Tariffs are a mistaken policy---unless you find a trading partner who's even dumber than you are and is willing to foot the bill for you. President Trump may have done that. The strengthening dollar suggests a deflationary effect of the tariffs arising from Chinese dollar purchases. The dollar gets stronger, Americans can buy more; the yuan renminbi gets weaker, the Chinese can buy less but sell more. American goods will be harder to sell, but Americans will be richer and have more money to spend. If this pattern continues, some of the effects of Fed monetary policy--reduced interest rates--will be counteracted. The stock market may be in for a roller coaster as Chinese and Fed manipulation--King Kong versus Godzilla--battle it out. Americans may at least temporarily benefit. In the long term, we would have been much better off without the manipulation, without the Fed, and with a market-based system free of central bankers and Wall Street subsidization.
I have temporarily reduced my gold holdings on the chance that dollar strengthening continues and gold continues to fall. A few days ago $1240 was a technical resistance point. Gold is now down to $1217, and it looks like the drop will continue. I suspect that the collapse in the commodity sector will continue down to the point where the Chinese stop subsidizing the dollar, probably when the dollar rises another five to ten percent.
Showing posts with label dollar. Show all posts
Showing posts with label dollar. Show all posts
Thursday, July 19, 2018
Wednesday, July 11, 2018
Trade War May Pressure New Bottom in Gold
President Trump's escalating trade
war appears to be affecting gold prices, which respond to a stronger dollar. The tariffs will make Chinese goods more
expensive, but the Chinese can make their goods cheaper by making their
currency cheaper to offset the effects of the tariffs. There are many ways the Chinese can do this: The yuan is pegged to the dollar, so they can
lower the peg. This is easy to do
because the Chinese owe at least a trillion dollars in loans to the US, and they hold
trillions in dollars and dollar-denominated loans that they’ve made to the US
government. If they purchase dollars, the dollar will strengthen, and Chinese
goods will become cheaper, offsetting the tariffs.
In turn, the price of gold is affected by the dollar. A
stronger dollar means cheaper gold. That correlation has held this week.
In
light of today’s White
House threats of an additional $200 billion in tariffs, the S&P 500 fell almost one percent and gold
fell back to $1244, a fall of about $10.
The yuan
renminbi-to-dollar exchange rate has fallen over the past couple of days to
$0.1497, the lowest level this year.
It
will be seen whether gold can hold a technical $1240 inflection point. If not, there may be a good way down as the Sino-American
trade-and-currency war escalates. That might provide a good entry point for
gold, perhaps below the $1,000 mark.
Hope is not prediction, though.
Monday, August 22, 2011
The Fed Is Responsible for US Jobs Exiting to China
Gerald Celente of Trends Journal and Trends Research Institute just e-mailed with a special report about the exodus of jobs to China. Celente takes a protectionist tack, with which I profoundly disagree. He writes:
"Libertarians and “free market” economists praise Wal-Mart’s low prices achieved by offshoring, but these prices do not include the costs of the decimated state and local tax bases that are destroying American cities, the costs of the high unemployment and the personal depression, crime, and income support programs. These and other costs are expenses imposed on third parties by the movement of American jobs abroad in order to maximize profits...
"Free trade works, if it works at all, only when capital and technology remain in the domestic economy and find their best use or comparative advantage. Offshoring is the contradiction of free trade. It is the pursuit of lowest factor cost and absolute advantage."
The basic statement of free trade, comparative advantage, is still valid. There is no reason for an ongoing exodus of jobs under a free market system where there is no paper money system to artificially inflate the dollar at the expense of workers. This has occurred since 1913, especially since 1970.
"Libertarians and “free market” economists praise Wal-Mart’s low prices achieved by offshoring, but these prices do not include the costs of the decimated state and local tax bases that are destroying American cities, the costs of the high unemployment and the personal depression, crime, and income support programs. These and other costs are expenses imposed on third parties by the movement of American jobs abroad in order to maximize profits...
"Free trade works, if it works at all, only when capital and technology remain in the domestic economy and find their best use or comparative advantage. Offshoring is the contradiction of free trade. It is the pursuit of lowest factor cost and absolute advantage."
The basic statement of free trade, comparative advantage, is still valid. There is no reason for an ongoing exodus of jobs under a free market system where there is no paper money system to artificially inflate the dollar at the expense of workers. This has occurred since 1913, especially since 1970.
The dollar is used as a reserve currency around the world, not just in China. Its reserve currency status elevates its value. There are $10 overseas for every dollar here, with central banks around the world holding trillions in treasury bonds. If the foreign dollar holdings were to be exchanged and the treasury bonds sold, as happens with bubbles, the dollar would be worth less than its current value. This happened to the pound in the early 20th century. Americans would be poorer, but manufacturing would return here. A Faustian bargain.
