Deflationist's Beware!
The one thing I wanted to take a look at today is the dollar since the market collapsed back in October:
My Take:
As you can see above, the dollar has pretty much collapsed since the market started rallying in March. I find this to be an interesting phenomenon.
Traditional thinking would tell you that this makes no sense:
Back when the world made sense, a strong currency was the base of any country with a strong economy. This makes the recent rise in equities even more suspect in terms of fundamentals in my view. If things are so rosy then why isn't the dollar strengthening?
Supposedly Europe is in much worse shape then we are. If this is the case then why the COLLAPSE in the dollar versus the Euro?
What does this all mean? The way I see it, the world is slowly getting away from the dollar and diversifying into other assets like gold, oil, and other commodities.
The deflationist's have been calling for $800 gold for months now and it hasn't happened. Gold continues to rally on any pullback.
In my view, the reason this keep happening is the Fed's policies are hell bent on destroying the dollar. In fact, I think the Fed behind closed doors is praying that the dollar gets devalued because it allows us to inflate out of our debts more easily. They would never admit this of course.
The Bottom Line
No economy ever flourishes with a collapsing currency. The Fed continues to spend like a drunken sailor as they bail out anything and everything that's about to fail. This continues to put relentless pressure on the US Dollar.
Until the "bezzle and the bailouts" are cleared from the system, I expect the dollar to continue to trend downward. Let's be honest here, no sane FCB wants to own the currency of a country that has both a weak economy and is trillions of dollars in debt.
The only thing that's saved the dollar thus far is the FCB's have continued to store the majority of their reserves into treasury holdings . They essentially blow themselves up if they bail on the dollar because of their treasury exposure.
What we need to start realizing is this doesn't HAVE to be the case. China appears to be gobbling up hard assets all over the place. Other FCB's continue to demand alternatives to the US dollar. I am not sure we will ever find one, but that doesn't mean the dollar can't collapse as the world diversifies its assets.
You need to ask yourself the following:
Why is oil rallying when there are tankers upon tankers filled with oil with nowhere to go as a result of no demand? Why is gold not collapsing in price like other hard assets like housing?
Lets take it a little further: Why is the DOW rallying like mad as the economy continues to struggle?
Could the market possibly be starting to price in inflation or possible hyperinflation in the near future? Three months ago I would have thought this idea was crazy.
However, after seeing the report on the $24 trillion in potential debt that the Fed's spending programs could cost us, I am not so sure anymore. Anything is possible at this point.
Historical P/E ratio's and technical analysis have become less and less relevant as we enter this new economic reality IMO.
The global financial system is morphing into something very different that I don't think anyone really understands, and I don't think anyone can predict how this all plays out.
The world is a changing folks, and traditional investing will most likely not be the answer.
19 comments:
Do you have any money making ideas or do you come here to vent your bear market diatribe followers? Lat time I listened to you i bought SRS around $50 and Im only down 60%.....Maybe you should stick to the conspiracy theory I hate America chat.
Where were all you debt bulls the last 20 years? You act like the situation was created overnight.
Jeff - economists often note that the one thing that is just as good as actual inflation is the threat of inflation - clearly we have this.
A story out today got me thinking:
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6pS.2Pr7bdQ
Very quietly, the govt is getting paid back on tarp funds and (so far) paid back in spades - I mean 23% return? Nice!!!
As much as I like to bash the govt and scream pigmen, let me play devils advocate for a minute.
I agree deflation is not a serious concern. As more time goes by more people get into the inflation to hyperinflation camp.
At the same time however, the govt is raking in the money it lent out to let us THINK inflation was coming, bigtime. We forget that these are loans - we assume they will never be paid back. Obviously, this isnt always the case.
Imagine the govt is able to do this on more and more of the TARP loans as time goes by, silently reigning them in, and making a mint in the process (actually subsidizing the cost of the nonperformers like AIG).
Anyhoo, do this a bunch of times and suddenly, the US govt balance sheet looks a heckuva lot stronger than we al assume. If the govt plays its cards right, it skirts deflation (with the threat of inflation), and avoids hyperinflation by pulling in outstanding loans - threading the proverbial needle.
Do I think it will happen - No. However, could you even imagine? How awesome would that be?
Jeff,
great piece! Some good observations on the buck I had missed. I added an excerpt in tonights post. Sorry to keep ripping you off, but the stuff is relevant and I know my readers like your writing.
Mj
"Do you have any money making ideas or do you come here to vent your bear market diatribe followers?"
Yeah. Accumulate cash, hedge for inflation, and be patient. Its been the same story for weeks now.
The market hasn't been trading rationally so I refuse to participate. Why do you think 70% of the trades are by HFT's right now?
#2
"Where were all you debt bulls the last 20 years?You act like the situation was created overnight."
Yeah it pretty much was created overnight.
Well in about 6 years. Most of it was caused by the housing bubble from 2003-2007 we then had another huge debt expansion with the trillion dollar bailouts from 2007 until now.
There are plenty of trading sites that will give you plenty of investing ideas on a daily basis.
I like to focus on protecting capital versus making money in a market like this.
GL
Anon
Great thoughts.
That would be sweet if they could ride that fine line.
The problem is history has shown that we usually overshoot one way or the other.
