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Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog

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September 17, 2009 – Comments (13)

I first wrote this blog post in My original blog on June 17, 2009. Here is the original post (Thoughts on the US Dollar, Analysis of the USDX Long Term, Follow up on the Gold Blog -- If you are a CAPS user, please rec the original blog post. It is another important and comprehensive post and needs as much exposure as possible --). I have decided to update the post right now for a few reasons:

1) *Everybody* is bearish on the US Dollar right now. The latest investor sentiment poll has something like 2-3% Dollar bulls right now. These are the same bearish conditions that were present in the stock market on March 9, and nearly the same bullish conditions that are present in the stock market right now. In short, we are at an extreme sentiment condition, which means things are ripe for a turnaround.

Now, there will be a lot of noise in the coming months when the dollar starts rallying and the stock market starts falling the dollar had put in a "major" bottom and proof that deflation will be the long term outcome. I don't think that is the case (by a long shot) and I think the qualifier "major" regarding the bottom for the dollar is up for interpretation. We will get a bottom that lasts 4-6 months, but I think the dollar will be headed down again.

... But wait? The dollar will be headed down and the market will be headed down. Isn't the weak dollar helping to fuel the stock market rally? Don't they need to move in opposite directions?

Original Post: http://marketthoughtsandanalysis.blogspot.com/2009/09/thoughts-on-us-dollar-analysis-of-usdx.html

.... Continued in Comments Section ....

13 Comments – Post Your Own

#1) On September 17, 2009 at 7:09 PM, binve (< 20) wrote:

2) **NO**. Please look at the following charts and read the following paragraphs





Short term is all noise. And the current dollar weakness is fueling the equity rally. Long term, equities will go down (due to poor fundamentals) and the dollar will go down (due to confidence crisis) together (such as 2007-2008 and numerous other occasions)

By and large, there is **far more** positive correlation between the Dollar and Equities than there is inverse correlation. They both go up and down together as evidenced in the chart above.

However, many others including myself, have observed that the "weak dollar" is currently fueling the the equity rally right now. So why the discrepancy?

Because you need to realize that we are still in the aftermath of the Greatest Deleveraging Event in History (2008)!

During the meltdown of 2008, everything was sold / redeemed for the relative "safety" (used exceptionally loosely) of Treasuries: shares in hedge funds, commodities, stocks, etc. As such there was a massive dollar repatriation. The dollar didn't gain value because it was strong! It did because it was "in the way" (you have to buy dollars in order to buy treasuries, it is sort of a necessity that way).

In the ensuing months we have seen the Fed ream bondholders through ever more massive QE salvos, intentionally destroying the "value" of US Treasury debt and the US Dollar. Since that time, money has been moving back out of Treasuries (putting downward pressure on the dollar) and into more speculative endeavors (the stock market). You can see here that there is not a "if the Dollar goes down then Equities must go up" relationship here. Money was leaving treasuries and equities were oversold so they were bought. That's it. Another force at work is the fact that the weak dollar and the oversold nature of equities a few months ago made stocks attractive to relatively stronger foreign currency holders, who could "get more bang for their Euro" so to speak.

You can see that the current inverse relationship between the Dollar and Equities is a product of a very particular setup and is not a given. In fact, the relative valuation of all of these asset classes (Treasuries, Dollar, Foreign Currencies, and US Equities) has shifted a lot the last few months. Anybody expecting this "status-quo" relationship to persist much farther into the future is going to be rudely surprised.

So what about the future? Are the deflationists right? Does all the world's money rush back into Treasuries and the US Dollar during the next crisis? Any claim of a "strong dollar" is bunk. The Fed has made it abundantly clear that QE is not going anywhere and they are getting more aggressive with Treasury purchases, not less. So anybody who thinks that US Treasury debt will still maintain the iron-clad safe-haven status in the future.... well, I have a Bridge in Brooklyn that I think you would be very interested in!!!