Under a libertarian system, a metallic standard, overseas investment would depreciate the dollar, eventually forcing overseas investors to repatriate their investments. The flow of gold or silver would pose a market-based mechanism to limit expatriation of investment. This has not happened in our state-dominated economy because of the paper money system and the limited ability of planners like Bernanke and Geithner to function independently of special interest pressure. Such pressure would not evaporate under a tighter degree of regulation. New forms of regulatory privilege would emerge. The current system is the result of government intervention and Progressivism. When the Sherman Anti-trust Act was passed in 1890 and the Fed established in 1913 firms were far smaller, there was less monopoly, there was no possibility of unlimited expatriation of capital, the average real wage was rising (unlike since 1970s, when the gold standard was removed) and although there had been depressions in the Gilded Age, they were milder and briefer than the post-Fed depressions and recessions in 1920, 1930, 1974, 1978 and today. Where does the investment capital to invest overseas come from? The Fed. It is not a libertarian free market phenomenon.
Celente's suggestion, to impose regulatory limits on where and how capital is deployed, would create impediments to investment and cause a stock market crash because of increased riskiness and regulatory controls. Small as well as large investors would be hurt. This is what occurred in the early 1930s, with the Smoot Hawley tariff contributing to the Depression.
Creating paper money with one hand and then imposing regulatory controls with the other disrupts expectations. Investment capital flees. New irrational bubbles form. Rather than expand firms’ investment here, investors would find overseas firms in which to invest. Many US firms would leave the country. Why stay here? The wonderfully educated work force? A stable government? Low taxes? I don’t think so. Voluntaristic solutions work better than state compulsion by planners with human hence limited mental capacities and motivations.
Wednesday, December 1, 2010
Managing Your Life in a Declining America
China's and Russia's announcement that they will use the ruble or the yuan to trade bi-laterally seems to have struck financial blogs, but few others, as important. Market Watch writes in an understated tone:
>China and Russia will stop using the U.S. dollar to settle bilateral trade and instead use the ruble or the yuan, though the move is not meant to signal a challenge to the dollar, according to reports Wednesday. China's Premier Wen Jiabao and Russian President Vladamir Putin made reference to the new currency trade pact late Tuesday, following meetings in St. Petersburg that also saw the signing of bilateral trade and energy-cooperation agreements, according to a report in the state-run China Daily. "About trade settlement, we have decided to use our own currencies," Putin told reporters, according to the report. Earlier this week, China added the ruble to the list of currencies that can be traded against the yuan on its domestic exchange.
I searched the words "China Russia trade dollar" on Google and got 238,000 hits, but the leading hits were all financial blogs. Moreover, the ostriches have proven eager to bury their heads in the central Asian sand. Tyler Durden notes that Russia and China made a similar bi-lateral statement more than a year ago and nothing changed then. Also, the dollar has risen since the announcement.
But the dollar has risen since the announcements of numerous momentous decisions that will depreciate it, such as the bailouts and the massive expansion of the monetary base in 2008. Wall Street's short-term faith in the dollar has over-ridden longer term logic since 2008. Unless the Fed decides to reverse its policies of the past ten years there is little reason to believe short term market fluctuations. Of course, as investors we need to consider such fluctuations.
It would seem that a decision to drop a long standing business practice will require adjustment. It would also seem that along with the dollar habit Russia and China may be concerned with US power. How long did the abolitionist movement in the US continue before slavery ended? Even in 1776 Jefferson wanted to include more aggressive statements against slavery than the Southern delegates to the Continental Congress allowed in the Declaration of Independence . If it took 86 years to abolish slavery, might it take a few years for the Russians and Chinese to switch to an alternative currency? By the time they and other global players make the decision the markets will have digested the information. At that point dollars will be worth a small fraction of what they are worth today. Hence, the head-in-the-sand response may prove to be insufficient.
There are several possible outcome scenarios to long term dollar depreciation and American economic decline. First, the Fed's monetary expansion could work for another round. The economy will grow in a valid way, jobs will be created and the public will become wealthier. The nation's jobs picture would improve and there would be little inflation. I don't think that will happen. The Fed has not been successful in stimulating sound economic growth. Although the past twenty years saw considerable economic activity, most of it involved the creation of unstable, low-end retail jobs. The high unemployment of today results from the economic illusion for which the Fed has been responsible. The Fed not only creates illusion but also transfers a wealth to Wall Street and corporate interests as well as to privileged workers in government, construction and big business. The past 10 years have seen a massive increase in privilege to the wealthy because of Republicrat policies. But until recently the illusion has been sufficient to keep Americans happy. Blissful ignorance might continue despite the Tea Party. If the Fed's monetary policies work, then the stock market will shoot up. I don't think that will happen in the long term, but I do think that there will be short to medium term strength in the stock market, say into 2011. After that, all bets are off.
The second possible outcome will be that the Fed's policy works but causes significantly higher inflation. This would happen if the commercial banks convert all of the money reserves the Fed has created into loans. That would stimulate a high degree of unproductive economic activity similar to the sub-prime building of the last decade. Economists will say that the economy has recovered, but Americans will become poorer. If you recall the seventies, then you have a sense of what higher inflation feels like. But the inflation this time around may be worse. This is the scenario I think will occur.
