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XMFSinchiruna (28.54)

Bernanke Holds a Match to the U.S. Dollar

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April 29, 2011 – Comments (32) | RELATED TICKERS: SLW , AUQ , AEM

I hope you find my discussion of Bernanke's latest dollar-bashing appearence of interest, and I request that you please circulate this one as you are able among your friends, family, and acquaintances. Sometimes a beautiful Friday evening after a streak of inclement whether is hardly a strategic moment to publish a discussion like this, and indeed I hope you all are out enjoying yourselves as I just was. When you next get back to your computers, however, thank you in advance for helping this article to not get lost in the shuffle of a late-Friday lull in Springtime. 

http://www.fool.com/server/printarticle.aspx?file=/investing/general/2011/04/29/bernanke-holds-a-match-to-the-us-dollar.aspx

Excerpts:

The real "Bernanke put"
Even as Bernanke spoke, the U.S. dollar index crashed unceremoniously through near-term resistance, setting the stage for an historic retest of the index's all-time low of 71.32 in spring 2008. When that last leg of technical support for the dollar buckles, I believe the acute currency crisis that I warned fellow Fools about more than two years ago will enter a new and highly disruptive chapter. We can only hope that this story may still have a happy ending.

As it happens, according to economists at Deutsche Bank, the dollar has already recorded a fresh new low for the fiat-dollar era, on an inflation-adjusted basis, as measured against a trade-weighted basket of currencies.

.....

Now, with a fresh Bernanke-boost in place, it seems to me that only a miraculous, immediate, and fundamentally unwarranted rally in the U.S. dollar -- to somehow avoid that fearful encounter with its all-time low from 2008 -- could snap the near-term momentum in gold and force a retreat in silver from psychological resistance at $50. While traders fight in the COMEX futures pits to determine the near-term dynamics of exchange rates between the three currencies -- gold, silver, and the dollar -- ultimately I maintain my long-term view that $1,500 gold is just the beginning.

Personally, I hope I'm 100% wrong about all of this. I would rather lose every last penny that I have invested in my top gold pick, Gammon Gold (NYSE: GRS  ) , or the immensely profitable Silver Wheaton (NYSE: SLW  ) , than be forced to observe the disorderly dethroning of the world's primary reserve currency. As I have stated before, though I have staked my investment capital in accordance with my macroeconomic outlook, gold's rise is for me a somber affair.

.....

David Woo, a currency strategist for Bank of America Merrill Lynch, summarized one such scenario in terms that ought to demand your Foolish attention:

"In our risk scenario, little progress on the fiscal front raises the probability of a fiscal crisis and the odds that the Fed becomes the buyer of the last resort. This would accelerate the process of the USD's demise as the global reserve currency and cause it to decline in a disorderly manner."

If U.S. Treasuries were a viable safe haven asset at present, then the world's largest bond fund would own some. PIMCO has shed all such exposure, and has even initiated a short position. Nobody seems capable of answering PIMCO head Bill Gross' non-rhetorical question: Who will buy Treasuries when the Fed doesn't? Someone has to bankroll the dauntingly massive gap between federal expenditures and revenue still emerging from Washington, and the bond market has relied upon QEII to fund 70% of U.S. debt issuance since its inception.

 

 

32 Comments – Post Your Own

#1) On April 29, 2011 at 9:32 PM, XMFSinchiruna (28.54) wrote:

And here is my latest discussion of Agnico-Eagle Mines:

http://www.fool.com/investing/general/2011/04/29/this-gold-miner-will-reward-your-patience.aspx

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#2) On April 29, 2011 at 9:36 PM, silverminer (37.03) wrote:

Sees that after printing out the article for my wife to read, I posted a link above the print-ready version. Here is the link to the first article above in full Foolish format.

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#3) On April 29, 2011 at 10:26 PM, richthegeek (< 20) wrote:

Seems Ben tries his best to spin it positively - or he just doesn't get it. At this point it is political suicide to take us off the drug we've become addicted to...yet they don't realize it will be much, much worse if they don't.

