Dollars and Pants
by Mark M. Rostenko
Editor, The Sovereign Strategist
November 29, 2004
Stocks rebounded last week but the major indices remained below their recent rally highs. The dollar continued to plunge while gold squeezed out yet another bull market high. Crude oil futures dabbled with the $50 level but closed slightly below.
Stocks continue to hold on to most of their recent gains, recouping most of the correction from the previous week. In the face of record high deficits, record low savings and a plunging dollar, the market isn’t doing all that bad. Corporate profits have almost assuredly already surpassed their peak, so what’s with all this strength?
Stocks gathered steam going into the election and then ran with it following the GW victory. Are the markets thrilled with the prospect of his impeccable/disastrous (take your pick - we’re not taking sides) leadership for another four years? Probably not. More likely the markets are thrilled with the possible influx of more investment capital.
While Democrats have staunchly resisted any rumblings about the privatization of Social Security (because we all know that the government is much better suited to manage capital than the private sector), Bush’s advisors have been weighing various options for an overhaul of the much-in-trouble system. There’s no official plan on the table yet, but rumor has it that the administration favors one that would allow workers to put 4% of payroll taxes (up to $1000 annually) into a personal retirement account.
I don’t know how many workers there are in the U.S. of A. Were I not so lazy I could probably find out, but navigating those “dot-gov” websites is like trying to paint a French Colonial style mansion with your neighbor’s tongue and a quart of powdered Kool-Aid. But I’m guessing that there are lots and lots of them. Multiply $1000 times “lots and lots of them” and you end up with a number somewhere in the neighborhood of “more than a couple billion.”
Clearly, my study is somewhat lacking in rigorous statistical methodology, but the obvious conclusion is that allowing the average American to invest a portion of his taxes in the stock market is a recipe for a rather small retirement nest egg. The other obvious conclusion is that a lot of money could flow into the stock market.
I don’t know if that’s the reason it’s climbing, but it might as well be. Since it doesn’t seem to want to fall, it might as well go up, and the potential influx of billions in investment capital is as good a reason as any other.
Lately I find the dollar and gold markets far more interesting than stocks. I’ve always found them interesting, especially after we started taking dollar-contrary positions with the Dollar Index around 119 (it’s around 82 now) and buying gold stocks a few months after the bull market there began in late 2000. It’s always interesting to profit handsomely. But lately things have become even more interesting.
In case you haven’t heard, gold is trading at a new bull market high, surpassing $450 last week. And the Dollar Index continues to crack, now trading only a wee bit from its all-time low, THE absolute low of the dollar’s value since the Bretton Woods currency party came to an end.
Gotta’ hand it to Uncle Al and the Merry Band of Powers That Be. We’ve seen a few lovely bubbles, but the currency underlying all those bubbles is almost worth less than ever. What goes better with a real estate bull market and bubbly-bounce in stocks than $4 loaves of bread, automobiles that cost more than the average worker makes in a year, and oodles upon oodles of credit card and mortgage debt?
It wasn’t too long ago that I suggested the dollar would be sacrificed in order to sustain the credit bubble, to keep stocks and real estate from caving in. And so it has been. The powers that be make no bones about it anymore: the dollar is “bye-bye” and who cares so long as the holiday shopping season is off to a merry start?
The dollar has been sliding relentlessly for years, never even managing a meaningful “dead-cat bounce.” When will the slide end? When the dollar falls enough to balance out some of the mess that our insatiable appetite for debt and consumerism have created.
A dollar decline should narrow the deficit. Ain’t happening so far. The last time the deficit was put back into whack with a dollar decline, the dollar fell 30%. So far the Dollar Index is down about that much while the deficit stands near a record. Clearly a testament to how atrociously out of balance our financial system really is.
Lots of folks figured the dollar couldn’t fall much more, what with everyone and his grandmother being short. Pundits and prophets said there are too many folks at the party so a reversal is inevitable. What they all failed to take into account is that the dollar isn’t a real market. We’re not talking about stocks, gold, peanut butter, or concrete here. We’re talking about paper dollars, the production of which is a monopoly run by people who wouldn’t and couldn’t understand fiscal restraint if it parachuted into their living rooms, then built a campfire and roasted marshmallows in their loafers.
The logic that says “if so many people are short and expecting a dollar decline, the dollar must reverse” is no logic at all. YOU DON’T BUY DOLLARS WHEN THE PEOPLE WHO PRINT THEM HAVE OFFICIALLY DECLARED THEIR CONTEMPT FOR THE PRETTY LITTLE PIECES OF PAPER.
If Ford announced tomorrow that they’re no longer supporting their automobiles, they’re no longer making parts and couldn’t care less what happens to your car, should a contrarian expect the value of existing Fords to rise or fall? You do the math. The dollar isn’t a car, it isn’t a commodity. It’s a piece of paper. And paper, my dear friend, is CHEAP and ABUNDANT.
Classic market rules, supply and demand considerations don’t work in textbook fashion in a rigged market that is routinely manipulated by global central banks. If the U.S. government says the dollar should go down, I’ll tell you where it will go: DOWN. I own my pants. If I say they’re coming down, they’re coming down. Period. The government owns our currency like I own my pants. You do the math.
What’s it all mean for the rest of the markets? Probably not a whole lot of good, but that depends in part upon how manageable the dollar’s decline is. If it goes into free-fall, if foreigners get fed up, say hello to sharply higher interest rates, sharply higher inflation and consequently, a sharply lower stock market.
Is an orderly and manageable decline possible? I suppose so. Normally I’d be disinclined to believe, given the sorry state of U.S. finances. But I’m continually amazed at how easily the markets are swayed by the prattlings of the powers that be.
Notice how the fedheads and their ilk have been talking down the dollar recently. Greenscam recently commented that foreigners’ appetites for dollars will decline. (An obvious conclusion that we at TSS have been discussing for years.)
Understand that the Fed chief’s job these days is primarily to psychologically manipulate the markets, tell folks what they want to hear so that they won’t do what any reasonable folks would inevitably do. (Get out of stocks, sell dollars, buy gold.)
Greenscam’s no dummy (although he does seem to play one on TV), and his strategy is almost certainly to give official “sanction” to the dollar’s decline in order to keep folks from freaking out. After all, if “Greenspan the Great, Most Bestest Central Banker Ever in the Whole Entire Freakin Universe” can stoically discuss “waning dollar appetites,” why should the rest of us worry?
I’m not worried. I’m just buying gold. It hasn’t failed me in three years and as long as politicians and their cronies remain in charge of this country’s finances, I don’t expect it to fail me anytime soon...
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