We also have a huge hole to dig out of. 24% return on a billion dollars is great but the losses are staggering from this bubble.
I hope we can claw our way out of this. Its going to take a long time either way before we can fix our balance sheet.
Get
No problem
Glad you are enjoying the blog.
I will have to get over to disconnect later and check it out.
The market is flush with helicopter liquidity looking for return, hence the bounce(s). The liquidity isn't going away anytime soon. Goldman said so.
DXY is suffering from renewed risk appetite along with a host of other factors including expectations of inflation and deficit concerns.
As a deflationist, I expect gold to mirror commodities and that's not up.
Toney
I worry about the confidence in the dollar as we continue to cheapen it.
Deflation will be short and sharp. I expect inflation to be the long term problem down the road.
You make some great points and it goes along with what someone else was saying above.
Is the market pricing in inflation and is wrong? Is it a headfake? Not so sure about that.
The last time we had this situation the market panicked back and forth between inflation and deflation in the late '70's.
Inflation later won and had to be killed by Volker in the early '80's.
Its still up for debate at this point. Both sides have a valid case.
It should be interesting to see how it all plays out.
Uh Oh
Big worries around the USD being used as a carry trade.
Its a long Aussie short the US Dollar play. This would explain the weakness.
Dollar pressure is forcing equities higher...FOR NOW!
ASk Japan how their market did when their currency turned into a carry trade.
It appears a ton of money is flowing into Asia specifically China.
More dollar weakness is likely here. Currencies are a mess tonight. Historical patterns are being shredded.
Watch the currencies.
Stay tuned. Might not get to it the rest of the week. Fmaily matters to take care of.
Jeff, Godspeed with the family issues.
Not to wade too deeply into the deflation/inflation debate, but it hinges on whether this is just the longest recession since the Great Depression, or another depression.
Define depression as an event requiring structural changes, rather than simply time, to heal the economy.
The Green Shoot crowd sees this as a recession. If they are correct, we should see recovery before the end of the year. That makes inflation a worry.
If they are wrong and this, indeed, is far worse than another severe recession, as I believe, then we are in for what John Williams calls a "severe structural depression." That spells deflation for certain, although there could be a spat of hyperinflation down the road if the Fed screws up, as they are wont to do.
Whether it ends up being inflation or deflation, the only asset that has historically done well in both environments is gold.
Toney - nice to see you lay out your case as well as the opposition case in reasonable terms. Many of the deflationists I know dont think inflaton is even possible - talk about arrogant.
John - uhh better check again what happens to gold if this is deflation. The answer, in case you cant find it, is that in deflation, gold gets crushed...
Ohh ugly after hours earnings.
Microsoft, American Express, and Amazon all disappointed.
Toney
great points
After seeing another $200 billion in treasury issuance, I find it hard to be long the dollar.
This takes a lot of air out of the deflation case.
I own dollars just in case. However, the dollar is looking more and more worthless by the day.
If this is the case then prices could rise.
We'll see. Like I said before, I need to see how this plays out more before I can feel confident making a call here. Patience if what I preach for now.
I will hedge for both scenarios until I see how the dollar acts.
It depends on your investment timeline. In deflation, gold collapses early on. However, John is right for the moast part long term.
Gold may get hurt early in deflation, but it usually comes back in price later on in the cycle.
"It depends on your investment timeline. In deflation, gold collapses early on. However, John is right for the moast part long term.
Gold may get hurt early in deflation, but it usually comes back in price later on in the cycle."
Jeff thats simply not correct. Think about it for a second - if it was true, gold would be the thing to hold in either deflation or inflation - in essence THE MAGIC BULLET - the one and only investment that is a store of value regardless of economic condiitons.
If that was true, given we are in the most uncertain times in the last 70 years gold would be over 10K an ounce right now - as both inflationists and deflationists flocked toward it with reckless abandon.
Seriously, you need to revise your thinking on this one...
Anon
My point is deflation is usually followed by inflation.
It all depends on how severe this collapse is.
We are going to have trillions of dollars sloshing around in the system once we get through this mess.
If you don't think this will be inflationary then I think you are making a mistake.
If we have an all out collapse then deflation likely wins.
At that point though does it really matter?
Jeff - I think this was a big misunderstanding.
John said - gold does well during deflation.
I said - no, gold gets crushed during deflation
You said - in deflation, gold gets hurt early and then comes back in the cycle.
That should have stopped the conversation right there. Cuz, now that I read your latest post, yo are saying early in the cycle (i.e. during deflation) it does poorly, and late in the cycle (i.e. during the inflaton that follows) it does well.
So basically you and I agree, during deflation gold gets crushed. We also agree, (although I did not explicitly state) that during the resulting inflation, gold does well.
That said - John needs to understand one thing clearly, GOLD DOES HORRIBLY DURING DEFLATON. Further when the inflation starts back up, it depends on how sharp it is.
If its hyperinflation, you get your money back on gold quickly.
If its weak inflation - gold may be like homes - it will be YEARS before you recoup your investment.
MJ - if you want to complain, propose a solution.
More importantly, I love this - watch Bernanke boil under the weight of a half trillion dollar loan to NEW ZEALAND:
http://www.youtube.com/watch?v=00ECLxK2YTs&feature=popular
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