Off Topic- The US Dollar.

[rickortreat]

The Dollar should be thought of as a share of a stock of the USA.  Each of us who lives here is a shareholder, as is anyone who holds our cash, bonds or notes.

The Dollar is collapsing- and although I've been known to exagerate at times, this time I'm not, and the Dollar really is going down very rapidly.  Three months ago the Dollar index- it's value against a basket of currencies was at 82.13. It dropped to as low as 75.503 today, an 8% decline!

The Dollar's value hasn't been this low since Clinton took office for the 1st time.

Gold crossed over $800 late last week.  Tonight it's up to $833.

Thought you should know.

[WayOutWest]

Funny you mention that, some super model made news today because she wants all her contracts to be paid in Euros instead of dollars.  If a dumb model can see the problem it must be serious. 


P.S. I know dumb models have smart and scheeming money handlers.

[Skandery]

Who gives a sh!t when its rumored that Paris Hilton is dating Shia LaBoeuf and they could kiss at the Kids Choice Billboard Cable Ace Video Music Awards.

[WayOutWest]

Who gives a sh!t when its rumored that Paris Hilton is dating Shia LaBoeuf and they could kiss at the Kids Choice Billboard Cable Ace Video Music Awards.

LOL!  Don't forget we as a nation need to keep gays from getting married!  We all know for a fact that not one single hetero couple are staying or getting married just to take advantage of the institution of marriage.  Who needs tax breaks and benefits.

[westkoast]

I think I am still close enough to the border where it might actually make sense for some places to start taking pesos as well!

Someone was telling me the other day "Seems like everything is just so expensive" and I had to tell him it's not that everything went up but the actual dollar has dropped so low.  He then gave him a  look.  I don't think a portion of the population understands why it's bad news  that the Euro is approaching 1.35-1.40

[Lurker]

I think I am still close enough to the border where it might actually make sense for some places to start taking pesos as well!

There is a pizza chain here that does except pesos.  And you couldn't imagime the flak they got from the anti-immigration crowd.  Because only illegals carry pesos, you know.   

[JoMal]

What it means is that "they" are winning.

[WayOutWest]

What it means is that "they" are winning.

Who?  The dirty Mexicans?

[Lurker]

  The dirty Mexicans?

Isn't that redundant? 

[JoMal]

  The dirty Mexicans?

Isn't that redundant? 

That may be, but if you wish to identify with "them", we may have a problem.

Actually, the "they" to which I am referring has more to do with the financial backers of the current administration. 

[ziggy]

This entire situation is very disconcerting.  This is all a function of liquidity, namely we have too much cheap money, and cutting rates makes that situation worse and worse.  The problem we have today is a direct result of Greenspan's ludicrous decision to take the OTC rate to 1%.  We injected massive amounts of money, and that led to the housing boom, and the incredible rise in commodity prices.  The notion that the reason prices for commodities (gold, oil, tin, nickel etc) reaching their incredibly high levels is because of China and India, is to a great extent utter poppycock.  The price of a barrel of oil in Canadian $ today is less than it was in 2002, same thing with the Euro, and the Kiwi $.  The only place where it is higher is here, because the US$ is now the US Peso.  Why would China and India affect only us and not the rest of the world?  They didn't, WE DID because of our cheap money policies.

We have much higher inflation than what is measured by the CPI, and at some point in the medium term future, the Fed will have to raise rates to stave off significant inflation pressures.  When they do the US economy will go into a recession.  Unfortunately that recession will be worse than it needs to be because of their wrong headed approaches today.  Recessions serve a purpose, because they keep the market honest, and force those engaging in bad practices today to pay for their greed and foolishness.  Bernanke is trying to bail those people out with his polices, but he is just making the bill bigger when we will eventually have to pay.