3) Regarding the short term bottom in the Dollar that should last for a couple of months: It is *extremely* important to understand the long term trends of the US Dollar (down) and the fact that all fiat currencies eventually trend toward their intrinsic value (zero). Look at the history of all fiat currencies. We even have dead United States currencies, since the US has been in existence! Anybody who thinks the Fed will not try to inflate their way out of this mess, or thinks there will not be political pressure to inflate the money supply or increase the debt ceiling on the US National Debt, really does not understand history or the willingness of politicians to dismiss sound economic policies in order to "look like they are doing something".

So this post is a repost/update to the original post. It has all updated charts with new annotations and revised counts (where necessary). Also I was playing around with a few numbering/coloring schemes when I wrote the original post, and all the charts in this new post are compliant with my EWP Numbering Scheme

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The analysis of the US Dollar is one that I wanted to tackle in my mammoth gold blog: Market Thoughts and Analysis: The Gold Blog. Gold...... / Original Post --- The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) --- UPDATED POST, Sep 11, 09. However, the last post was really big and this topic is big enough to warrant its own post.

But First, A Discussion with the Deflationists that I Debate With

Hey guys :). Let me say that out of the whole inflation / deflation debate, the only thing I know is that I am not 100% right. I guarantee it. There is no way I am calling the trends and the timing completely accurately. Moreover, I do realize that there are both inflationary and deflationary pressures acting in the economy all the time. I have read Mauldin, Prechter, Mish, Roubini, and Krugman. I am not going into this inflationary stance blindly. I can see the very salient points that are being from the deflation camp.

It is just that when I read all of the evidence, on both sides, I think the inflationary argument makes the most sense for the long term. (IMO).

That does not mean that I am discounting the deflation argument!. Like I said, some of the points being made are very valid. However, I think many deflationists (Mauldin and Prechter definitely do not, but Krugman does ... a lot) combine monetary deflation and price deflation and lump it into one single category (a huge no-no if you are trying to understand the true cause and effects). But even the ones that do not confuse monetary policy and price supply/demand effects, some are improperly accounting for monetary assets, what is and is not one, and using improper monetary supply indicators to look at the problem.

Now those were some bold words. But like I said. This is just my opinion. And opinions are like a**holes, everybody has one :). So I again acknowledge that I am not getting this 100% right, and look forward to good and civil debates about this issue. This issues has been debated a lot in the past on Caps (and I have been taking part in those for over a year), and will continue to do so in the future.

It is that important.

On to the Analysis

There are so many issues to consider that are all interrelated when talking about the economy / inflation-deflation / the US Dollar / US Treasury / Federal Reserve. And there is no way I will be able to do it justice in one post. But here is a list of some of the issues.

- Money and Monetary Assets
- Money Supply
- Monetary Inflation / Deflation
- Price Inflation / Deflation (NOT the same thing!)
- Velocity of Money
- The US Treasury
- The Federal Reserve
- Policy Decisions and speeches made by Chairman Bernanke
- US Treasury Bonds
- Treasury and Market Rates (Bond Yields)
- Quantitative Easing
- Debt Held by Foreign Governments
- Foreign Currencies
- Intentional Currency Devaluation and Currency Devaluation Wars
- .... !! (lots more)

Wow, that is a jam-packed list of some heaving-hitting topics. There is no way I will be able to cover all of these in one blog post. Here is a recommend reading list (highly recommended), and I will try to hit a few highlights and engage in a bit of discussion before I put up some charts at the end.

- Steve Saville: Market Value, Money and Credit - Good layman's description of TMS and its importance
- Quantitative Easing Explained  - Just a good funny article on QE
- Steve Saville: Why We are Gold Bulls - A good inflationary summary
- Steve Saville: Money Confusion and Inflation/Deflation - Good discussion as to what constitutes money and why some monetary discussions are invalid
- Zeal: Big Inflation Coming 2 - Good discussion of inflation and deflation.
- Mises: TMS - Good Definition of True Money Supply (TMS).
- Saville: Inflations New Upward Trend - Misuse of the Velocity of Money concept
- John Mauldin: The Endgame - Very good deflation arguments.

