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Strategies & Market Trends : Strictly: Drilling II -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (14785)	6/26/2002 7:20:32 PM
From: Frank Pembleton	Read Replies (5) \| Respond to of 36161

THE GREAT CALAMITY WAITING TO HAPPEN by Kurt Richebacher Long ago, we predicted the dollar's collapse. Despite the soaring deficit in the current account, it went from strength to strength. Our opinion, however, has not changed. What has happened with the dollar since 1995 is more or less a repeat of the experience of the first half of the 1980s. Thanks to booming financial markets and the prevailing perception of superior economic performance, the United States attracted capital inflows that easily covered the soaring deficit in its current account. Yet we took the opposite view. Noting the exploding U.S. budget deficit, an unprecedented consumption boom and the soaring trade deficit, we kept warning of the dollar's inevitable plunge - in contradiction to the bullish consensus that believed in the U.S. economy's renaissance through supply-side Reaganomics. The final outcome of the dollar's bull-run in the early '80s is now well known. The reversal came when the U.S. economy slowed down in 1984-85. Inexplicably, the dollar even surged at first, but soon began an even sharper decline. Yet in the summer, it seemed to start a new rise. As all major governments, except for Japan's, wanted a lower dollar, the fears of renewed appreciation galvanized the celebrated Plaza Accord of Sept. 22, 1985. Although the following joint interventions of the central banks to weaken the dollar were on a very small scale, the U.S. currency went - with strong intermittent fluctuations - into a long, steep slide that ended in May 1995. The single most important question at this juncture is definitely whether any decline of the dollar will be orderly and limited in scope or whether it will be as precipitous and prolonged as the fall between 1985-95. It seems the latter is unimaginable for most people. Longer-term forecasts generally project a stronger dollar next year, reflecting the U.S. economy's recovery. It is our definite view that the U.S. currency is destined to slide to new lows, that is, below those of May 1995. Basic to this assessment is the recognition that the imbalances that have accumulated in the U.S. economy and its financial system in the wake of unprecedented credit and debt excesses during the past six or seven years vastly surpass those that accrued in the early 1980s before the dollar's ensuing collapse. The crucial test of a country's economic development from a long-term perspective are the changes in two aggregates: investment resources (savings) and investment incentives (profits). By these two measures, the U.S. economy's growth structure has been literally devastated in the past few years. National saving, net investment and profit margins are at all-time lows. Their malignant counterparts are a record-high share of private consumption in GDP and soaring foreign indebtedness. Pondering the dollar's vulnerability, comparisons with conditions and events in the early 1980s are certainly informative. At the time, everybody was awed by the exploding gap in the U.S. external current account. When the dollar's collapse started in 1985, it soared to a record amount of $122 billion, equaling 3% of GDP. During the last two years, the U.S. current account deficit has run well above an annual rate of $400 billion, or about 4.5% of GDP. However, the biggest difference between the mid-1980s and the early 2000s is, by far, the international investment position of the United States. In 1985, the international investment position of the United States went into negative territory for the first time. Foreign-owned assets in the United States of $1,061 billion compared with U.S.-owned assets abroad of $949 billion, for a net of negative $111 billion. At year-end 2000, the market value of foreign holdings amounted to almost 10 times the amount of 1985: $9,377 billion, vs. U.S.-owned assets abroad of $7,189 billion, resulting in net foreign indebtedness of $2,187 billion. With another deficit in the current account of $417 billion and continuing increases in the current year, net foreign indebtedness is rapidly approaching $3,000 billion. We mention these figures in particular for two reasons: first, because they are widely unknown; and second, they provide some idea of the fantastic magnitude of the forces that may come into operation once the dollar's invincibility comes into question... Considering the astronomic size of foreign dollar holdings that have accumulated in past years, the stage is definitely set for a bandwagon against the dollar. And its trigger is just as obvious: growing disillusionment about the U.S. economy and its asset markets. Keep a watchful eye. Disappointment about the trumpeted U.S. economic recovery is the critical near-term event. Regards, Kurt Richebacher, for The Daily Reckoning