>Not too bad for a "Dead Buck Bounce"... -g <
In my opinion, the dollar is on borrowed time unless the deficits get under control quickly. I am not optimistic that anything will happen on that front, in fact, I expect deficits to get significantly worse this year. I believe that the dollar bounce was helped by technical factors, the Yen carry trade and in significant measure by the American Jobs Creation Act which will expire at the end of this year.
The Yen at 1.21 is becoming a problem, not just for the U.S. but may likely also bring additional tension to the Chinese/Japanese relationship.
Don Coxe >http://www.siliconinvestor.com/readmsg.aspx?msgid=21960567<
"Well, it’s always difficult if you unleash an essentially racism and nationalism, it’s always difficult to rein it in when you think it’s reaching the toxic stage. And what alarms me, frankly, is looking at this chart, 1.22 on the Yen was the level that the Chinese indicated to the 325 international banks that bailed out Indonesia in August and September and October of 1998, 1.22 was what they said was the minimum level that they would accept for the Yen. Well, Japan, as you can see from the chart, drove the Yen almost to par on the Dollar.
So now, we’re trading at 1.20 – 1.21 range on the Yen, which is uncomfortably close to 1.22, which is the line in the sand which Japan drew seven years and two months ago. So, I don’t know whether China has revised its range for the Yen, this is all conjecture. It’s conjecture based on external evidence and extrinsic evidence as opposed to any statements or policy bulletins.
But the reason I’ve chosen to draw it to everybodies attention, is that this fall in the Yen is a major global development. It’s clearly behind this breakout in gold. It’s probably contributing that 18-year high in silver and it’s one of those things that could destabilize the system."
The drop in the yen will likely soon lead to similar protectionist noises in congress as the China story, especially in light of the problems of the automakers in an election year. However, the Yen is falling for one primary reason and that is its low to zero interest rates in Japan, something that can be changed much easier than the relatively fixed exchange rate mechanism of the Yuan. Clearly we are hearing noises to this effect from the BoJ already. Developing tensions between Japan and China might very well also lead to a military buildup in the area, likely resulting in less appetite for U.S. treasuries.
These dollar unfriendly developments are only made worse by the U.S. becoming more and more isolated on the political world stage as well as the worsening need by the U.S. for imported savings.
I view gold and energy as complementary. I believe in peak oil and therefore a growing scarcity in both oil and gas over the LT. Short term I am not as optimistic as I expect the economy to slow significantly in 2006. However, I continue to hold some high leverage energy investment plays. However, by far the largest portion of my portfolio is in gold, silver and miners.
In contrast to quite a few here, I believe that the FED will not protect the bankers and will seek the services of the printing press very early on once they realize that things are taking a harsh turn down. The reason for this opinion is that elections are not won by banks. Once we hit the skids there will be many solutions proposed and just about all of them require government spending. The FED today is a highly political organization and careers there are made by complying with the powers that be. I cannot think of a more appropriate example than Ben Bernanke.
With no safe heaven currency around and everybody printing at significantly higher levels than gold production, there is only one currency that provides the safety and wealth preservation that investors have confidence in over the long haul: gold.
Here is Faber >http://www.quamnet.com/fcgi-bin/columnists.fpl?par2=5&par3=1
"From recent US Federal Reserve Board meeting minutes, it would appear that monetary policies will move from a tightening bias to a neutral or easing mode within the next six months or so. In the past, I have maintained that the US, with a debt-to-GDP ratio of over 300%, has no other option but to print money (see figure 1).
Tight money policies, which would depress asset prices such as stocks and home prices is simply not an option the Fed will consider. As a result, inflation will continue, whereby I am using here inflation as defined by a loss of the purchasing power of paper money. At times, such as in the 1970s, this loss of purchasing power of money is brought about by rapidly rising consumer prices, while at other times, such as in recent years, the purchasing power of money diminishes because real estate, stock, art and bond prices increase significantly. In both cases, under consumer price or asset price inflation your dollar today can only buy a fraction of what it bought ten or twenty years ago."
We are now observing increased awareness that fiat currencies are risky investments. The fact that the dollar had a nice bear market rally has not significantly increased confidence in the currency and I believe for good reason.
With low interest rates, gold is an extremely attractive alternative currency and this is what we are now observing in Japan. However, even at higher interest rates, gold can be quite attractive if these higher interest rates are perceived to damage the economy. Once the U.S. economy turns down, combined with other dollar bearish fundamentals, there is IMO significant risk that the dollar might easily lose 20% to 30% within the next 12 to 24 months. This is supported by many statements from the administration in the past and also hinted at by Don Coxe several times but again here:
"It has been suggested to me in a couple of meetings down here that maybe the Japanese-US relationship has, in fact, been redefined and that the people in the Bush administration would not be unhappy with a Dollar devaluation, which would occur if The Great Symbiosis unraveled.
That they are so frightened by the protectionism that’s unfolding in Congress that if the Dollar were to fall to 1.40 on the Euro and par on the Canadian Dollar, for example, and that this would force in effect an upward revaluation of the Renminbi, that this wouldn’t be something that would produce great hand-wringing. And if it came at a time of a slowing US economy anyway, alright, then although it would mean higher US interest rates than they would be normally, it wouldn’t mean like, 7% Treasury rates, because you wouldn’t have the base rate at that level."
We therefore have a multitude of fundamental reasons for dollar devaluation and even likely attempts to influence its direction at the policy level. I therefore view this dollar rally against the Euro and Yen as a rather temporary phenomenon and will at the end of the year go short the dollar via the Swiss Franc on the currency front and obviously retain my gold investments.
And here again Faber reflects my opinion perfectly:
"So, if Mr. Bernanke does what he believes in -- namely that asset deflation has to be avoided at all cost and, therefore, massively prints money, no matter where the Dow will be in future, at 36,000, 40,000, or at 100,000, as some pundits predicted in their in 1999 published books (of course shortly before the market tumbled), you will be able to buy the Dow with ounce of gold worth either $36,000, $40,000 or $100,000.
Now, you may think that I have become insane. That is partially true because I am convinced that the US Fed's monetary policies will lead to exponentially widening wealth inequity and impoverish the majority of US households, which will then lead to social strive, protectionism, war, and the breakdown of the capitalistic system. However, if one considers that in 1932 and in 1980 (see figure 5) one could indeed buy one Dow Jones Industrial Average with just one ounce of gold, then maybe my views are rather conservative. Possibly one will be able to buy, sometime in future, one Dow Jones with just half an ounce of gold! "
P.S. As to your point regarding RE, just because your purchasing power increases domestically when RE loses half its value, does not mean that you made any money if the dollar tanks. Look at Faber's figure 2 for a great illustration of that fact. This is the principle basis of my argument. Very similar arguments have been made by here by GST time and time again. |