Okay, I will will trying to hit the highlight and put my argument in the smallest nutshell I can manage.

Why I Think We Currently have Monetary Inflation and will get Price Inflation both Long Term and in the Relative Short Term..

An argument that I hear from a lot of deflationists is the "Pushing on the String" argument, which boils down to the fact that the Fed can print 700 septillion dollars if it wants to, but it can't make us borrow them. Another way to think about this would be: What if Bernanke literally printed all that money and put it all in one big pile stacked up next to his desk in his office and didn't hand it out to anybody, would that be inflationary.

The answer to both situations is: no, it would not be inflationary .... ahhh, but if it were only that simple.

I going to let you in on secret that will make this whole argument clearer and put things into perspective. Ready?.

The US Government is broke.

To be clear, the term is technically insolvent. We are running massively enormous annual budget deficits, on top of which we have more that 10 trillion in Federal Debt, and if you add in unfunded entitlements the problem is even worse.

On top of that the economy is in the toilet, Tax revenues are down and government is growing, not shrinking.

So what is the plan: Quantitative Easing.

And the way this will work out is a lot more insidious (and I might even venture sinister) that most of us think about this issue on first pass. From my last blog post:

"...What all of these posts talk about and discuss is what I believe (again, this is all simply my opinion, nobody has a crystal ball on this one) to be the biggest threat to our “money”, and that is inflation.

I believe that every signal that the Fed has given, both in rhetoric and action, is that it will try to spur the economy / avoid economic collapse by monetizing the debt of the Federal Government and all the Financials that made bad mortgage bets. The newest euphemism for this activity is Quantitative Easing. And this will be an unprecedented transfer of private debt to public debt (largest in the history of mankind). Bond rates are already beginning to signal the inflationary hazard of this policy DESPITE the fact the one of the main goals of QE was to put a floor under bond prices (put a cap on bond rates)..."
.

So here is the QE plan, Part A: The government needs to service the debt (pay the interest owed) on Treasury bond, otherwise it will lose its credit rating (.... uhhhh.... yeah) and then truly be bankrupt. In order to do this, the Fed is buying more Treasury bonds from, yep, the Treasury so that it can a) service the debt on the outstanding treasuries and b) allow the government to continue to run budget deficits. Basically the Fed is issuing new money (out of thin air) to buy new debt to service old debt and to allow the government to run further into debt. And no, you did not read that incorrectly.

QE plan, Part B: Monetary Inflation. Remember in Part A I talked about creating money out of thin air?.

".Now I said the US Dollar is backed only by debt. Remember above that the US Dollar (or more specifically the US money supply) derives it value from the fact that it is a claim on the future tax of US citizens. This is a finite amount (the maximum of course being 100% tax on all citizens). But the point to realize that this is conceptually finite. On the other hand, the Federal Reserve has no limit as to the amount of fiat dollars it can produce.

Increasing divisions (more fiat dollars created out of thin-air) of a finite resource (the future taxes the US money supply is claiming against) make each division, both old and new, by definition less valuable.

This is the definition of monetary inflation.
."

Who does monetary inflation benefit the most? Debt holding nations. The old debt is denominated in the same amount of dollars. The size of the debt that needs to be serviced does not grow simply because the money supply grows. So the Treasury can service the old debt with newly devalued (or inflated) dollars, which we new have a lot more of.

QE plan, Part C (they nasty one with lots of unintended consequences): . This aspect of the plan is to buy back toxic assets off of Bank/Financial balance sheets. Like I said in part A, the plan is to keep long term bond rates low, to keep general market interest rates low, so that (hopefully) consumers can refinance (borrow) their way out of their current troubles and spur consumer spending .... Ta-da! ... (uh, okay). The what this ends up being is the largest transfer of private to public debt in the history of mankind, all in the name of more borrowing! *Moral hazard alert*

But lets not even talk about the moral hazards, (because I can't do anything about it), lets follow the money and see if we can guess some outcomes.

