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Dollar Purchasing Power Under Pressure



April 20, 2011 – Comments (1)

Board: Macro Economics

Author: washcomp

Well the US dollar index hit a 52 week low last night and now stands at 74.36. This took out the low of December 2009 as well, but still hasn't gotten to the all time low of 70 that it hit in early 2008. IT's decline today was .90% which is a big deal. The US equity market is likely to celebrate and resource intensive stocks should outperform.

Oil is back above $109 a barrel, gold is above $1,500 and silver is continuing to outperform gold.

I won't bore you with individual currencies, other than to say that just about all have risen with the CHF, AUD and CAD near their highs for the year.

What does this mean to the investor? Well, most of us evaluate our holdings in terms of USD, but the same could be true of any currency base:

As a currency decreases in global purchasing power, especially when cash does not compensate with appropriate interest returns, while the absolute sum remains the same, your assets are decreasing. As the US dollar drops, for those using that currency as a benchmark, it is imperative that other investments take up the slack. These can be stocks, commodities, gold/silver, foreign currencies or whatever, but it is clear that one must be diversified out of pure dollar holdings in order to compensate for their loss of value. We are being told that inflation is "in check". From the way that it is calculated, that may be the case. OTOH, from the standpoint of our personal expenses, prices are rising and without replacing that loss of purchasing power, our potential standard of living is being impacted.

Some of us prefer to ride single horses in the race, but my preference is for a broader spectrum of holdings which provide inertia against sudden change. Regardless of the strategy employed, and realizing that things may change direction quickly (and therefore maintaining a large cash position is a prudent policy), market participation is mandatory as long as the US dollar keeps sinking. That said, for those who use different currency bases, the effects of the dollar decreasing also affect the valuation of US equities and bonds that you may be holding. While there may be a buying opportunity down the road, it is important to understand your exposure and risks as the increase in US equity prices has to be adjusted to the way your particular currency is behaving compared to the dollar.

In the absence of interest rate increases, which I don't expect in earnest (there may be a small one at the beginning of 2012 to show the Fed is serious) until after the 2012 presidential election, and in the absence of negative news from the Eurozone (or an economic fault line developing in China), I expect the US dollar to continue to be pressured.

While the US population feels vindicated by the recent agreement to cut $39B from the federal budget, it can't be lost on the international bond holders that the CBO reported the actual savings this year will be about $380M. They will also listen for the timing of the cuts that Congress will discuss and likely note that the majority of them won't take place until well after the next election. The Fed will probably not continue an overt QE3, but will sub-rosa continue to support the bond market to the best of their ability. That said, in the absence of "black swan" type news, the bond rally has about run its course.

While I may mention how I'm personally addressing my assessment of the above, I am not an investment advisor and would hate to be responsible for anyone following me into an error of judgment. I am, however asking each of you to think about what I have been chronicling in my various posts regarding currencies as a signal of what is taking place and re-look at your asset allocations. There are numerous ways to skin this cat and they are not mutually exclusive. Make sure you know where the life vests are located just in case the weather gets choppier than you've prepared for.

We take the US dollar for granted. It has been a stable currency for generations in most of our eyes, even as we discuss it's valuation dropping precipitously due to inflation over the last generation or two. I am not saying the currency itself is in danger, but am merely mentioning that the basket of goods you are able to purchase with it is getting smaller over time.


1 Comments – Post Your Own

#1) On April 22, 2011 at 12:38 AM, Lordrobot (91.42) wrote:

High debt leads to high debt and higher interest rates; It does not lead to a reduced dollar. The only mechanism that dilutes dollars is when the M1 money supply increases. That is presently not the case. In fact the M2 is growing faster than M1 indicating more savings and less debt for citizens. 

The only inflators I see are the speculative bubbles in commodities. Oil demand is down yet prices up. This is presumably a function of the dollar but Oil has vastly risen more than the dollar has declined on the futures markets. THERE ARE NO SHORTAGES OF SUPPLY! Oil is just a speculative bubble and it will break hard; it always does.


As for gold and silver, they are totally irrelevant. They have no value but intrinsic value so nobody has any clue what they are worth. They are the worst investment class and frequented by hairdressers and cab drivers just before it plunges. Just like the housing bubble, the hairdressers and cab drivers were flipping homes for riches. But today they are still cutting hair and driving cabs.  


What you have written here Jeff is mere gossip. And its flatly wrong. While you may be paying more for bubble commodities, you are paying much less for Asian made electronics. And the chief cause of inflation is wage price inflation which is deflationary.  


Further, the value of the dollar is established just like oil and the bubble commodities in the market place. So the plunge of the dollar is a matter of perception but that perception has been good for exports. And in the bubble commodity realm, inports are higher but demand drops. So the system is dynamic.  


Jeff, some of us have lived through other recessions and listend to the drone of teh loss of dollar value, the hype of gold and all the rest of it. The system known as capitalism corrects itself.  Today for exmaple I bought dollars, why? Becaues the ebb and flow of investment capital and value is dynamic. Nothing goes down forever or up forever. Unless of course you feed into the gold bugs idiocy and the housing boom idiocy a few years ago. Remember the real estate talking heads giddy with 25% annual appreciation saying houses never go down in price? Whoops they sure do.


Gold and silver and everything under the sun that can be bought sold or traded is marketplace dependent.  I for one will never buy gold. I think it has no value. I think it is no more valueable than tulips, although you can eat some tulips.  So you diversify and feed into your end of the world end of the dollar hype. Its not going to happen. You can't tell the difference between hedge fund hype and reality. So here is some reality. 


What Bernanke has done is quite brilliant. Imagine a poker gave with five players. Three are running out of money and two are winning. China and Australia are winning, the US and Europe and South Africa are losing.


What Bernanke has done is he spoke to the losers and said he will backstop their debt so feel free to borow some money from the winners. In doing so the money on the table never increases yet the players can continue to play. Thus the M1 money supply has not been grown and the dollar has not suffered from the printing presses which people like you continue to broadcast as if it is fact. The reality is much different than your story. But what I can tell you is that Gold and its red headed stepchild silver are bubbles with remarkably stupid investors along with guys like Soros. There will be a butchering. The velosity of the drop will be faster than the rise. Further, the dollar will rise too. 


Right now the mechanism that Bernanke uses to encourage bank lending is to BID DOWN the treasury bonds to make them less attractive to big banks. Thus banks should increase lending and make more money. Recent Citibank earnings demonstrate precisely this trend and increase in loans.  Bernanke has done a nearly flawless job balancing monetary accomodation and straight talk with horrible political policy from Obama. Those Obama policies have now met the tea party and there is going to be some change.


Bernanke however remains steady, no surprises as was the case in the Volker years. Yet investors, mostly young stupid investors and flipper day traders, complain about Bernanke as a money printer etc. Every time they open their mouths, Krap falls out. Economics is a discipline with one foot in mathematics and the other in psychology.


Whether you like it or not economic cycles are about the sinusoids of boom and bust of supply and demand and also soundings of traders dickering for a better bargain. 


As I have said, I won't own gold. It has no worth to me. To sell gold to someone, you will have to go find a hairdresser or cab driver.  I can't recommend your post because I believe your reasoing is erroneous and at best a collection of sound bytes by speculators hawking dead fish and has nothing to do whatsoever with the study of economic systems.  

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