The third scenario is that the banks will not lend a multiple of the reserves that have been created and instead contract their loans. That would result in deflation. The markets have been afraid of this scenario but it would turn out better for the average American (except for the unemployed). Stocks and bonds would decline as would non-monetary commodities. Gold and silver both seem to behave today as monetary commodities. Hence, they may do as well in this scenario as under inflation. However, agriculture, DBA would not. As well, the stock market will probably fall as profits and consumer demand decline along with the availability of money. There will be high unemployment but the government will become increasingly paralyzed. I do not think this will occur because there will be too much pressure on the money center banks and the Fed to purchase US debt. Even if the banks do not lend to the public, the Fed will continue to monetize the federal debt, and government will continue to spend in value-destroying ways, resulting in inflation or dollar depreciation.
A fourth scenario would be total economic breakdown. This might occur if there is disruption to the power grid through terrorism or some other disaster and the government lacks the resources or competence to respond, a kind of global or national Hurricane Katrina. I know people who fear this but usually what goes wrong is what you don't expect, not what you do expect. If you have a year's supply of dry food in your pantry I personally wouldn't call you crazy but I don't believe you will need it. At present I do not have any dry food, silver bars or firearms. But having a rifle and an ample supply of junk silver (pre 1960 coins or one ounce silver bars) might be a good idea. You likely would never need that stuff but if you have five thousand dollars to invest in an insurance policy, you might consider those steps.
It seems to me that at this point cash is still safe, although the days of cash may be drawing to a close. Gold and silver are highly speculative because of investment or speculative demand, but their persistent rise suggests that a broader-based demand for gold-as-money is motivating the price increases. I have about ten percent of my portfolio in commodities and I am going to allow the percentage to increase for quite a while, purchasing some additional amounts. I am also taking care of whatever home improvements I can afford, and if I inherit an additional $100 grand will buy myself a Boxster S. I aim to invest in what I know or plan to know.
>China and Russia will stop using the U.S. dollar to settle bilateral trade and instead use the ruble or the yuan, though the move is not meant to signal a challenge to the dollar, according to reports Wednesday. China's Premier Wen Jiabao and Russian President Vladamir Putin made reference to the new currency trade pact late Tuesday, following meetings in St. Petersburg that also saw the signing of bilateral trade and energy-cooperation agreements, according to a report in the state-run China Daily. "About trade settlement, we have decided to use our own currencies," Putin told reporters, according to the report. Earlier this week, China added the ruble to the list of currencies that can be traded against the yuan on its domestic exchange.
I searched the words "China Russia trade dollar" on Google and got 238,000 hits, but the leading hits were all financial blogs. Moreover, the ostriches have proven eager to bury their heads in the central Asian sand. Tyler Durden notes that Russia and China made a similar bi-lateral statement more than a year ago and nothing changed then. Also, the dollar has risen since the announcement.
But the dollar has risen since the announcements of numerous momentous decisions that will depreciate it, such as the bailouts and the massive expansion of the monetary base in 2008. Wall Street's short-term faith in the dollar has over-ridden longer term logic since 2008. Unless the Fed decides to reverse its policies of the past ten years there is little reason to believe short term market fluctuations. Of course, as investors we need to consider such fluctuations.
It would seem that a decision to drop a long standing business practice will require adjustment. It would also seem that along with the dollar habit Russia and China may be concerned with US power. How long did the abolitionist movement in the US continue before slavery ended? Even in 1776 Jefferson wanted to include more aggressive statements against slavery than the Southern delegates to the Continental Congress allowed in the Declaration of Independence . If it took 86 years to abolish slavery, might it take a few years for the Russians and Chinese to switch to an alternative currency? By the time they and other global players make the decision the markets will have digested the information. At that point dollars will be worth a small fraction of what they are worth today. Hence, the head-in-the-sand response may prove to be insufficient.
There are several possible outcome scenarios to long term dollar depreciation and American economic decline. First, the Fed's monetary expansion could work for another round. The economy will grow in a valid way, jobs will be created and the public will become wealthier. The nation's jobs picture would improve and there would be little inflation. I don't think that will happen. The Fed has not been successful in stimulating sound economic growth. Although the past twenty years saw considerable economic activity, most of it involved the creation of unstable, low-end retail jobs. The high unemployment of today results from the economic illusion for which the Fed has been responsible. The Fed not only creates illusion but also transfers a wealth to Wall Street and corporate interests as well as to privileged workers in government, construction and big business. The past 10 years have seen a massive increase in privilege to the wealthy because of Republicrat policies. But until recently the illusion has been sufficient to keep Americans happy. Blissful ignorance might continue despite the Tea Party. If the Fed's monetary policies work, then the stock market will shoot up. I don't think that will happen in the long term, but I do think that there will be short to medium term strength in the stock market, say into 2011. After that, all bets are off.
The second possible outcome will be that the Fed's policy works but causes significantly higher inflation. This would happen if the commercial banks convert all of the money reserves the Fed has created into loans. That would stimulate a high degree of unproductive economic activity similar to the sub-prime building of the last decade. Economists will say that the economy has recovered, but Americans will become poorer. If you recall the seventies, then you have a sense of what higher inflation feels like. But the inflation this time around may be worse. This is the scenario I think will occur.