So, like I said at the beginning of this thing, a common deflation argument is "the Fed can't push on a string". And for consumer spending this is true, The Fed can buy up every single bank asset and monetize every public and private debts, and that does not mean that consumers will borrow.

But here's the kicker, they no longer need to.

The Fed clearing the balance sheets of Financials AND growing the money supply (which banks access) to *unprecedented* (quite literally) levels, has created a new avenue for this monetary potential energy to leak out of the reactor core of the financial system.

Banks and Financials are not stupid. They may be unscrupulous, they may bend the rules, some may even be crooked, but one thing they are not is stupid.

They see the writing on the wall. The Fed is monetizing debt left and right, and bonds are FAILING! We are in a bond bubble. If you don't think so .... well, there is very little point to this whole conversation then. I believe it is self evident that we have a long term Treasury bubble that has been building for more than 50 years (to clarify, the rising value of Treasuries was not bad when we had legitimate GDP to back it up, but the rise the last 15 years has simply been because the US Dollar is a reserve currency, and NOT due to fundamental economic growth). Rates are rising from a panic low (panic high in bond prices) and now they have only one way to go: up.

To anybody who watches these things, the message is clear: risk is rising.

Monetary Inflation is already baked in based on the borrowing spree of the Treasury. That train is nearly unstoppable now, the new debt - service old debt - run budget deficit triangle is fully self-perpetuating now. Only with a huge slash in the size of government and tightening of all spending will stop that cycle now. But raise your hand if you think that is happening.

To outperform the debilitating effects of monetary inflation, based on the signals from the bond market, financials will find ways to outperform for themselves, their shareholders and bondholders. And that means taking risk, that means speculation, and I believe that ultimately means real assets. I think this newly freed up credit will find its way into hedge funds and will ultimately find its way into the main beneficiary of monetary inflation. Real assets, because they cannot be inflated. I think commodities will be by far the biggest beneficiaries.

Everything that the Fed is doing guarantees, promotes even, the taking of risk. And all of this risk taking and speculation into real assets leads to, yep, price inflation.

As always this is my take, my opinion, and my $0.02.    

What this means for the US Dollar

Honestly? I think the US Dollar is going to tank.

I think Treasury bond rates are going to rise, and they are going to rise substantially. As rates rise because the Fed is unable to keep a floor under bond prices (because I QE is going to fail big time at "providing confidence and stability to the bond market"), Foreign debt holders are going to dump bonds. Foreign governments are not stupid too. The see a rising Treasury Rate on the Worlds Reserve Currency as a sign of increased risk, and they too will put their money into real assets. So when the Foreign governments dump bonds, the Fed has to buy EVEN MORE to try to put a floor under bond prices. This is a positive feedback loop. Both the Input is positive and the Gain is positive, and the on/off switch is stuck in the ON position.

Here is another thought that I stand behind:

"An argument that I have heard going around is that the US will be in a relatively stronger position as the currency devaluation wars goes down. The US is not the only economy in trouble. Far from it in fact. Nearly all Central Banks will be engage in a currency devaluation war. The main purpose of which is to make the debt servicing burden easier for all of the interest paid on Treasuries held by foreign governments. Whether the US comes out on “top” in this “strongest among the weak” battle (which I remain skeptical of, considering the size of the US debt the size of the ongoing QE programs) is irrelevant from my point of view.

Because having a currency that is “stronger” than your competitors while you are devaluing your own, still puts your currency in a weaker position relative to a currency that is not being devalued.

And what currency would that be? Gold.

This is the ultimate reason why I believe that gold is one of the few legitimate bull markets. Because I believe the US and most other Central Banks will try to inflate their way out of this mess. The US Dollar will undergo a huge devaluation in both real and nominal terms. And gold utility and true value comes during times of economic crisis (which I believe we will have a lot more of) and during times of weak currency confidence."

I think all of this risk and speculation not only hurts the Dollar, but is a huge confidence blow to the strength of the worlds reserve currency. I think the US Dollar Index or most USD Forex pairs will trend down over the next several years and gold (especially gold) and commodities will trend up.

