Everybody is spelling doom for the dollar. Why would they not?Especially since Treasury's Tim Geithner and Fed Chief Ben Bernanke are telling you publicly that they hate USD, and that they will do anything in their powers to keep Crude Oil and stock indices higher at any cost, what do you want the investors to do?
The worlds reserve currency is down some 15% since March 2009, when measured against a basket of equally scared currencies. But don't you dare measure against real hard assets like copper and crude oil. The USD is down some 50% in these cases. But whats the problem? Its all good if Wall Street is making money of the demise of America. If it was to the benefit of Goldman Sachs to own Dollars instead of crude and copper, we would see Geithner and Bernanke whip out their Patriotic swords and actually do what they swore to do, which is DEFEND THEIR CURRENCY!
Back to realty.
Yet despite these cruel real facts, Fed God Head Bernanke thought it wise to increase the size of the monetary base by $86B just last week alone. That brought the base total to over $1.73T, the highest level since May and just $37B off its all time record high.
But why the expansion this last week? Did he get a call from Goldman Sachs to demand more dollar destruction? Did he hear that the dollar was trying to get stronger? Was it that the equity markets were finally do for a correction? Was it that Crude Oil couldn't move above 75?
Earth to Ben! You have already been renominated for another incompetent term, relax, stop playing politics and do what you do best, which is basically fucking up monetary policy.
Its really foolish to think about an imminent dollar rally especially when Goldman is still long Crude and short Treasuries. We all know that they cant stand to pay overtime to their programmers to change their stock trading machine code to start selling equities instead of buying them.
Bottom line, The dollar destruction will end when Lloyd Blankfein says it will end. When Goldman flips to being short crude and long treasuries, will we see Geithner/Bernanke sing God Bless America.
In the long run it seems the Fed has caved into the plain truth that having an $11.7T National Debt means that a loose monetary policy is very necessity. Any truth to the rumor that the expansion happened in the same week that it was announced that the deficit would grow by at least $9T over the next 10 years?
The economic reality is that when a country owes a tremendous amount of debt, it becomes less burdensome and easier to pay off under an environment where the currency is losing value every day. A sadder reality is of course the citizens of that same country become poorer while they are taxed without their consent through eventual inflation. It is also true that the holders of that country's debt become victims as well, although I don't generally care about America's creditors. Screw Them! You want to get paid? Lets go to war!
The Chinese can talk all they want about alternatives to the greenback, its going to happen sooner or later, but not before their is blood spilt. So the Chinese will continue to lighten up at the long end of the curve and fatten up on the short end.
The Fed is in a difficult position. The world's current reserve currency can't inflate its way to prosperity. The danger of causing a disorderly decline of the dollar is very high.
No country in the history of all that is holy was ever able to sharply devalue its own currency while bringing about a stable economy and fostering real growth. That's because a strong currency is indicative of a strong country. One that is providing investors with solid economic growth, positive interest rates, a current account surplus and low inflation.
We told the Japanese how to handle their own crisis in the early 90's. How they should clean up their banks. Level their real estate market. Cut spending and consumption. Make their banks come clean on their balance sheets. The Japanese never listened, and today neatly 20 years later they are still paying the price.
We told all of the Asian countries not to devalue their own currencies in the late 90's. That defending their currencies was vital to their economies.
Today, America is doing exactly the opposite of what they were preaching previously. This is why American style capitalism and politics is so viciously hated around the world.
At the moment, the market is going up. Treasuries sideways. Dollar down. Commodities up, but this cant continue. Eventually a weaker USD will no longer mean the market goes higher. At some point it will result in not only the end of strong gains in the averages but a violent move much lower in bond prices as well.
The SHORT USD - LONG EQUITY trade is very crowded at the moment. This trade may get even more crowded, especially since the Fed has made it abundantly clear that it will rely on an inflationary monetary policy to help the government pay off its debts, but when the party is over, it will be ugly and their will be blood.
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