The third scenario is that the banks will not lend a multiple of the reserves that have been created and instead contract their loans. That would result in deflation. The markets have been afraid of this scenario but it would turn out better for the average American (except for the unemployed). Stocks and bonds would decline as would non-monetary commodities. Gold and silver both seem to behave today as monetary commodities. Hence, they may do as well in this scenario as under inflation. However, agriculture, DBA would not. As well, the stock market will probably fall as profits and consumer demand decline along with the availability of money. There will be high unemployment but the government will become increasingly paralyzed. I do not think this will occur because there will be too much pressure on the money center banks and the Fed to purchase US debt. Even if the banks do not lend to the public, the Fed will continue to monetize the federal debt, and government will continue to spend in value-destroying ways, resulting in inflation or dollar depreciation.
A fourth scenario would be total economic breakdown. This might occur if there is disruption to the power grid through terrorism or some other disaster and the government lacks the resources or competence to respond, a kind of global or national Hurricane Katrina. I know people who fear this but usually what goes wrong is what you don't expect, not what you do expect. If you have a year's supply of dry food in your pantry I personally wouldn't call you crazy but I don't believe you will need it. At present I do not have any dry food, silver bars or firearms. But having a rifle and an ample supply of junk silver (pre 1960 coins or one ounce silver bars) might be a good idea. You likely would never need that stuff but if you have five thousand dollars to invest in an insurance policy, you might consider those steps.
It seems to me that at this point cash is still safe, although the days of cash may be drawing to a close. Gold and silver are highly speculative because of investment or speculative demand, but their persistent rise suggests that a broader-based demand for gold-as-money is motivating the price increases. I have about ten percent of my portfolio in commodities and I am going to allow the percentage to increase for quite a while, purchasing some additional amounts. I am also taking care of whatever home improvements I can afford, and if I inherit an additional $100 grand will buy myself a Boxster S. I aim to invest in what I know or plan to know.
Monday, February 8, 2010
No Such Thing as a Safe Currency, Save One
Jon Nadler of Kitco quotes Bloomberg's Ben Levisohn:
“For all the concern over the $1.6 trillion US budget deficit and record debt load, the dollar is as valuable now as 35 years ago. Measured against a basket of currencies from the G-10 nations proportioned against each other, the greenback is up about 3 percent since 1975, according to the Bloomberg Correlation-Weighted Currency Index. That was four years after the Bretton Woods agreement set up in 1944 to link currencies to gold, collapsed.”
At the same time, Nadler bears bad news about the darn euro, quoting The Sydney Morning Herald, which notes that even prostitutes in Greece are threatening strikes because of loss of welfare benefits:
"The stakes are high, not just for Greece but for the entire euro zone, where efforts to forge a common economic identity are threatened. Last week, the panic spread to Portugal and Spain, and the cost of insuring their debt against a default soared to record levels as investors bet that, like Greece, governments in those countries won't be able to rein in bloated budgets."
Nadler points out that the continent's financial problems are linked to Democratic Party-style social welfare programs that have decimated its economic growth. Again quoting the Sydney Morning Herald:
"on a continent where the culture and legitimacy of the mother state are so deeply ingrained - and now in some cases unaffordable - a question remains: can the European Commission say 'no more' to prodigal nations like Greece and, to a lesser extent, Spain and Portugal? And how will the countries themselves confront the political fallout of economic distress?"
Given the failure of Democratic Party-style economics in Europe, it is amazing that anyone reads the European-style New York Times anymore, or that Americans have elected an administration that is committed to instituting Europe's failed tribalist philosophy here in the more civilized, individualist United States.
Also of importance are the implications of the dollar's strength. I just blogged about the effects on employment of a strong dollar and how the US government and the Fed have orchestrated the exit of high wage jobs via monetary policy. No currency is safe because the others will inflate as much as we do. What is amazing about this process of dollar repatriation given risk in Europe, which, quoting Nadler, I predicted a month ago using my coin flip method of investing, is that massive deficits and expansion of the monetary base, have been accompanied by increasing DEMAND for the dollar. When the supply of dollars goes up, cheapening them, demand also goes up? Is this a curious application of Say's Law, that supply creates its own demand?
I think not. There is a chasm between Wall Street's short term thinking and longer term reality. Keynes said that in the long term we're all dead, but Keynes is dead and we won't have to wait that long, hopefully (from a death standpoint).
If, given the high inflation rates of the past 40 years the dollar has held its own against other currencies, there is no such thing as a safe currency, save one. Spell it G-O-L-D. That does not mean that gold is going up next week or next month. But the world is on a welfare addiction habit, and the welfare addiction is destroying the source of the "good faith" of the US government. By raising spending, providing stimulus handouts and increasing the money supply, the US government is telling America's hard working employees: "You are fools. Look at the looters at Goldman Sachs." By taxing incomes, the US government is telling you: "Do not work, live off government." By subsidizing the welfare mothers on Wall Street, the US government is telling any entrepreneur: "Why waste your time? Get a value-destroying job in New York City."
If you trust the current pattern of events, trust the current strength of the dollar. Otherwise, think about alternatives. Stocks are fine, but inflation confuses investment, credit is overextended, lending is on hold and the US economy is a mess, starting with over-investment in real estate. This will result in downward adjustments in consumers' wealth and reductions in access to credit.
How will those problems be cured? Ben Bernanke has already done it. Expand the amount of money. But entrepreneurship has been hammered through decades of high tax rates, regulation and harassment of small business. My local pharmacist says he spends half his day filling out government forms. The same in other businesses. So stocks are not exciting. Too much regulation; too much mismanagement; too much malinvestment that needs to be cleaned up.