Charts

Sorry, I am running out of steam again. Here are charts on the True Money Supply (TMS). Notice not only is it at is highest level ever, but recently the growth is accelerating!! Also here are my counts and trendline, S/R charts for the US Dollar (and UUP for a recent intraday proxy)

The trend is down. I don't like it. I HATE IT in fact. But I do recognize that things are they way they are, and not what I want them to be.

So with all of this, I am sharing my thoughts. I am not trying to convince or to lecture. This is a post for the sake of discussion. I have been doing some serious thinking on this issue for a very long time, and I think I have a (hopefully) valuable perspective on it. Hopefully this adds value to your thinking (as GV would say) :)










Of course, as always, all of this is just my $0.02 .... :)


Assuming You Believe Any of My Analysis Above, What Makes Sense as a Long Term Investment?

Note my specific terminology "long term investment". Not trades, not something to be held for 3 months or 6 months, but what makes sense for the long term (5-15 years). For myself (I am not recommending anything to anyone else, just sharing my own thoughts on how I see the situation), the answer is primarily gold with commodities as a close second. Real Assets makes the most sense. Given the economics weakness, and the inflationary Quantitative Easing policies designed to combat / offset the weakness, real assets make the best protection. Not cash, and absolutely not Treasuries.

Will gold or oil go down in the short term? Maybe, perhaps even likely. How much? Don't know. How long might they correct? Don't know. And moreover, I do not care.

I have no interest in holding large amounts of "fake money" (US Dollars) to try to time the best purchase of "real money" (Gold). Others may play that game or even advocate it. I will not. I believe a currency crisis in the US Dollar is highly probable, if not inevitable. And maybe there will be warning signs, or maybe there won't be. This is a Black Swan event in the making, which makes the timing by definition unpredictable.

So in my investment account: I am in gold now, and I add on pullbacks.

Instead of me talking about gold here, I have a whole post very specifically focused on it, and I would highly suggest that you read it: The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure) Sept 11, 09

Conclusion

Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.

The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ultimately be comfortable with their own investing decisions.

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#2) On September 17, 2009 at 10:16 PM, Tastylunch (29.40) wrote:

Binve see this shoutout you got?

" As usual, and I'll just pull a page right out of the binve files here, this does not constitute investing advice and is merely my opinion on what "could" come to be."

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=261503&t=01002756778892789413

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#3) On September 17, 2009 at 10:44 PM, binve (< 20) wrote:

LOL! That's great :) Thanks for the heads up Tasty :)

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#4) On September 17, 2009 at 11:59 PM, biotechmgr (34.09) wrote:

Here are my ruminations on the dollar, inflation, and what the gov will try to do. Like you, I would not sit here and claim infallible knowledge on the topic.

Many people fear the decline and death of the dollar. Socionomically, and contrarian-wise, this indicates to me that it may somehow not come true.

 On the other hand, we all know the Fed and gov will take any measures to prevent deflation. They will create money (really, credit) when needed.

Then I thought, what could stop the Fed's unlimited monetization of debt? When demand decreases. Or when confidence in the little shell game they play declines which also lessens demand. So a scenario could look like this: Fed monetizes more debt to a point where investors (say China) finally says enough: your debt is too large and is becoming more risky. Fewer Treasuries are sold, and interest rates begin to climb. More bonds are sold but interest rates continue to climb. The US realizes it cannot service the debt at a certain point, and is forced to stop selling so many bonds to lower rates. This seems to be the market force which will finally dictate how much debt the US can get away with. So the Fed cannot hyperinflate the dollar, if this case will apply.

The strength of the dollar is always relative. To what? Other currencies. For the dollar to die, it would have to the one of the weakest on the planet. Other currencies would have to be in higher demand relative to it. Which countries could be considered to be in relative better shape in a depression than the US. I don't know the answer. I do feel the US will be in a relative better position to much of the world and that the dollar will not simply crash. But confidence could be a problem and it could happen.

