? Why spend even more when the crisis has been solved, when Big Government has saved us, as Krugman himself proudly pronounced not too long ago?
So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.
One might object that this all makes perfect sense since Krugman is actually not an economist, but rather a propagandistic, dishonest, and filthy mouthpiece for any Democratic agenda you throw at him. But that’s not a very nice thing to say about this poor fellow so I would never go down that path … oh wait, I just did it, damn, sorry Paul! It’s just … could you maybe try to be a bit less predictable??
And yes I know I know, he goes on in there talking about how the situation remains terrible and how we must remain careful and bla bla bla, but that nonsense just doesn’t matter. He did lead his readers to believe that “big government saved the day”! He did say that we’re NOT going to have another Great Depression. That’s the essence of his message.
Here is a good discussion about it on yahoo:
The truth is, we’re seeing precisely the expected scenario in action, the Japanese model:
From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.
A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.
Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.
Reality is kicking in again. We’re slipping out of a small break we took from recession, and back onto the inevitable path. As a result of foolish government intervention we are now, once again, in worse shape than we were at them time the real correction was supposed to occur. And this is rather likely to be reflected in consumer behavior, and by extension also in Treasury yields.
An interesting side effect of the Dollar rally is what’s happening to Chinese exports. Since its currency is pegged to the US Dollar, the Yuan is strengthening against the Euro which is hurting the powerful Chinese export lobbyists.
This is yet another case for a coming Yuan devaluation against the Dollar, that I already talked about almost 1 year ago:
The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.
A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.
Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:
- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government
All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.
Bottom line: The supposed Yuan devaluation everyone seems to be expecting, were the Yuan to be freely floated, is simply not gonna happen!
That’s all I have to say for now. Have a good weekend everyone!