That leaves commodities. But in the short run, they will be subject to ongoing attacks from the central banks. But are you willing to trust the federal government and the dollar over the long haul?
“For all the concern over the $1.6 trillion US budget deficit and record debt load, the dollar is as valuable now as 35 years ago. Measured against a basket of currencies from the G-10 nations proportioned against each other, the greenback is up about 3 percent since 1975, according to the Bloomberg Correlation-Weighted Currency Index. That was four years after the Bretton Woods agreement set up in 1944 to link currencies to gold, collapsed.”
At the same time, Nadler bears bad news about the darn euro, quoting The Sydney Morning Herald, which notes that even prostitutes in Greece are threatening strikes because of loss of welfare benefits:
"The stakes are high, not just for Greece but for the entire euro zone, where efforts to forge a common economic identity are threatened. Last week, the panic spread to Portugal and Spain, and the cost of insuring their debt against a default soared to record levels as investors bet that, like Greece, governments in those countries won't be able to rein in bloated budgets."
Nadler points out that the continent's financial problems are linked to Democratic Party-style social welfare programs that have decimated its economic growth. Again quoting the Sydney Morning Herald:
"on a continent where the culture and legitimacy of the mother state are so deeply ingrained - and now in some cases unaffordable - a question remains: can the European Commission say 'no more' to prodigal nations like Greece and, to a lesser extent, Spain and Portugal? And how will the countries themselves confront the political fallout of economic distress?"
Given the failure of Democratic Party-style economics in Europe, it is amazing that anyone reads the European-style New York Times anymore, or that Americans have elected an administration that is committed to instituting Europe's failed tribalist philosophy here in the more civilized, individualist United States.
Also of importance are the implications of the dollar's strength. I just blogged about the effects on employment of a strong dollar and how the US government and the Fed have orchestrated the exit of high wage jobs via monetary policy. No currency is safe because the others will inflate as much as we do. What is amazing about this process of dollar repatriation given risk in Europe, which, quoting Nadler, I predicted a month ago using my coin flip method of investing, is that massive deficits and expansion of the monetary base, have been accompanied by increasing DEMAND for the dollar. When the supply of dollars goes up, cheapening them, demand also goes up? Is this a curious application of Say's Law, that supply creates its own demand?
I think not. There is a chasm between Wall Street's short term thinking and longer term reality. Keynes said that in the long term we're all dead, but Keynes is dead and we won't have to wait that long, hopefully (from a death standpoint).
If, given the high inflation rates of the past 40 years the dollar has held its own against other currencies, there is no such thing as a safe currency, save one. Spell it G-O-L-D. That does not mean that gold is going up next week or next month. But the world is on a welfare addiction habit, and the welfare addiction is destroying the source of the "good faith" of the US government. By raising spending, providing stimulus handouts and increasing the money supply, the US government is telling America's hard working employees: "You are fools. Look at the looters at Goldman Sachs." By taxing incomes, the US government is telling you: "Do not work, live off government." By subsidizing the welfare mothers on Wall Street, the US government is telling any entrepreneur: "Why waste your time? Get a value-destroying job in New York City."
If you trust the current pattern of events, trust the current strength of the dollar. Otherwise, think about alternatives. Stocks are fine, but inflation confuses investment, credit is overextended, lending is on hold and the US economy is a mess, starting with over-investment in real estate. This will result in downward adjustments in consumers' wealth and reductions in access to credit.
How will those problems be cured? Ben Bernanke has already done it. Expand the amount of money. But entrepreneurship has been hammered through decades of high tax rates, regulation and harassment of small business. My local pharmacist says he spends half his day filling out government forms. The same in other businesses. So stocks are not exciting. Too much regulation; too much mismanagement; too much malinvestment that needs to be cleaned up.
That leaves commodities. But in the short run, they will be subject to ongoing attacks from the central banks. But are you willing to trust the federal government and the dollar over the long haul?
Tuesday, January 12, 2010
China Now Tells You How Rich You Are
Kitco links to a Toronto Globe and Mail article that says that today's fall in the price of gold and the stock market and rise in the dollar is due to a speech by Pen Junming, who works in China Investment Corp., a sovereign asset fund. The Globe and Mail quotes Junming:
“'I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further,' he told an academic forum. 'The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades.'"
Carry trades involve hedge funds borrowing at low rates in the US and investing around the world at higher rates. Hedge funds have used much of the new money pumped into the economy by the Federal Reserve bank during the Bush and the Obama administrations in this way.
When, later that day Junming said that these views were not official and were strictly personal, the dollar gave back some of its gains. Mr. Peng added:
“'China should have the right attitude about investing in gold. There is no urgent need for China to increase gold buying for now, because prices are high.'”
Yesterday, I bragged of my coin flip method of deciding how to invest in the short term. Today I have a more substantive explanation for staying in dollars for now. Please note, however, that I do not think that Chinese bankers are particularly adept at investment (no more adept than Americans, anyway). They bought into US bonds when the dollar was far stronger than today, and rode a Cyclone roller coaster ride down. The article states that two thirds of China's sovereign assets of 2.27 trillion dollars are invested in dollars.