I believe that next summer will be the beginning of a major world wide correction.  The first big reason will be the Beijing Olympics.  The Olympics have had the same effect on every major city that has hosted them since 1988 in Seoul.  The Olympics provide an economic stimulus to the host city, and once that stimulus is no longer there, they drop into a recession.  Happened clearly in Atlanta after 1996, and in a very major way to Sydney and all of Australia after the 2000 games.  Also happened in Barcelona in 1992, as well as Seoul and Athens.  The difference between now and then is that the amount of fiscal stimulus in Beijing is on an order of magnitude of 20-30 times what these other countries had.  It was estimated that Sydney spent 3-4 billion, Atlanta 2-3 billion, and Beijing 60-80 billion.  Don't for a moment believe that China will continue to grow and demand commodities on the same scale once that fiscal stimulus disappears.

The result will be a significant correction in China.  China's banking system is loaded with bad debt, and has been for a long time.  The Chinese gov't plan was to push their export economy very very hard after Clinton signed MFN status for them.  The plan was to grow out of their bad debt problem, but of course the investment in China has been so massive that they have added even more bad debt to the system.  Once the fiscal stimulus goes away, the economy will slow, and the bad debt will percolate to the top, and then we will see a major world wide correction.  Costs in China have already increased dramatically, and many companies are already leaving China for lower wage countries like Vietnam.  I talked to a guy who makes hardware for wood windows in China, and he has said that he has had to deal with 10-15% wage rate increases yearly for the past 8 years.  The costs are such that for him, it must be 20% less in China to even consider doing the business there.  His plan is to close his Chinese facilities and move them to Mexico.

[rickortreat]

"They" may be winning, but the dollar decline doesn't help them unless they keep their money outside the US dollar.

Most rich people tend to be Republicans, but I think the majority of them are as much in the dark about what's happening with the Dollar as the average man or woman.  It isn't a hard concept to understand that your dollar is progressively worth less and less.  You all remember seeing your parents put gas in the car, and know that what they paid then is a lot less than now.  You also know they were making less back then than you are now (hopefully)

It is the ability to disguise the decline in the dollar by increasing the relative supply of them that confuses people.  They think they're doing better since they have more money, and not realizing they're spending more because everything is more expensive.  Everything is a lot higher than it used to be, housing in particular and of course, the stock market.

The PROBLEM is when you expand the money supply and ease credit too much, the economy overheats and stalls.  Sometimes you can jump start it by lowering interest rates again, but if you rely on that particular trick, the deflationary forces don't stop, they just get hidden for a little longer, and the pain is much much worse when the thing unwinds.

Well Kiddies, IT IS unwinding, and definitely NOT in a controlled manner. The Dollar went down to 75.08 today, before coming back up to 75.6.  Gold is taking a little breather here, in part because of the Dollar rebound.  The buck has been going down so sharply, everyone was expecting a reversal, simply because that's the way the market behaves. 

Same thing with Gold rising, it was going up $12+ for multiple days in a row. A very substantial move over a couple of weeks from the middle of August at 651 to a high today of 845.90 before falling back to $830. 

Take advantage of opportunities like these to add to your positions.  That doesn't mean go buy tomorrow- wait and see what happens first and then go in- don't try to be the first guy in, ever.  But Gold is still a no-brainer, and I doubt any correction will be sustained or long lived.   

Jim Sinclair is warning people to take possession of their stock certificates for fear that your broker may be caught up in the derivative mess.  Good luck getting your cash out of Citi or Merrill if they go belly up!  He says things are much worse then they appear and is desperately trying to lite a fire under everyone to do what they can to protect their assets, meaning minimize the number of parties between you and your money.  I suggest you go to his site and read it for yourself.  jsmineset.com

Ziggy you're analysis is great, you see this very clearly.  I think the correction is already under way and it's happening right here in the US. In theory, the US should become more competitive because of the decline in the dollar, but as long as China pegs their currency to ours, we still loose jobs to them.  They have to raise wages because they have to inflate as much as we do in order to keep their currency lower!

To a certain extent Zigs, all currencies are declining against Gold, not just the $US.  Demand is definitely higher for goods right now, with China and India purchasing and consuming much more than they used to. 

This situation won't stabilize until counties agree to allow their currencies to float and let the market and flow of goods determine the value.  The current problem is because they are all playing games to try to get an advantage.  This has caused the actual value of goods and services to be severely "out of whack" in different countries.  When the rebalancing occurs - we're going to experience a lot of the pain right here, and the Dollars  recent decline is the indicator that I've been expecting.

