Update On The Dollar

Avoid dollar at all costs -- Jim Rogers, June 2008

It seems a more lucrative position would be to avoid Jim Rogers at all cost.

Let's take a few minutes for a dollar update. I first wrote while global stock markets were making new highs that my favorite investments were U.S. dollars and yen. A position that was completely laughable at the time. Or was it?

Above is a chart of five major currencies since the beginning of 2008. That includes the dollar, the Canadian dollar, the British pound, the euro, the yen, the Mexican peso and the Australian dollar. Why lookie, lookie, lookie. And, what are the two best investments of 2008? Chinese stocks? Oil? Corporate bonds? High yield bonds? Hedge funds? the Indian stock market? It would just so happen to be that durtie durtie durtie U.S. dollar and the Japanese yen. On a comparative basis, the yen and dollar are doing even better. As an example, the yen has made a recent move of thirty percent against the Australian dollar and even more against the Brazilian Real. The implications for corporate earnings are also substantial. That would be #24 on the Top 41 Untruths list - Global companies get more than half of their earnings overseas and that makes them a great investment. Uh, don't think so. Quantitative analysis actually matters more than emotional analysis. And, I don't even know what I'm doing as it pertains to foreign exchange markets. At least I didn't until I started incorporating the it into my analysis.

There is nothing more representative of Modern Finance than the massive speculation in the foreign exchange market. That includes Wall Street firms betting against the dollar for personal profit at the expense of the American people. I have heard many remarks that traders will dump the dollar if the U.S. policy doesn't change. Traders can dump the dollar all day long for all I care. Just as you now see with equities, commodities and bonds, traders can't control markets for anything other than short cycles of time. I think people might acknowledge that given all markets are now shredding traders left and right, they are simply along for whatever ride develops. The level of arrogance in traders today takes a life time of self-deceit to develop. And, as I have said often, quantitative or technical analysis is a function of fundamentals. In other words, traders will take what is given to them as their models erode or they will ultimately fail. Trying to trade counter to a move one didn't anticipate or continue to trade models that erode over time is a deadly game that has only one end - ruin. Just ask the hundreds, if not thousands of hedge funds that are(will) blowing up.

Let's digress a bit into a secondary discussion. I wrote many moons ago that forms of exchange between countries have consistently changed over time. We may be nearing a point in time where the dollar comes under pressure as the world's reserve currency. I am not talking about price pressure. I am referring to pressure from other states (countries) as global finance is shaken off of its foundation. Many European countries, Russia, China and others have most recently called for a new summit to discuss this very topic. Personally, I would whole-heartedly embrace a new medium of exchange other than the dollar as long as it does not create an even larger bureaucratic entity. Or create some international governing body. We don't need an incompetent European Central Bank type of governing model for currencies. A major source of this mess is government meddling in markets. And, that statement goes back decades and well beyond the bounds of the Federal Reserve and well beyond the U.S.. If you are unhappy with government today, and polls suggest 91% of Americans fit into that category on some level, wait till you get a whiff of a global governing body where corrupt cronies in China or Russia determine your economic vitality. It will be interesting to watch these discussions. That is, if there is any transparency into the process. The elitists who created this environment would surely rather have the sovereign be uninformed so they can do what they will. With all eyes focused on the economy, I don't think that is going to happen. There are times we can all quibble over whether the Constitution is to be interpreted literally, but now isn't one of them. Now is a time for strict interpretations of the Constitution. And, part of that includes any attempt by global elitist cronies who don't espouse any Constitutional ideals similar to our own attempting to usurp our rights for their personal agenda.

On that note, a very common theme exists amongst many that the U.S. had abused its power as the world's reserve currency. And, it's easy for many to blame the U.S. for so many problems around the globe right now. A valid position exists that the U.S. has often not been very neighborly for some time. And, that one country should not dominate global exchange. The euro has had moderate success over the past cycle. But, there are many positions out there, including those of some smart but very misguided people, that the U.S. is the source of nearly everything wrong with the global economy. It's time to shift that perspective back from the extreme. That position is preposterous. As I have written numerous times, including one of the first posts I put up on here, the opposite is a more appropriate position - many countries refuse to undertake significant political and economic reform to stimulate their own economies and would rather attempt to suck the U.S. economy dry. And, the U.S. has made it far too easy for that to happen. That fact has been a major contributing factor in the globalization of this crisis.

Sharing and coordinating regulatory frameworks for business transparency and investor safety across borders is something I support. An example might be accounting principles. Any form of internationalizing regulation over forms of exchange or otherwise is something I clearly do not support. The distinction being a body of international pinheads making and enforcing sovereign regulatory decisions. Such a move, seemingly being considered by those who created this mess, would put our economic future into the hands of those that managed to screw their countries up even more than these same pinheads have managed to screw up ours. It is no coincidence our government seems in crisis. It is indeed by design - to allow it to accomplish nearly nothing of significance. That is, until there is crisis, where unanimity coalesces. And, while it may therefore appear the U.S. form of government is outdated, nothing could not be further from the truth. It is not our government that makes us great, it is the lack thereof that makes us great. Yet, as Thomas Paine told us, the only thing worse than government is no government. And, in many regards, that is where we are today. With respect to many issues, there is no government of the people, by the people, for the people. To perpetuate this onto a global regulatory scale that would, in any way restrict the self determination or rights of American citizens, would be an act of high crimes against this great country. Let's make sure there is no attempt to go there.

Regardless, the global redistribution of wealth is over. That redistribution went from the U.S. to emerging markets and from the middle class to those who consider themselves the ruling elite as defined in my populist post. As I wrote back in 2006, we could eventually see all of the global wealth created since 2000 be destroyed. And, it appears we are well on our way to validating that statement. Or worse.

Finally, these are very unnerving times. The ferociousness of this environment has and will continue to be underestimated. Or, maybe more appropriately, the status quo will do anything to try to convince the world that all is well in hopes of rekindling Goldilocks. Not necessarily as some perspective of conspiracy but because it is the only environment the status quo knows. And, change creates great fear.

It is not so much what I see that is unnerving, it's what I know is lurking beneath the surface. For many, it may therefore be intuitive to believe the dollar should collapse but until I see something to invalidate my thesis, regardless of very unnerving economic distress in the U.S. (And, we were talking about systemic risk in our banking system when no one was. ie, This environment is not foreign to my dollar position.) my consistent view of a strong dollar is still intact. As I wrote in the 41 Untruths, strong re the dollar is comparative. I surely don't expect to see the dollar return to its bubble days of 1999 and 2000.

Intermediate term the dollar remains very overbought and most likely has come too far too fast. A pull back is going to happen at some point. Any pullback should not be confused with news of the moment as is always the case with the financial press. In other words, "Dollar falls due to Federal Reserve moves." or any other similar reporting is just hooey to fill the empty newspaper space or internet headlines. (Twenty four hour news feeds need to fill your head with something. And, little of it includes useful facts.) Just as were the original headlines as to why the dollar was falling in the first place. The dollar's bottom might be $72, $68, $78 or something else, but we are likely putting in a substantially major bottom in this range.