"Lou Jiwei, CIC's chairman, has been careful not to say much about how the fund invests its money. In October 2009, he said the fund was putting more money into commodities, real estate and infrastructure to hedge against medium- and long-term inflation and a fall in big currencies."
Thus, Pen's statement might reflect a change in position associated with last year's increase in the gold price. The article goes on to say that US asset managers continue to dominate the fluctuations in the dollar. Nevertheless, the Chinese have so entwined themselves in the dollar that their opinion matters. If the US ignores their advice, then we risk a sell off.
I have previously blogged about my fear of a major confrontation with the Chinese occurring in the next (22nd) century. I don't think the dollar will last that long. It should give Americans pause that the purchasing power of their dollars has, under the Federal Reserve Bank's and banking system's regime, become dependent upon the opinions and desires of foreign governments. Unless you idiosyncratically believe that the motives of the Chinese government coincide with your interests, you might wonder about the desirability of a system that has made you dependent on the opinions of a dictatorially and still-communist run nation with a culture very different from our own. I have always loved Chinese culture and the Chinese people, but frankly, I think the Americans have lost their minds.
“'I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further,' he told an academic forum. 'The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades.'"
Carry trades involve hedge funds borrowing at low rates in the US and investing around the world at higher rates. Hedge funds have used much of the new money pumped into the economy by the Federal Reserve bank during the Bush and the Obama administrations in this way.
When, later that day Junming said that these views were not official and were strictly personal, the dollar gave back some of its gains. Mr. Peng added:
“'China should have the right attitude about investing in gold. There is no urgent need for China to increase gold buying for now, because prices are high.'”
Yesterday, I bragged of my coin flip method of deciding how to invest in the short term. Today I have a more substantive explanation for staying in dollars for now. Please note, however, that I do not think that Chinese bankers are particularly adept at investment (no more adept than Americans, anyway). They bought into US bonds when the dollar was far stronger than today, and rode a Cyclone roller coaster ride down. The article states that two thirds of China's sovereign assets of 2.27 trillion dollars are invested in dollars.
"Lou Jiwei, CIC's chairman, has been careful not to say much about how the fund invests its money. In October 2009, he said the fund was putting more money into commodities, real estate and infrastructure to hedge against medium- and long-term inflation and a fall in big currencies."
Thus, Pen's statement might reflect a change in position associated with last year's increase in the gold price. The article goes on to say that US asset managers continue to dominate the fluctuations in the dollar. Nevertheless, the Chinese have so entwined themselves in the dollar that their opinion matters. If the US ignores their advice, then we risk a sell off.
I have previously blogged about my fear of a major confrontation with the Chinese occurring in the next (22nd) century. I don't think the dollar will last that long. It should give Americans pause that the purchasing power of their dollars has, under the Federal Reserve Bank's and banking system's regime, become dependent upon the opinions and desires of foreign governments. Unless you idiosyncratically believe that the motives of the Chinese government coincide with your interests, you might wonder about the desirability of a system that has made you dependent on the opinions of a dictatorially and still-communist run nation with a culture very different from our own. I have always loved Chinese culture and the Chinese people, but frankly, I think the Americans have lost their minds.
Whither Gold?
Gold went up today just four days after I blogged that I was mostly in cash. I just wrote a column for a popular local newspaper called the Lincoln Eagle that should come out in a few days and I suggested that there are four scenarios that might evolve: (1) bank failures/inflation; (2) deflation/inflation; (3) inflation/stagflation and (4) steady course. Jon Nadler of Kitco had suggested that we were in for a higher interest rate regime like we saw in the late 1970s and early 1980s, but I do not believe that it will be possible for the Fed to successfully execute a deflation or regime of high interest rates followed by a moderate (by 2010 standards, not by 1950 standards) re-inflation as was done under the Carter and Reagan administrations. It is likely that interest rate hikes will lead to stress on banks and additional unemployment. I do not believe that Obama is naive as was Carter to appoint a Fed chairman with the discipline to raise rates. Paul Volcker was exceptional and has not been equaled in the Fed's history. Even there, he reversed his monetarist policy by the early 1980s.
This time around the scenario is much worse. We are at zero (negative real) interest rates and ten percent unemployment. If the Fed raises interest rates then there will be additional unemployment and the Honorable Barney Frank will blow his stack as well as some other things. Moreover, with less reserves the banks will be expected to earn money like everyone else, by working for it, and that will make them unhappy, and the American public cannot allow bankers to be unhappy. It is not part of the American way.
So which way is gold going to go? In situations like this I use the coin flip test. Heads market up short term, tails market down short term. It kept coming up tails, so I'm staying put for now. But not in the long term.
The time for Obama to demand that the Fed clamp down on interest rates was this year. The Fed could have triggered a recession, higher unemployment and higher welfare payments, and the economy would have had two or three years to improve after a year or two of high rates. Instead, Bush handed the banks nearly a trillion dollars, the Fed tripled the monetary base and the money supply is growing like bamboo. Obama added additional handouts, and the likelihood of any sort of fiscal and monetary discipline is now an impossibility for the Messiah of Bloat.