[ziggy]

To a certain extent Zigs, all currencies are declining against Gold, not just the $US.  Demand is definitely higher for goods right now, with China and India purchasing and consuming much more than they used to. 

I am sure that increased demand from China and India, the world in general has increased commodity prices such as gold.  I placed a qualifier in my statement above, "to a great extent, it is utter poppycock".  By that I mean, the affect of China and India is much less than affect of cheap and excessive liquidity.  What is driving $100 a barrel oil, and $800-$850 gold is not increased demand, but the declining value of the US$.

Read this today in dailyfx.com.  The notion that the $'s drop is manageable is analogous to, but slightly less dramatic, than Nero playing his violin while Rome burned.  In other words he is living in a dream world.  The Fed is not managing this, they are flopping around like a fish out of water.  GM's trouble with Toyota is not because the US$ was too strong, it is because Toyota is a better managed company with a better cost structure.  To assume that slashing the value of the $ is going to make GM a stronger company is ludicrous.

What Does the Federal Reserve think About the Dollar?s Weakness?

Being short US dollars has been the best trade in the currency market this year because it has fallen against everything in sight. Today, it dropped to a record low against the Euro and Canadian dollar and multi-decade lows against the British pound and Australian dollar.  Even though our targets of 2.10 in the GBP/USD and 90 cents in USD/CAD have been reached, our targets of 1.50 in the EUR/USD and 1.0 in the AUD/USD have not.  The latest acceleration in dollar weakness was triggered by comments from China?s Cheng Siwei who hinted that the Asian Giant may be diversifying their massive reserves out of ?weaker currencies and into stronger ones.? Although Cheng Siwei tried to retract his comments shortly afterwards by saying that he did not mean China will buy more Euros, the damage was done. So how does the Fed feel about the latest dollar weakness?  According to Atlanta Fed President Lockhart, the dollar?s decline is ?manageable.?  Other Fed officials speaking today were also not worried.  Both Mishkin and Poole felt that the affect on inflation from the weak dollar was limited. Although the dollar?s weakness is inflationary, the US also needs a weaker currency to boost growth.  General Motors reported one of its biggest quarterly losses ever while Toyota reported the sixth straight year of record setting profits. We are sure that the US auto manufacturer is not happy about being trumped by its Japanese competitor and further dollar weakness is exactly what GM needs to help regain its edge.  Federal Reserve Chairman Ben Bernanke is scheduled to deliver a testimony to the Joint Economic tomorrow and his comments can easily exacerbate or reverse today?s decline in the US dollar.  Unfortunately I do not expect him to say anything groundbreaking since they are stuck between a rock and a hard place.  On the one hand inflation is a serious problem with the US dollar weakening and oil prices not far from $100 a barrel, but on the other hand the banking sector is prone to further subprime losses.  As a result, there really isn?t much that the Federal Reserve can do so they will probably sit tight, watch incoming economic data and buy time before their next monetary policy meeting on December 11th.

[ziggy]

I just don't get Bernanke.  He is concerned that rising gas prices will hurt consumer spending increasing the probability of a recession, so what does he do?  He cuts rates, which increase monetary inflation which causes oil and gas prices to rise which does exactly he says he doesn't want to have happen.

