Charles Sizemore, of HS Dent Investments, writes The Destruction of the Dollar? Not So Fast…
A funny thing happened on the way to the dollar’s imminent destruction: it broke its downtrend and is now looking to finish 2009 strongly.
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Is the US federal government spending an irresponsibly large amount of money these days on stimulus…much of it borrowed? Absolutely. But so is virtually every European country, and yet the euro remains strong. The same is true for the Fed’s excessively lax monetary policy.  As bad as it is, it is only marginally worse than that of most other developed countries. As we wrote in a prior post (see “Who’s Next?“), some Eurozone members are at significant risk of sovereign default. And what might a default by a member or, in the most extreme case, the exit from the Eurozone of a major regional economic power like Italy, mean for the future of the euro? Let’s just say it wouldn’t be good.
The dollar was too expensive in 2000. But today, after nearly ten years of grinding bear market, the dollar is cheap and despised. Legendary speculator George Soros is credited with saying that the secret to making money in the financial markets is to find the trend whose premise is false and then bet against it. And we believe that the dollar bear market is one such trend. And Soros’s old partner, legendary contrarian investor Jim Rogers, agrees.
For those who read SHTF Plan regularly, you may note that this assessment from HS Dent directly contradicts our recent article Hyperinflationary Depression – No Way of Avoiding Financial Armageddon.
While the greater “depression” trend is still the case in both scenarios, the difference is whether or not we experience an inflationary depression similar to that of Zimbabwe, or a deflationary depression, similiar in nature to the 1930’s.
This seems to boil down to whether or not The Fed will be able to print enough money to offset the contraction in credit markets. It is, of course, more complicated than that, but that’s the general argument.
For this SHTF Planner, Marc Faber’s assessment earlier this year in The Inflation-Deflation Debate Heats Up is a plausible scenario that involves both elements.
For those trying to play this crisis for short-term gains, the road to wealth will be rocky. If however, you are looking at the long-term, tangible assets should pay off, because regardless of what happens in the near-term (0 – 36 months) the end result will likely be very bad for the US dollar and assets denominated in dollars.
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Comments…..I am curious to find out how the Gov boosted the $ ? Some of the economists you cite had predicted the rise a month ago. Bob Chapman said yesterday the strengthening was Gov intervention. Please clarify.
I think the dollar rally probably has multiple factors, but if the US govt (and other govts) wanted to boost the dollar, they certainly could — at least for a limited time. I am not an expert at foreign currency transaction and CDS, but I believe the Fed tried to do something like this earlier this year. I read Chapman’s piece, but he did not elaborate as to how this is being executed.
If the Fed did want to boost the dollar, this is how they might do it: Fed Using Currency Swaps to Boost the Dollar
In addition, I think that the dollar could potentially see a more “natural” rally. Take a look at what happened in the day or two following Dubai… And today, for example, as Greece’s credit risks scare investors, we see capital pouring back into the dollar and US Treasuries. It seems that no matter how much smack they talk around the world, the US Dollar remains the safe haven asset…. This will change, in my view, eventually, but for now, investors run to the US when the SHTF in financial markets around the world.
From Bloomberg 12/17/09:
“The dollar rose to the highest level in three months against the euro while stocks and commodities slid as investors shunned risky assets on concern the global economic rebound will stall. Treasuries rallied. “
Europe is worse off than the US, but no one over there is talking about it. It may very well be that the “collapse” will start in Europe and then move here…. In fact, it can be argued that a debt collapse in Europe was partially responsible for the 1930’s Depression…
Lots of variables at play and to get anywhere close to understanding wtf is going on, we would need to look at every aspect of the global economy.
I am officially a “pro.”
A professional guesser anyway.
Well, we’ll see how this goes…when I said I thought the dollar would rebound, I was thinking an index well above 80…maybe even 90 – to around the March ’09 level…and that is still a long ways off…
This is horribly paranoid… but remember how artificial the oil rally felt – well above $100 for no reasons – only those offered on TV by guessers. Remember when the market crumble last Fall and felt bottomless… then rallied with no end in site – forces are at play while the average investor sits on the sidelines. The dollar rally almost seems “planned”. How else can large (Soros sized) funds collect on the carry trade? I agree with this fork in the road analysis – darned if it do – darned if it don’t. I’m feeling a lot of pain with fewer brown bags when I buy $100 worth of groceries or $100 worth of booze – but certainly no wage based inflation (you get a pay raise in 2009?) Point here – the dollar spike will make several assets cheaper – if you don’t own commods or metals now – think about that dollar cost average play with a increased exposure to such. If you ran the rally in equity – ring some of the register.Â
This market’s reins are in the hands of other forces. Macro we are skewered. Micro hurts worse. Bet wisely.