Although I remain in dollars this week, I am watching this closely as my strategy is not wise for the long term.
This time around the scenario is much worse. We are at zero (negative real) interest rates and ten percent unemployment. If the Fed raises interest rates then there will be additional unemployment and the Honorable Barney Frank will blow his stack as well as some other things. Moreover, with less reserves the banks will be expected to earn money like everyone else, by working for it, and that will make them unhappy, and the American public cannot allow bankers to be unhappy. It is not part of the American way.
So which way is gold going to go? In situations like this I use the coin flip test. Heads market up short term, tails market down short term. It kept coming up tails, so I'm staying put for now. But not in the long term.
The time for Obama to demand that the Fed clamp down on interest rates was this year. The Fed could have triggered a recession, higher unemployment and higher welfare payments, and the economy would have had two or three years to improve after a year or two of high rates. Instead, Bush handed the banks nearly a trillion dollars, the Fed tripled the monetary base and the money supply is growing like bamboo. Obama added additional handouts, and the likelihood of any sort of fiscal and monetary discipline is now an impossibility for the Messiah of Bloat.
Although I remain in dollars this week, I am watching this closely as my strategy is not wise for the long term.
Saturday, December 19, 2009
Ron Paul on the Dollar
I noticed this on Youtube. I don't totally agree with Paul on everything, but I will not settle for less than him as to the most important issue, America's collapsing currency.
Monday, November 23, 2009
London Times on America's Feeble Dollar
The London Times has an excellent article on Obama's weak dollar strategy. The article notes:
"All of this means that investors do not believe that President Barack Obama will respond to the enormous pressure put on him during his visit to Beijing and take steps to strengthen the dollar. The president and Treasury secretary Timothy Geithner might talk the talk of a strong dollar but they walk the walk of a declining one. A weak dollar should lift exports and cut imports, which in White House terms means jobs for American workers. And it is jobs that the president asks his aides about first thing every morning. With reason."
The article notes that there are risks associated with gold investing, in particular the chance that the Fed will attack inflation. The article inaccurately attributes the Volcker Fed policy to Reagan. Carter appointed Volcker and he instituted his monetarist strategy during the Carter administration. Reagan allowed him to continue. But Volcker reinstated inflation in the early 1980s and the Reagan administration was for it. They called it "supply side economics".
A likely scenario is that Obama and Bernanke will resist limiting monetary expansion until a strong inflation is underway. There will be plenty of time to exit gold when they do exit. Even if they do exit, the credibility of the dollar has been permanently reduced. I'm not sure that even if the Fed strengthens the world will take the dollar seriously in the future.
"All of this means that investors do not believe that President Barack Obama will respond to the enormous pressure put on him during his visit to Beijing and take steps to strengthen the dollar. The president and Treasury secretary Timothy Geithner might talk the talk of a strong dollar but they walk the walk of a declining one. A weak dollar should lift exports and cut imports, which in White House terms means jobs for American workers. And it is jobs that the president asks his aides about first thing every morning. With reason."
The article notes that there are risks associated with gold investing, in particular the chance that the Fed will attack inflation. The article inaccurately attributes the Volcker Fed policy to Reagan. Carter appointed Volcker and he instituted his monetarist strategy during the Carter administration. Reagan allowed him to continue. But Volcker reinstated inflation in the early 1980s and the Reagan administration was for it. They called it "supply side economics".
A likely scenario is that Obama and Bernanke will resist limiting monetary expansion until a strong inflation is underway. There will be plenty of time to exit gold when they do exit. Even if they do exit, the credibility of the dollar has been permanently reduced. I'm not sure that even if the Fed strengthens the world will take the dollar seriously in the future.
Sunday, April 26, 2009
Chinese Buy Gold
The gold market had looked bearish for the past couple of weeks and gold seemed to be breaking through support, but Bloomberg reports that the more recent spurt of price increase is due to Chinese buying. In other words, the Chinese central bank aims to hold gold. It currently has almost $2 trillion in foreign currency reserves. If it follows Russia and builds a 10% reserve holding, gold will be the winner and the dollar will be the loser.
There could be longer term repercussions as to the Chinese acquisition of gold. Why stop at 10%? There is no reason to trust the Fed or the dollar, and the American republic is running out of steam. This is due to self indulgence and corruption among American elites. Wall Street will not permit slow monetary growth, and foreign dollar holders will lose. If the Chinese are smart, they will convert all of their dollar holdings into gold.
Americans should think in terms of pressuring their Congressmen to repeal the legal tender laws that were passed during the Civil War. There is no reason why Federal Reserve monopoly money should be mandatory or "legal tender". There should be a free market in money. The Fed does not represent the public. Why should the public be forced to accept their garbage notes?
There could be longer term repercussions as to the Chinese acquisition of gold. Why stop at 10%? There is no reason to trust the Fed or the dollar, and the American republic is running out of steam. This is due to self indulgence and corruption among American elites. Wall Street will not permit slow monetary growth, and foreign dollar holders will lose. If the Chinese are smart, they will convert all of their dollar holdings into gold.