From dailyfx.com

The US dollar remained weak as Federal Reserve Chairman Ben Bernanke killed any chance for a dollar rally.  In his testimony to Congress today, Bernanke commented on the upside risks to inflation but focused more on the downside risks to growth.  More specifically, the Fed Chairman expects growth to slow noticeably in the fourth quarter, which confirms his dovishness.  If he had done the opposite and focused more on inflation like his counterparts in the Eurozone and Australia, the dollar could have rallied.  However he chose to spend his time expressing concern that higher energy prices, tighter credit and continued weakness in the US housing market would lead to softer consumer spending.  This coincides with the survey results from 10 of the nation?s largest retailers, 7 of which including Wal-Mart and Macy?s reported sales below forecasts. For dollar bears still looking for a recession, the Fed?s acknowledgement that consumer spending could be at risk indicate that they haven?t completely ruled out another rate cut.  Although extremely volatile, Fed funds future are now pricing in a 90 percent chance for an interest rate cut next month.  We have seen these expectations turn on a dime over the past few weeks so there is only so much credit that we can give to this data especially since we will not be receiving the most up to date retail sales and inflation reports until next week.  Rising gasoline prices are becoming a growing problem; over the past 2 weeks, average gas prices according to AAA have increased 15 cents in California.  In Santa Cruz, the average price per gallon is $3.37 and in Gorda, California, some drivers are paying up to $5 a gallon.  Winter heating bills across the nation are expected to rise as much as 25 percent according to the Energy Information Administration?s latest monthly forecast.  As a result, our call for EUR/USD to rise to 1.50 remains intact even though tomorrow?s data has a better chance of being dollar positive than negative.  We are expecting the release of trade balance numbers for the month of September as well as import prices and consumer confidence.  The recent weakness of the US dollar should help to improve the trade balance and drive up import prices.  Consumer confidence however will probably suffer.

[ziggy]

Dollar Danger

Every discussion about the global economy must address the sharp decline in the US dollar ? it?s a huge
story. Since its peak in 2001, the US dollar has lost roughly 40% of its value versus the Euro and the
Canadian Loonie and about one-third of its value versus the UK Pound.

The dollar is even down 45% against the Albanian Lec ? which is like Michigan losing to Appalachian State every Saturday for six years.

No matter how many times US Treasury Secretary Henry Paulson or his predecessors have said the US is
committed to a strong dollar policy, the foreign exchange markets have ignored them. Some are
suggesting the Treasury should say it louder and more frequently and possibly even intervene by buying the dollar on foreign exchange markets.

But none of this will help because the value of the dollar is determined just like other commodity prices ?
by supply and demand. When the price of pork bellies changes, everyone knows the reasons must be related to either supply or demand. But for some reason when it comes to the dollar, people seem to forget this fact.

Some blame the decline in the value of the dollar on the trade deficit or the budget deficit, while others
blame it on a lack of confidence in President Bush. Linking these issues to dollar demand may be
theoretically possible, but these links are very tenuous.

The U.S. still imports substantially more than it exports, but the trade deficit is falling fast and most
forecasts suggest it will continue to do so. Yet the dollar?s decline has accelerated in recent months.
The federal government still has a budget deficit but, at 1.2% of GDP in Fiscal Year 2007, it?s low
versus historical averages and lower than at a similar point in the 1990s business cycle, when the dollar was strengthening. True, due to prescription drug legislation, President Bush has presided over the largest
expansion in entitlements in a generation, but that law was enacted a few years ago. Lately, government
spending has been growing slower than GDP.

Finally, the theory that global dissatisfaction with President Bush is a catalyst for dollar decline is pretty
much ridiculous. The drop in the dollar has accelerated since the 2006 election, which handed control of
Congress to the Democrats. Moreover, it is widely believed that a Democrat will win the White House in
2008. As a result, if one is worried about demand for the dollar, a more credible explanation for recent dollar weakness is the possibility of tax increases starting in 2009, particularly on income from capital. This would make the US less attractive to foreign investment.

However, we believe the main reason for the dollar?s weakness is due to supply, in this case the oversupply of dollars by the Federal Reserve, the entity that has ultimate control of the printing presses. The Fed was too loose for far too long early in the current business cycle, raised interest rates too slowly, stopped too soon, and now it has cut rates multiple times before it ever got tight enough to bring down inflation. The dollar has lost 5% of its value versus the Euro since the Fed reversed course in September.

In the weeks and months ahead, expect more public pronouncements from prominent officials ? both US
and foreign ? that attempt to bolster the dollar. It could be that there is even some intervention. But none of this will have any long-term impact on the dollar. Its fate is ultimately in the hands of the Fed. Without a change in policy by the Fed, any intervention gets mopped up immediately. In the end, if the Fed gives in to markets and cuts rates again, the dollar will keep falling. If it stands its ground and eventually retracts recent ?emergency? rate cuts, the dollar will rebound.