Wednesday, May 19, 2010

Ron Holland on the Coming Currency Crisis and Economic Viagra

Ron Holland has an excellent blog on the Lew Rockwell site about the coming currency crisis.  Holland makes four excellent points:

1. The Greek crisis may lead to a shrinking of the Euro zone as more socialist nations like Greece pull out in order to have the flexibility to inflate further.

2. Eurocrats would like increasing centralization of Europe, just as Republicrats here in the US favor increases in Washington's power.  But, Ron rightly notes, Europe "would be far better off as a confederation of sovereign states that allows competition among individual national currencies." The same is true here in the U.S.  The U.S. would be better off if the states were sovereign and were to spin off from Washington, which ought to become a loose coordinative hub like Brussels is today.

3. There will be continuing periods of dollar strength as the mania of  "dollar safety" continues to motivate investors.  Eventually, though, massive increases in the monetary base and China's and Japan's ending of their subsidization of a devaluing dollar will cause currency depreciation here.

4.  Holland concludes:  "Eventually the sovereign debt crisis will also come to the U.K. and then to the U.S., with disastrous results. The tragedy in Greece today is just a glimpse of what will happen to the sovereign debt of the United States. It will come to America, and it will come on its own schedule, so be prepared."

That means be ready to purchase gold when the price of gold falls.  I have about 5% of my total assets in gold right now and I'm planning to increase it over time, buying in the dips.  Other commodities such as agriculture (DBA) and general commodities (DBC) as well as silver (SLV) and other metals should be included in a balanced portfolio.  Gold stocks (for instance, Eldorado, EGO or GDF) and leveraged gold ETFs (e.g., DGP) are higher risk/higher return ways of investing in gold.  Similar ETFs exist for silver and other commodities.

I am currently 68% in cash and about 10% in commodities, including silver and agriculture as well as gold, and about 6% in two foreign currencies, the Canadian dollar and the Australian dollar. The rest is in a few stocks, including a Singapore ETF (EWS).

My worst positions are the Australian and Canadian currencies which have plummeted, apparently because of the Euro crisis (I don't understand why, but I also don't understand why the dollar is rising).  A buying opportunity in the making?

Do not buy and hold.  The mammoth increase in monetary reserves two years ago has motivated the past year's run-up in the stock market, and it may be that this injection is running out of steam. It is possible that the massive increase in potential liquidity (tripling of the monetary base) will continue to boost the stock market for some time, but ultimately the viagra will wear off.  Then, Bernanke, Obama and their supervisors at 85 Broad Street will need to decide whether to inject nine times the monetary base to try to "get the stock market up" another 50%. If they do, hyper-inflation will be a certainty. If not, then expect some major disappoints in the American stock market.

Bernanke's use of monetary reserves somehow reminds me of viagra.  The older the rally gets, the more viagra is needed.


indianist said...

I have been trying to know why the dollar rate is rising and why is the rupee value falling? When will all these get over and India will have a better economy? Please share your ideas with me if you are aware of it.

Mitchell Langbert said...

The Indian monetary aggregates and the US monetary aggregates are growing at high rates. The Indian government has gotten bad press, and foreign direct investment has fallen sharply as a result. In contrast, many on Wall Street believe that the US dollar is a safe haven. I do not believe that. The US dollar has been pumped up at a similar rate to the rupee, and there have been massive increases in Federal Reserve Bank Credit. American economists mostly believe that further increases will help. Down the road, the dollar will fall, if not collapse. Not that I'm recommending the rupee as an investment, although it might be a good time to buy for the short run. I have no idea whether the underlying political problems will be rectifying. Six decades of socialism created bad habits that are hard to break. Rather, hard assets like silver or gold would seem to be preferable in the long run. In the short run dollars might continue to do well for a while. Stocks and housing will be good if there is a nice correction. The US stock market has had a healthy run up, and since we are still in a cyclical bear markets we can expect at least one, maybe two or three, more sharp drops before the bull market. The Fed already created the monetary base needed for a bull market, but there is considerable waste in the US economy, including in things like housing, that need to be cleaned up.