There are a few basic powerful events here which you should remember, when making decisions in this market:
1. Europe is melting down again, with governments getting their crediting ratings cut on an almost weekly basis.
2. The ability of the U.S. government to sell treasuries without Fed assistance is in question.
3. The U.S. budget battle is largely being influenced by ideologically driven forces who aren’t beholden to the status quo.
4. There is a massive carry trade taking place on top of the Yen; but with Europe sucking horse cock, who’s debt are these traders buying?
Massive cross currents are always difficult to navigate, but by ignoring point 2, I’m betting the dollar strengthens substantially, because of the Europe/Japan/Congress trio, which last time I checked means the U.S. stock market is going to get hit hard. This whole situation reminds me of summer 2010.
I was on the beach in Texas, sipping Gin & Tonic, which was a very good thing; I was entirely too drunk to feel fear when I did take the time to look at the numbers coming in.
Except this time, we also have a budget battle taking place in Congress, with freshmen Tea Party members dead set on cutting spending substantially. Fuck whatever the Fed are doing, if our government actually cuts spending, that’s a dollar strengthening exercise in and of itself. It also can’t be accomplished without implementing some form of austerity on us U.S. citizens.
Altogether, the U.S. dollar is definitely the low cost / high reward trade here. Nobody wants to admit that our currency can be anything but garbage. However, all the forces are working back to U.S. supremacy, even after everything that’s happened.
You’ll notice I’m all long, with no notes on my books, other than what I need. Needless to say, I’m not a fan of the dollar. But I tip my hat to the realities of the world by having covered all my debt. I will not fight the U.S. dollar here, if it wants to be king once more. And all that needs to happen for that, really, is the U.S. government to go into a shutdown. It’s as easy as nothing getting accomplished, and if the other world events keep pressure up, then that event would be multiplied substantially.
Just keep an eye out; things haven’t changed substantially yet, but the underlying conditions have. Rewards shall be blessed on those who exercise constraint.
If you enjoy the content at iBankCoin, please follow us on Twitter
Excellent post, Mr. Thaler. I’ve been preaching this for months. There will be no INFLATION. Get ready for the DEFLATIONARY VORTEX.
fiscally the U.S. is in worse shape than any other country and impending is a vote that will in all likelihood pass to allow the gubmint to even worsen our image… USD is garbage, with competition only from the Euro. In all reality, it’s a race to the bottom for the two.. The Euro may win though, because the EU may dissolve at this rate
Quit reading the asshats over at ZeroHedge, Chivo. How can you say that the “U.S. is fiscally in worse shape than any other country” and then talk about the EU dissolving in the next sentence? The fact of the matter is is that it’s not about which currency is inherently “good,” it’s about which is the least bad. The Yuan will never be a reserve currency because no one can trust their government (save your, “the U.S. is just as bad” comment, no it’s not even close). The Yen doesn’t require explanation. Care to tell me which currency you see stepping to the forefront to supplant the USD, or, as you put it, hit the bottom first?
well, i suppose i should have added an extra adjective to compare the U.S.’s fiscal picture to only those other countries with as much an economic impact as the U.S. Sure, portugal and greece and ireland are skating on cracked ice at this point, but really, who cares about them?
I’d invest in plenty of other currencies over the USD, and I have already put my money where my mouth is.
In terms of a reserve currency, though.. Well, I like shiny stuff!
(laughter) I’d love to have a monetary system based on a finite resource, but a lot has to happen between then and now to make it possible. People may hate government spending right now, but I think most of them are unwilling to cast down the images of Keynes or Roosevelt.
Our fiscal picture doesn’t look that bad right now, sans our government’s fiscal picture and about 15-20% of the population.
Definitely, a lot has to happen. But I’m not advocating an overnight switch.
Currencies are like the stock of a country.. If the country is strong, the stock(currency) goes up, vice versa if the country is weak. Seeing as how the USD has lost >95% of its value over the last century, well, that explains a lot….
Here is an interesting point, however:
It is possible for a currency to rally while a country’s economy weakens.
And that is probably what is about to happen.
Only if other countries (and currencies) worsen at a quicker pace.
Right now, I see 4 major crises that can cripple the global economy..
Middle east/africa, Japan, European debt crisis and our very own debt ceiling crisis. As of right now, I don’t see the others worsening to an extent that drives people back to the dollar. Who knows about the future, though…..