Another possible dollar death scenario. After a depression, the "game" always changes. Will China become the next superpower and US be supplanted? This could lead to a long decline for the dollar as other currencies and countries strengthen.

One scenario I have considered is for all currencies to lose confidence. Gold dips to the $600s as deflation takes hold. But in a wave 3 up for gold/metals/commodities, a hyperinflation follows the deflation as everyone realizes money is worth only about the paper it is printed on. Hard assets, land, and any other tangible assets become the next boom as people realize all the made up money, credit, and derivatives were just a game.

I do think the dollar / gold outcomes will surprise us, and I am sure not sure of the outcome.

What I do know is if gold goes to the 600s, I will convert any available liquid assets to 50% currencies/50% metals. I will also look for an opp to buy ag land on the cheap if possible. I'll be too scared to play markets at that point and just want to preserve assets.

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#5) On September 18, 2009 at 12:53 AM, binve (< 20) wrote:

biotechmgr, Thanks for the response!

Then I thought, what could stop the Fed's unlimited monetization of debt? When demand decreases. Or when confidence in the little shell game they play declines which also lessens demand. So a scenario could look like this: Fed monetizes more debt to a point where investors (say China) finally says enough: your debt is too large and is becoming more risky. Fewer Treasuries are sold, and interest rates begin to climb. More bonds are sold but interest rates continue to climb. The US realizes it cannot service the debt at a certain point, and is forced to stop selling so many bonds to lower rates. This seems to be the market force which will finally dictate how much debt the US can get away with. So the Fed cannot hyperinflate the dollar, if this case will apply.

This is by far the most nuanced and well-thought out deflationary argument to Quantiative Easing that I have ever heard. I am still in the opposite camp, however, and I will lay out a different scenario. But I really appreciate hearing this argument. I agree it is a very valid possibility! And it goes beyond the lame and invalid "the velocity of money (which is an erroneous/misused concept) is decreasing, therefore we are in a deflation" argument that I often hear from the deflationary camp. So this whole post was worth it to hear the opinion that you wrote. Thank you :)

So, to my scenario

The reason why the US Dollar can be devalued and the Fed and Treasury will monetize debt far longer and to bigger scales than most suspect is due to one simple fact: the US Dollar is still the world's reserve currency. Most assets / commodities are still priced in dollars, the US treasury market is still the biggest on the planet, despite initiatives that China is beginning to take to try to decouple from the US marketplace, its economy is still dependent on exports to America (and it is growing it M2 at a furious pace to keep the yuan fixed to the dollar). At some point in the future, China may stop buying US Treasury debt (however, it is important to understand why they buy it in the first place, which most people really do not catch: Steve Saville: Getting Some Things Straight Regarding China), but they must drastically alter their economy first. This unfortunate fact gives the Fed the leeway needed to continue it's fiscally abusive Quantitative Easing policies.

I think in this case, given the way these pieces are positioned, Congress will raise the National Debt ceiling, the Treasury will issue new bonds to cover the governments Operating Budget, and the Fed will create money of of thin air to buy these bonds (the Fed will soon become the largest buyer of T-Bonds, in several of the recent auctions more than 50% were bought by the Fed) and to monetize more private sector debt as more financial institutions fail (Option-ARM default wave is coming the next couple of years). And the rest of the world basically has to play ball because of the US Dollar reserve currency status and all the points I listed above.

Now, maybe in 5-10 years, real effort is made to come up with a new reserve currency (either SDR from the World bank, or something less flawed). Then that will make a big difference and all of these ideas will need to be revisted.

But for now, I think the US Government/Treasury/Fed has rigged the game (or at least has gamed the system the past few decades to be positioned to do this) has the intention and ability to monetize much of the public debt and is already monetizing a large portion of private debt with the intention of monetizing much more of it as the crises continues to unfold during P3 / the next few years

Just my take :)

This is an excellent discussion, thank you for the comment !!.

