-- Posted Wednesday, 14 January 2009 | Digg This Article
| Source: GoldSeek.com
Rick’s Picks
Wednesday, January 14, 2009
“Phenomenally accurate forecasts”
Just when we’d written the dollar off as brain-dead, it comes roaring back for no good reason! Does this mean that Treasury paper, too, will soon be bounding to new record highs, also for no good reason? We’ll know soon enough. In the meantime, how do we account for the dollar’s resurgence over the last month, following its horrific collapse after Thanksgiving? The only thing we can think of, knee-jerk contrarians that we are, is that it’s a case of buy-the-rumor, sell-the-news. The rumor was that a zillion dollars worth of bailouts and cash infusions into the banking system have yet to achieve even a measureable result, much less a significant one. The news is that Helicopter Ben is well on top of the situation and will soon inveigle yet more metaphysical trillions from who-knows-where for the purpose of shoring up financial institutions, if not shaky borrowers. Some wag estimated that this could send Treasury issuance above $2 trillion in the remaining three quarters of 2009.
So how did the dollar react to all of this blandly catastrophic news. Why, by rallying sharply, is how. The Dollar Index was up nearly 1.5% on the day, proving that investors are not merely delusional about the state of financial system, they are borderline psychotic. Tune them in to the self-aggrandizing charlatans who have been touting the prospect of an economic recovery in the second half, and you have all the ingredients needed to produce a 25% sell-off in the stock market. Sentiment indicators underscore this possibility, since they have skewed wildly bullish in the last couple of weeks.
More Letters on Inflation/Deflation
We have been deluged with responses to a recent commentary, “Calling All Inflationists…” and will continue to share them with you. If you’d like to join in the discussion of issues raised herein, you can do so at the new Rick’s Picks forum. Meanwhile, here are two more of the letters we received, each with an interesting point to make. The first is from Ross Moyer:
I understand you would like a detailed analysis regarding how we will recognize that inflation has returned? I'd be happy to oblige except that inflation must disappear first before it can re-emerge. You see, inflation is alive in well in the monetary aggregates and the trend towards more money creation is confirmed by that most nettlesome canary in the coalmine, gold. And despite all the efforts to suppress gold by the authorities, it manages to maintain a rather elevated price. Until gold kicks the can, inflation cannot be pronounced MIA let alone dead.
Gold is the ultimate arbiter of whether inflation is lurking in the system, and if inflation were utterly absent, gold would, like the stock market, be trying to avoid being cut in half instead of off a mere fifteen to twenty percent from its all time highs. Furthermore, the weekly technical setup looks like gold is preparing to challenge last year's highs sooner rather than later. That is most strange behavior in an environment where inflation is said to be absent. What's more, I posit that gold isn't merely reacting to the prospective creation of yet more U.S. debt for the purposes of untold domestic bailouts, but to enormous amounts of fiscal stimulus being planned by other nations, particularly the Chinese, who will be spending their massive dollar surpluses to shore up their own faltering economy. We will have to wait and see to what extent they succeed, but it is certainly far too early to bet on their failure as the Chinese are much better candidates than we to hold the line with the sort of neo- Keynesian strategies they likely will be resorting to in the coming months and years.
In a broader sense here is why placing your money on long lasting deflation is a losing bet. Short of a massive die off, recall that despite all the tumult in our domestic markets over the last year and a half or so, that there are still just as many souls on planet earth as there were before sub prime mortgages became part of everyone's lexicon. Six and a half billion souls exist on the planet, and they still need to eat, transport themselves, and generally live, as best they can, their lives. Where and how do we Americans fit into this grand picture? I maintain that the U.S. with its outsized influence in world affairs is well on its way to taking a far less prominent role in the activity of the other 6.3 billion inhabitants of planet earth; I further assert that part of that process will involve the eclipse of the dollar as the world's reserve currency. This will, by necessity, entail a great deal more inflation here in the U.S., perhaps hyperinflation, as this nation is no longer able to game the global system by virtue of controlling the monetary medium of world trade. The day when we are removed from our lofty perch is already in process, and the point of recognition that we are just a hulking monetary leper can come at any time, but like the incipient rise in gold, it will, in my view, occur sooner rather than later. The signs are all around us.
John G. explains why inflation or hyperinflation are unlikely before 2010:
Inflation and hyper-inflation are two among several alternative scenarios, and unlikely scenarios at least until August 2010 (the four year cycle bottom). However both inflation and hyper-inflation have happened before and could happen again.
If Asia chooses to remain dependent upon exports to the U.S. then we languish in a Japan style deflationary stagnation for a very long time. However if due to rising trade and international tensions, China begins selling its dollar reserves and, in a few years, adopts a gold standard - don't laugh! - it would be a declaration of independence ridding them of the need to maintain foreign reserves, enabling them to "decouple" their producing economy from our consuming economy, and directing an economic nuclear bomb at the U.S.
China is now the largest gold producer with production sufficient to grow its money supply. They mine but they do not sell.
The U.S. would then be unable to borrow in dollars at reasonable rates nor to repay its debts without severe deflation. Thus isolated, The U.S. would be deprived of the ability to lean on its trading partners and would be forced to print its existing debts into worthlessness.
The broad point is that the U.S. is at the mercy of other nations (China and Russia) which have the initiative and can do what they want with the U.S. and its dollar reserve currency.
Anything can happen.
***
Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2007, Rick Ackerman. All Rights Reserved. www.rickackerman.com
-- Posted Wednesday, 14 January 2009 | Digg This Article | Source: GoldSeek.com