I don’t see how our debt ceiling issue is a crisis. Our not being able to borrow should strengthen the currency, not weaken it; unless you feel that the government not being able to spend absurd amounts of money is going to somehow destroy the universe.
I want to know who is going to buy the debt that is being sold?
When our debt is invested in it strengthens our currency, the opposite happens when the masses are selling it…
Depends on whom they’re selling it to, or what happens to those dollars after they’ve been “invested.”
If Congress was going to keep spending like crazy, then I’d agree with you; Fed would likely come in and start devaluing like nuts. But here…the Tea Party are zealots. I agree with them, but that doesn’t change the fact they’re zealots.
Never underestimate what lengths a zealot will go to. If they force Congress to play with a balanced budget, that changes a lot of assumptions in your “sell debt, lower dollar” model.
If Japan drops treasuries, it means the Tresury has to offer more money to compete for the cash. But if the Tea Party stiff arms the Treasury and forces government to pay its debt as opposed to restructuring it…
Right, a reserve currency of the shiny stuff is an entirely different ballgame. And while it’s impossible for me to 100% refute its logical merits, the only question I have for those who want a gold/silver/etc. based currency is: what would have happened if we entered this global crisis with that kind of reserve currency in place? Now, the simple counter argument is that having a gold/silver/etc. backed currency would have kept us out of those bubbles in the first place. And maybe that’s true, to an extent. Irrespective of your views on the U.S. budget, the extent of the Fed’s powers, I truly wonder where the world would be if not for the Great Chairman and his Printing Press.
There is no simpler vs advanced argument because there is only one argument. On currencies not backed by a finite resource, irresponsible decision making runs rampant and the value of the currency fades. On a gold standard, the last 50 years worth of bubbles don’t happen and the global economic crisis we are still currently withstanding, born from irresponsible financial decisions and extraordinary levels of debt, never happens.
Cain, in continuation of the small reponse above.. so it doesn’t get lost, as I was confused as to which reply button to hit (lol)…..
A country that can finance its debt should have a strong currency…. A country that has to call a special vote to raise the debt ceiling because they consistently borrow too much… Should not have a strong currency
Should…Shouldn’t…
We might be getting a stronger dollar, regardless of what we deserve. I’m not guaranteeing it, only saying the conditions are there.
Cain, I am enjoying this discussion… This is in response to your post above: when a foreign entity buys our debt, it is essentially investing in dollars, because the debt is denominated in dollars.. so for example, when china buys our debt, the RMB gets converted to USD, thus giving USD a boost.. this is the underlying theory for the majority of USD bulls and what lies behind the “reserve status” etc…
This I’m sure you know, so I’m confused what you mean by “it depends what happens with the dollars…”
If they (meaning anyone) is buying our debt, there is demand for dollars, bottom line.. and more demand = higher price..
Regarding the rest… Under normal circumstances I’d agree with you… and while the recent influx of more strict government officials has been a nice site for more hawkish citizens, I don’t think we yet have enough to throw Ben and co. off track.
The bottom line is the housing market still blows, employment isn’t anywhere near where it should be, and until that happens, it would appear as if Ben is going to continue down the same path… “temporary” inflation signals be damned…
If the Paul’s and others tried to stop irresponsible fiscal government decisions by NOT raising the debt ceiling then I see this happening: the sellers drive the price of debt down, hiking interest rates, foiling the housing market some more and without the Fed as “buyer of last resort” the economy tumbles again IN ADDITION to a higher supply of dollars (thanks to net sellers of debt) driving the USD down (BAD BAD BAD)
If the debt ceiling gets lifted (most likely scenario), then due to the circumstances mentioned above, we get continued easing in the face of QE Lite, 1, 2 & ZIRP, and dollar speculation takes the USD lower, deservedly so or not. I say deservedly so or not because it’s tough to pinpoint a real value for the dollar, sans speculation
As per the “what happens to the dollars comment”:
If the US government creates a service that somehow results in a useful product, then they have strengthened the currency.
If they borrow money, then spend it without creating value, they have weakened the currency.
Here’s where my heads at. China buying up dollars for renminbi only strengthens the dollar as long as China holds the reserve. But when China then turns around and buys our debt, which in turn has been resulting in the US spending said currency domestically, our currency does not strengthen, it weakens.