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#6) On September 18, 2009 at 7:42 AM, outoffocus (23.49) wrote:

This is an excellent post and great comments.  However there seems to one major element missing (or at least not given much mention) from the overall analysis: the American consumer.  American consumers are leveraged up to their eyeballs and increasingly unemployed.  In normal times inflation does not have that much of an adverse effect on the average consumer because their salaries increase with the (reported) inflation rate.  Currently the US economy is shrinking and theres little chance any of this excess liquidity will make it to the average consumer (in any meaningful way).  If we have too much inflation (especially in commodities), it will cripple whats left of the US economy because salaries will not be rising to counter the resulting commodity and asset inflation. In other words, I highly doubt that the Fed can just continually inflate without ultimately killing the American consumer.  If you want a preview of what that would look like, check summer 2008. 

Heck I even believe that all this talk of recovery (when really we are just in the eye of the storm) is dangerous for the overleveraged American consumer because it puts their guard down.  Currently Americans are paying down debt and saving, a behavoir that should be encouraged.   If Americans start believing everything is ok and go back to the same reckless behaviors that led to this crisis in the first place, then the US's fate as a fallen giant is sealed. 

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#7) On September 18, 2009 at 8:29 AM, russiangambit (29.40) wrote:

>  And the rest of the world basically has to play ball because of the US Dollar reserve currency status and all the points I listed above.

Binv, you are very mistaken when the rest of the world will simply play ball. All diplomatic relationships is quid pro quo. On international arena US cannot have its cake and it too . If it wants to devalue dollar, the other coutries will demand concessions from the US. Will they be politically acceptable? I doubt.

I am more in line with biotech's view of FED finally having to stop QE. I think if oil goes to $80 you will see the rambling starting. 

> Now, maybe in 5-10 years, real effort is made to come up with a new reserve currency (either SDR from the World bank, or something less flawed). Then that will make a big difference and all of these ideas will need to be revisted.

If US keeps devaluing dollar at the current rate I give it 2 years max.  We are already 2 years into this crisis. and 1 full year since the meltdown. I have no doubt that for the past year the rest of the world kept exploring their options.

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#8) On September 18, 2009 at 4:07 PM, binve (< 20) wrote:

outoffocus, Thanks! Those are great observations!. I have talked about consumer spending and consumptive based GDP in several other posts, but did not address it in this post.

I think in short the US consumer is going to get screwed. And I think the Fed knows this, I think the Treasury knows this, and I think the GAO, BLS, etc. all know this. I think the plan will be to squeeze consumers without letting them know, because I think the Fed *believes* it has no other choice (the choice they are not considering is to dissolve itself, since they believe they are part of the solution, not part of the problem). I think consumers for the next couple of years will be sacrificial lambs. I think the Fed and Government statistics offices will tell the consumer that the CPI is much lower that it really is (via the usual games, hedonics, and other BS), and it will tell the public that GDP is growing (the same way it "grew" the last 2 quarters, from government spending. Productive growth was way down, and consumptive growth was flat. Government is the biggest growth sector in the economy. But since it is not productive, it constitutes fake GDP, only window dressing).

All the while it will be monetizing debt because it thinks that is the only path left.

Eventually this game breaks down completely. And so a scenario like the one biotechmgr outlines could come to pass. But not without serious stagflation / serious inflation or hyperinflation comes to pass first.

Man, I am really not trying to be so dour. I am also not writing these words/predictions callously. It makes me very angry what things have come to. That the Fed and the financial system could have been reformed when times were good, so that we could weather the bad times with a much healthier economy.

However, that time has passed and I believe the Fed playbook now is not to change course, but to just step on the accelerator. I think in Bernanke's mind, that is the only plan he has.

russiangambit,

Binv, you are very mistaken when the rest of the world will simply play ball. All diplomatic relationships is quid pro quo. On international arena US cannot have its cake and it too . If it wants to devalue dollar, the other coutries will demand concessions from the US. Will they be politically acceptable? I doubt.