 I feel happy about my PM investments until I realize that it's not the PMs that are going up, but the dollar going down. Sad, really.

 A heartfelt thanks, as always, for the great articles and advice.

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#4) On April 29, 2011 at 10:55 PM, Valyooo (99.81) wrote:

Sinch, what do you estimate GPL's fair value to be at current silver spot?

(Sorry I bet you get like 900 of these questions a day) 

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#5) On April 30, 2011 at 1:59 AM, awallejr (80.13) wrote:

I know I am in the minority on this site regarding my view on Bernanke, but seriously what do you want him to do?  Did you want him to jack up interest rates in order to throw this country back into recession?

It is no longer a question of what caused the mess this Country is going through.  We know. Greed. Reckless lending.  Glass-Steagall repeals. Etcetera etcetera.  The question is how to cure the problem.  Bernanke did what he thought was needed in order to avoid a total collapse of the Country's economy.  He inflated and threw as much liquidity as he thought was needed.  And guess what?  Corporate profits have been growing.  Corporate America has been healing.  The banks got a true bailout because, guess what, we simply couldn't let them fail despite our anger towards them.  I wish many went to jail, but too late now.  Many literally got away with highway robbery.

But this silliness, yes silliness, that the stock market's rise is an artificial rise due to some double secret manipulation by Bernanke is exactly that, silliness.  I am GLAD that companies are healing their balance sheets and growing profits.  And if Bernanke is the cause of that well kudos. 

I am tired of the Kudlow king dollar rant.  The people that want king dollar are the ones that have a ton of cash and want to earn lots of interest off it since that is a basically riskless investment, despite the fact that the average joe doesn't have so much cash as to profit thereby.  Sorry but it is nothing but a millionaire's rant.

The times they are a changing.  It is no longer a US centric economy, but a world economy.  That doesn't mean the US can't prosper.  It just means that other countries will prosper too.

And when things start to look bleak, guess where the money flows into?  Yes, the US dollar. Where else.  The Euro?  How?  We keep fearing the collapse of that "critical" economy of Greece. The Yuan?  All of a sudden an economy 1/8th the size of the US is in the driver's seat?  50 years from now, who knows.  But not now nor the foreseeable future.  When the average Chinese earns more than 50 cents an hour I might listen.  It is a country reliant on exporting its crap.  Yes crap.  Stuff that is cheaply made.

The dollar isn't going away anytime soon.

 

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#6) On April 30, 2011 at 7:00 AM, dbjella (< 20) wrote:

The dollar isn't going away anytime soon.

Nope, there is just more and more of them to bid up the stuff we really do need.  

To me, the solution of strong money is going to be really bad; really bad in the short term, but then we hit bottom and from there we can move forward and grow.  In this current situation, we are stuck with very little wage growth with high unemployment and rising prices :( 

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#7) On April 30, 2011 at 9:15 AM, portefeuille (99.78) wrote:

USDDEM.



enlarge

(from here)

 

Using 1.95583 DMark as a "proxy for the euro prior to its introduction" (1.95583 DEM were converted to 1 EUR when the euro was introduced) you get

1 USD = 1.372 DEM -> 1 "EUR" := 1.95583 DEM  * 1 USD / 1.372 DEM ≈ 1.4255 USD and

1 USD = 3.363 DEM -> 1 "EUR" := 1.95583 DEM  * 1 USD / 3.363 DEM ≈ 0.5816 USD.

So the "EUR" went from a relative low at around 0.58 USD on February 28, 1985 to a relative high at around 1.43 USD on March 31, 1995, to a relative low at around 0.82 USD on October 26, 2000, to a relative high at around 1.60 USD on July 15 2008, to a relative low at around 1.19 USD on June 7, 2010, to a relative high at around 1.49 USD on April 28, 2011 (if the chart above is reliable ...).