Foreign nations buying up dollars only strengthens the dollars for as long as they hold those notes in reserve.
I more or less see the debt ceiling either a) not getting raised, or b) getting raised only in conjunction with steep spending cuts.
I don’t think we get a massive rush to sell treasuries because we continue to meet our payments after deep cuts/government shut down. Austerity is either met voluntarily or unvoluntarily (voted verse shutdown). However, I don’t think that suddenly translates into devastation, because America can absorb the damage.
Take housing: fuck those 13%, sure they all fail, but how many additional people have their money betting on housing prices? We’ve already restructured enough that some additional failure won’t drastically change the outcome.
Shit’s mostly priced in.
So life goes on, American taxe revenues decline, but expenditures (from keeping those homes afloat) decline by a greater magnitude, and the US can make payments easier.
The stock market will probably trade down though.
You know, that or everything keeps going as it has been, because everyone freaks out at meaningful reform. One of those things…
Ahhhh, ok.. I see what you are saying now Cain.. a much more abstract take..
I was implying the simpler understanding that a bid for dollars strengthens the dollars..
Still, because the USD is the reserve currency, and the US Govt considered the most likely to afford their debt, the underlying bid for dollars creates demand that gives it strength.
But really, that is what we are questioning… Of late, it’s become more visible that perhaps the government can’t finance its debt. That is my view…
Without selling new debt, how would the government pay back old debt? Which again brings back into picture our fiscal position… Even ignoring the other unfunded areas such as social programs etc, our trade deficit is fugly and our employment situation not much better.
You know what they say… there is some truth behind every lie (or exaggeration..) I’d argue that it is becoming more likely America is one big ponzi scheme… I just don’t see how we could possibly finance our massive debt without sending the economy into a tailspin
Also, even if you ignore what higher rates would do to an already crippled, and still hurting, housing market… higher interest rates would also just make our debt less affordable….
All in all though, I see your ‘everything keeps going as it has been’ scenario most likely. People hate change… the masses hate it even more..
Not to mention that currently it is still only the minority calling into question the things we have been discussing… Input costs aren’t TOO high yet .. Employment isn’t recovering TOO slow yet .. Oil (in particular) isn’t TOO high yet .. Housing isn’t getting destroyed TOO quickly anymore .. Our debt is STILL getting paid .. etc ………
Oh and I suppose most of all: the dollar isn’t TOO worthless yet … (lol)
A good thing for me, though… gives me more time to accumulate more gold & silver
(laughter) keep in mind too, Chivo, I was largely disagreeing for the sake of discussion.
You nailed the crux of my argument when you said that our currency will strengthen if other currencies suck more.
April 2011, meet April 2010.
Can’t disagree with you there. Hey maybe you can answer this.
Hypothetical: EU disbands, Euro goes away.
What happens to EUR/USD and the DXY? Lol…
(laughter) sucks to be holding those.
Maybe Sheila Bair can work out a ‘cash for keys’ or ‘short sale’ with the Japanese holders of treasury? We’ll pay them a % of face value and wipe out the notes.
What do you suggest we do to deal with the 15-20% of people that don’t look good. As I see it, poverty and uneducated people aren’t going to disappear or emigrate to Australia. So while I understand the drag on the economy or healthcare system or whatever, I’m not sure anyone has offered up an alternative. Is your suggestion to cutoff all aid to poor people? I’m not saying that as a judgment, just as a question.
My comment had nothing to do with the place of poor people, or their health or livelihood. In fact, I wasn’t declaring that we should do anything.
I’m more just pointing out that if the dollar strengthens causing certain sectors of the US dollar to deteriorate further, it can be handled. I used housing assuming that further job loss or what have you would send those 13% realing.
I guess my point is austerity-like-conditions won’t really cripple us, it’ll just hurt. The regular jackass has plenty of abuse he or she can still take. I wasn’t suggesting anything, just postulating that when the support nets finally break (or are cut), they aren’t going to strangle us.
There’s no systemic risk left.
That’s what I was saying.
Well, unless you count risk from too many people betting against the USD.
If that thing were to rally hard enough, it would ruin many people’s day.
Nice thread and discussion. Short dollar long whatever is a bit crowded and those guys are probably setting up for some “angry cocaine withdrawal gorilla smackdown”
The commodity-inflation trend is not sustainable because it will lead to economic slowdown which then leads to dropping commod speculation and prices