First, I need to clarify, since based on your statement you seem to be making an incorrect assumption. I don't write "the rest of the world will simply play ball" flippantly or happily. It am exceptionally angry in the arrogance of the US government that it believe it can act that way (I think it does and I think it will). I would find it very interesting to see if the rest of world would impose some fiscal responsibility on the United States.

...I just don't think it likely, at least not in the next few years. Again, I find no joy in making that prediction, I just think it is the mostly likely outcome.

If US keeps devaluing dollar at the current rate I give it 2 years max.  We are already 2 years into this crisis. and 1 full year since the meltdown. I have no doubt that for the past year the rest of the world kept exploring their options.

Again, I just don't find this likely. China has made some strong statements regarding this the past year, but I think its symbotic relationship with the US can't be severed quite yet. However, I find its stockpiling of real assets (Oil, Copper, Aluminum, Gold, Rare Earth Metals, etc.) a very interesting development. Maybe a commodity backed currency (which was an SDR variation being explored by the World Bank, if I am not mistaken) is in the cards in the not-too-distant future.

In the meantime, I think the Fed sticks with the playbook (QE and more QE) for the forseeable future. And unfortuately, I think the rest of the world's economy is still positioned to suffer this abuse. I don't write that happily, that's just how I see it.

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#9) On September 18, 2009 at 7:10 PM, tonylogan1 (28.24) wrote:

rec'd. nice work binve.

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#10) On September 19, 2009 at 12:57 PM, binve (< 20) wrote:

Thanks Tony !

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#11) On October 02, 2009 at 12:44 AM, EV38 (99.19) wrote:

This is the best blog I have seen on this site. I agree with the vast majority of what you say. We are most bullish in the same sectors with the exception that I rank base metals ahead of gold at the moment. Yet we have directly opposing general market views and our CAPS scores move in opposite directions.

Is it bullish or bearish to be a commodity bull?

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#12) On October 02, 2009 at 9:16 AM, binve (< 20) wrote:

EV38,

This is the best blog I have seen on this site.

Thanks!! That is one of the best compliments I have received.

Yet we have directly opposing general market views and our CAPS scores move in opposite directions.

LOL! Yeah, I am a bit of a conundrum. I am inflationist (that all of the economics shenanigans and Fed and Treasury policies will resultsin massive monetary inflation). Now does monetary inflation always beget price inflation? Yes! Now, here is where I diverge from most other inflationists: Does price inflation mean that all asset classes rise? NO!. I think the price inflation that wil / is resulting from the massive True Money Supply (TMS) growth will find their way into real assets first and primarily. I think the equites (generally as an asset class) will benefit by dropping not as far as they otherwise would (I think GSMs, miners, and commodity producers as sectors will outperform the rest of the market for the next decade).

This post summarises my long term view (equity direction for the next 5-15 years) and why I am bearish on equities fundamentally and technically:
The Long View -   Aug 27, 09.

Is it bullish or bearish to be a commodity bull?

Good question :) I think we agree and are both bullish on commodities, base metals and precious metals. But I think we have a disagreement on equities. If you look at my other portfolio (binv271828) you see my long term thesis stance much more clearly (I use binve for much more shorter timeframes). However I started binv271828 at the height of the commodity runup. LOL! So my score currently stinks, but it came all the way back from -4500 points, so that's something :). But long term I am not worried. The Dollar direction is down, and real assets are going up.

Thanks for the compliments!!.

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#13) On October 02, 2009 at 2:17 PM, EV38 (99.19) wrote:

Thanks for the article. I've read the beginning of it so far. I am very wary of using P to E numbers when valuing stocks in a top or bottom of a cycle because earnings are highly leveraged. Think of it like this...would it have been a good idea to buy TOL in 2005 because their P to E was 7? Or DRYS a couple years ago because theirs was 3 or 4? Same reasoning applies to selling certain companies at the bottom because their P to E seems abnormally high. The best analysis you can do IMO on stocks during a bear is on their balance sheet and cash flow to see if they will remain solvent during the downturn. If they appear like they can, then its best to hold and wait for greener days ahead.

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