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#8) On April 30, 2011 at 10:27 AM, MoneyWorksforMe (< 20) wrote:

Sinch,

You may want to keep an eye on Sandstorm gold. It has been remaining strong, in a persistent uptrend, while many of the leveraged gold plays have been locked into a range-bound pattern. It looks poised to have a good run soon... 

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#9) On April 30, 2011 at 10:27 AM, MoneyWorksforMe (< 20) wrote:

Sinch,

You may want to keep an eye on Sandstorm gold. It has been remaining strong, in a persistent uptrend, while many of the leveraged gold plays have been locked into a range-bound pattern. It looks poised to have a good run soon... 

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#10) On April 30, 2011 at 12:15 PM, OneLegged (< 20) wrote:

awall, I would argue that The Bernank didn't prevent a collapse he merely postponed the date and worsened the eventual outcome.  This "kicking the can" method, ultimately (mathematically), cannot work.  Unless something changes drastically and the debt is actually purged from the system rather than papered over by fantastic accounting tricks and borrowing 40+ cents of each dollar that the government spends.   I don't see that there is any other possible outcome than a rather severe contraction of this whole ball of wax.  One cannot spend more than one take in indefinitely.  For each dollar of pull-back that occurs when QEII ends if QEIII is not begun there will be an equal dollar of loss to the GDP.  As has been oft repeated:  "Who will buy Treasuries when the Fed doesn't?"

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#11) On April 30, 2011 at 1:38 PM, awallejr (80.13) wrote:

Been hearing that for years now yet Corporate America has been improving earnings.  In 2009 people were complaining how companies profits were based not off of improving revenue but on cutting costs, hence it being nothing but a jobless recovery.  Fast forward to today and companies have been improving their revenues now and continuing to improve profits.  Jobs have been slowly returning, but still returning.

But it is going to take YEARS.  When Bernanke said the FED was going to keep interest rates low for an EXTENDED PERIOD OF TIME, he meant exactly that.  Because it is needed until we get through the housing crisis.  And unlike that dufus Cramer who arrogantly called the housing bottom at June of last year, we still have several years to go.

Seriously what other realistic option could have been done to backstop what was loooking like a massive worldwide financial collapse?  I say realistic because I really don't want whereaminow coming in and telling us to go libertarian or Peter Schiff groupies saying just let the whole system collapse and let nature take its course.

Right now inflation is still tame.  You want ugly have lived through the late 1970s-early 1980s where you had double digit inflation double digit unemployment and double digit interest rates.  And Bernanke is right about separating out energy/food because their prices do fluctuate over the course of a year.  This is always a good time to invest in energy plays.  Read my blogs this time last year and 2009 where I always tell people to play it.  Oil will drop below $100 this year. 

And if you really want to help lower oil and commodity speculation which has driven up prices, get rid of the damn ETFs, especially the 2x 3x ones.

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#12) On April 30, 2011 at 2:21 PM, Valyooo (99.81) wrote:

awall normally i agree with you but not this time.  government (specifically the fed) caused the financial disaster...so u wont the government to still keep control?

Thats like curing a caffeine adiction with heroin.  Sure it will calm you down for a little while....but then youre addicted to heroin.

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#13) On April 30, 2011 at 2:52 PM, rd80 (99.11) wrote:

Both Bernanke and Geithner made public statements supporting a strong dollar in the past week.

Unfortunately, no one from the press thought to ask an important question.  WHICH dollar?

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#14) On April 30, 2011 at 4:27 PM, OneLegged (< 20) wrote:

The consumer is 2/3 of the economy.  Enough jobs aren't even being created to keep up with domestic population growth.  Don't forget we are going into year 4 of this debacle.  This alone is an almost impossible hurdle to overcome.  Despite trillions of $ in stimulus if you back out borrowing from the equation we have a negative GDP.  Its just not nice anywhere you look other than the exchanges. 

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#15) On April 30, 2011 at 5:04 PM, kdakota630 (31.51) wrote:

rd80

WHICH dollar?

LOL!  Touché.

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#16) On April 30, 2011 at 6:45 PM, awallejr (80.13) wrote:

Except Valyooo The Fed didn't cause the financial crisis, although Greenspan did add to it (and it was Bernanke who actually burst the bubble with his constant raising of interest rates).  The seeds were sown when Congress repealed Glass-Steagall back in 1999 and let Wall Street get into the mortgage business.  And whenever you give Wall Street something new to play with greed and recklessness inevitably run amok.

There was a real chance of total financial collapse in fall '08-Spring '09.  Bear Stearns, poof.  Lehman Brothers, poof.  Merrill Lynch, poof (well as a stand alone company).  Citibank from $54 to 97 cents.  BAC basically the same.  GE and GS with hats in hand asking Buffett for loans.

And the carnage finally stopped when the Treasury and the Fed said they were not going to take over all the banks.  And Bernanke committed himself to do whatever it took to keep this country from heading into another Depression.  And right now he has accomplished that. 

I am open to discuss realistic alternative solutions.

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#17) On April 30, 2011 at 9:53 PM, golfer121501 (< 20) wrote:

awallejr,

 There was a real chance of total financial collapse in fall '08-Spring '09.

Yes, this is true, but by delaying (NOT avoiding) the collapse in 2008, it will be all the more terrible when it does finally come crashing down.  To imply that it hasnt happened yet, so it never will is foolish.  Plenty of people were saying this in early 2008.  How right were they?

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#18) On May 01, 2011 at 12:34 AM, awallejr (80.13) wrote:

No saying it hasn't happened yet, is saying it hasn't happened yet.  You assume it is a delay.  Nothing more.  That is simply mere assumption.  Time will tell, but so far so good.

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#19) On May 01, 2011 at 11:30 AM, OneLegged (< 20) wrote:

Do you think that if Bernanke hadn't "burst the bubble" as you said above that the economy would still be humming along?  No, the problem was then and still is today:  Too much debt in the system. 

 Its not mere assumption that a downturn has been delayed.  Mathematically, under the current set of conditions, it is a certainty.  No one, not even a government, can continue to spend more than they take in for an idefinite period.

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#20) On May 01, 2011 at 12:29 PM, awallejr (80.13) wrote:

What are you talking about, we had a near total collapse.  If nothing was done to deal with it we would be enduring a severe Depresssion right now.  Bernanke's actions were to re-inflate the system, purposefully helping the banks to earn their way out of trouble.  Why do you think GS wanted to be treated as a bank, so they can get their greedy hands on all that free money.

The price of his actions is inevitable inflation.  The question is how bad will it be and will that force tighter fiscal policy to pull us into a downturn or another recession.  Who knows.  Time will tell.  So far inflation is comparatively tame.

And I am not talking about the Federal Government.  Fed and local government's must and are trying to address their debt issues.  Their pullback is the second hit to the economy which Bernanke is trying to steer through by getting private industry to grow enough to absorb that second hit. 

Personally I hope it succeeds.  My concern is that because of the tight lending guidelines by commerical banks many people  lack the ability to finance new ventures.  And generally new jobs tend to be created more by the small cap businesses. 

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#21) On May 01, 2011 at 2:31 PM, OneLegged (< 20) wrote:

All of the Fed's actions to this point have been attempts to ramp up borrowing to get things headed in the "right" direction.  Mathematically these policies can't work.  

 What evidence is there that the Fed is trying to address the issue of debt?

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#22) On May 01, 2011 at 2:59 PM, awallejr (80.13) wrote:

All of the Fed's actions to this point have been attempts to ramp up borrowing to get things headed in the "right" direction

I disagree.  I would be repeating myself now.

And when I said "Fed and local governments"  I was referring to Federal government, not The FED.  I have to be more careful about abbreviating since it can cause confusion.

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#23) On May 01, 2011 at 8:11 PM, OneLegged (< 20) wrote:

Sorry, I should have caught that about the FED/Fed.

Without reducing unemployment (2/3 of the economy is consumer demand) and flushing the bad debt out of the sytem the only way to show a "recovery" is to blow a new bubble to hide the aftermath of the previous one.  That's where QEII and the Fed window giving 0.00% to 0.25% capital comes in.  Even with this massive liquidity injected into the system we had GDP growth of 1.8% in Q1.

 We will see what comes out in the wash.  What Bernanke is trying here now didn't work for Japan 20-odd years ago. 

Great discussion awall.  I will keep your points in mind as this mess evolves.  Have a good one.

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#24) On May 02, 2011 at 1:23 PM, ikkyu2 (99.51) wrote:

The USD is the only currency backed by the US Armed Forces.  In the end, it's not going to lose its status as the world's reserve currency.

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#25) On May 02, 2011 at 4:09 PM, Horiemon (< 20) wrote:

Ouch for silver stocks

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#26) On May 02, 2011 at 4:38 PM, silverminer (37.03) wrote:

Horiemon

I was like a kid in the candy store today. It was a thing of beauty, with plenty of dry powder remaining for any further near-term consolidation and/or dislocations of miners vis-a-vis the metal price.

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#27) On May 02, 2011 at 7:28 PM, reinman60 (< 20) wrote:

Eric Sprott knows value when he sees it.  He sold $35 million of PSLV at a hefty premium, and reinvested the entire proceeds in bullion and mining stocks.

http://www.theglobeandmail.com/globe-investor/investment-ideas/streetwise/eric-sprott-defends-selling-his-silver-units/article2007195/

 

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#28) On May 02, 2011 at 7:33 PM, reinman60 (< 20) wrote:

Come to think of it,you'd have to be Loonie not to buy more Canadian siver mining shares at these prices.

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#29) On May 02, 2011 at 8:27 PM, Valyooo (99.81) wrote:

I picked up SVM at $12.10, SLW at $38, and GPL at $3.35....oh man  today was great.

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#30) On May 03, 2011 at 12:04 PM, adprofessor (97.22) wrote:

Valyooo

Given the early drops today, are you seeing the further dislocation that silverminer is waiting for (#26) or are you jumping in further?

I love following all of the posts/comments here among you mining guys! Thanks.

a mining lurker.... :)

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#31) On May 03, 2011 at 4:35 PM, rfaramir (30.46) wrote:

The answer to "Who will buy Treasuries when the Fed doesn't? Someone has to bankroll the dauntingly massive gap between federal expenditures and revenue still emerging from Washington, and the bond market has relied upon QEII to fund 70% of U.S. debt issuance since its inception."

is for the Treasury to STOP issuing new Treasuries. I.e., do NOT vote to raise the debt ceiling. Make Congress make the tough choices necessary to stop spending above revenues coming in. Then with the Treasury NOT issuing new Treasuries (only re-issuing maturing ones), buyers won't fear buying them, so buyers will reappear, so the Fed won't have to monetize them anymore.

I don't believe this will happen until later in this mess which may end up being the death of the US dollar, so I'm not letting up on my purchases of silver, gold, and miners, and certainly not selling them. I call on both Democrats and Republicans to not raise the debt ceiling (as did Sarah Palin yesterday); I am fairly confident they are still deaf. If I get my wish, I will not be (very) sad, as gold and silver will never go to zero, and my salary will then start going much further, instead of decreasing in value every day. The Fed is monetizing about $4Billion per day (planning on $23 Billion this week alone), which is killing our purchasing power. Make it stop!

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#32) On May 03, 2011 at 6:04 PM, reinman60 (< 20) wrote:

Eric Sprott reiterates his support for silver:

 

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/5/3_Eric_Sprott.html

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