Americans should think in terms of pressuring their Congressmen to repeal the legal tender laws that were passed during the Civil War. There is no reason why Federal Reserve monopoly money should be mandatory or "legal tender". There should be a free market in money. The Fed does not represent the public. Why should the public be forced to accept their garbage notes?
Thursday, November 13, 2008
Increasing Value of Dollars Offsets Stock Declines
Many people, including myself, have been suffering from declining stock values. Those of us who track our account values may forget that the value of the dollar has increased, and to a surprising degree given the Fed's weak dollar policy. At this point in time, people who have a diversified portfolio that includes a dollop of cash should take heart from the fact that their dollars have increased in value and that this implicit increase, which does not appear on your statement, offsets the declining stock market. This increase in value may offer an additional reason to consider investing the cash in stocks and commodities over the coming year.
Since the summer, the dollar has increased against the Euro by more than 20%, and against the Australian dollar by about one third. Thus, if you are holding a portfolio that includes 1/2 stocks and 1/2 short term money market or treasuries, your decline is not nearly so bad as it seems.
The Dow topped at about $14,164 in October 2007 and is currently at 8,308, a decline of 41%. If you were holding 1/2 short term treasuries and 1/2 stocks, your portfolio has declined by a little less than half that adjusting for interest on your bonds. For instance, if you had $250 in stock and $250 in cash, your portfolio looks like it declined by 41% x 250 - 3% (interest on bonds) x 250 = $95 / $500 = 19%.
But in that calculation you're excluding the gains in the dollar, which are not reflected in your financial statement. The dollar gained about 20% against the Euro, so you've gained 20% x $250 = $50. Subtracting the $50 implicit gain in the dollar from the $95 paper loss gives you a loss of $45. So if you were diversified in cash you suffered a loss of $45 / $500 = 9% net of the dollar gain.
Although a 9% loss is unpleasant for all of us, it is hardly earth shattering to anyone who's been around the stock market via a 401k, mutual fund or brokerage account for the past ten years.
Thus, there is no need to panic. Rather, John H. Cochrane, a professor at the University of Chicago, gives some fascinating advice in today's Wall Street Journal. Cochrane, like Warren Buffett, argues that smart investors should be buying now. Cochrane suggests that the ratio of dividends to price or dividend yield indicates that current valuations are mediocre and that in light of recent history, this may be a buying opportunity, although not an excellent one. Whether to buy depends on your personal circumstances, cash flow, risk preference, time of life and the like. Cochrane argues that when the dividend yield is high and reaches six or seven percent, the market is low and stock prices historically have increased during the ensuing seven years, but when the yield is low and falls to below 2% as it did around 2000 the market is high and stock prices have declined during the ensuing seven years. Currently, yields are middling.
However, Cochrane's analysis does not contemplate money supply policy, which influences both the dividend/price ratio and stock prices. When the Fed is increasing the money supply, as it has, then yields are going to be relatively low and stock prices are going to increase over the ensuing period. The Fed has pumped money into the system repeatedly during the past 35 years, so Cochrane's chart shows a secularly declining dividend/price ratio since 1950. Moreover, the chart suggests that average returns since 1971 have been greater than average returns between 1945 and 1971. The lowest returns occurred around 1967, several years prior to President Richard M. Nixon's removal of the international gold standard. The highest returns occurred around 1946, not long after World War II and around 1982, upon the advent of President Ronald Reagan's "supply side" economics. Increasing money supply may be the causal variable that both reduces dividend yield and increases future stock returns.
Thus, the cyclical ups and downs need to be interpreted in light of the long term trend. What are the political ramifications of the stock market's depending on perpetual injections of money and what are the policy implications?
In order to reach 1981 levels, a huge amount of liquidity will need to be injected into the system. But there is already much waste in the economy in terms of bad real estate investments, unworthy purchases on credit and the like. To compensate for these the Fed will need to give the economy much testosterone. This would cause the dividend/price curve to continue to decline. However, there is the risk of intensifying the above-average inflation rates that have characterized the recent past. If Americans are willing to live with a declining stock market, then perhaps the Fed will restrain inflation and stop the dividend/price trend from following its 63 year long downward pattern. If the main point of American society is to increase the stock market, then more injections will be needed, and increasing welfare transfers from cash earners to stock holders will ensue, likely intensifying the already massive inefficiencies in the American economy.
Which will it be? Paper wealth? Or real wealth? Further monetary expansion? Or deflation and permitting the termination of badly managed firms?
Since the summer, the dollar has increased against the Euro by more than 20%, and against the Australian dollar by about one third. Thus, if you are holding a portfolio that includes 1/2 stocks and 1/2 short term money market or treasuries, your decline is not nearly so bad as it seems.
The Dow topped at about $14,164 in October 2007 and is currently at 8,308, a decline of 41%. If you were holding 1/2 short term treasuries and 1/2 stocks, your portfolio has declined by a little less than half that adjusting for interest on your bonds. For instance, if you had $250 in stock and $250 in cash, your portfolio looks like it declined by 41% x 250 - 3% (interest on bonds) x 250 = $95 / $500 = 19%.
But in that calculation you're excluding the gains in the dollar, which are not reflected in your financial statement. The dollar gained about 20% against the Euro, so you've gained 20% x $250 = $50. Subtracting the $50 implicit gain in the dollar from the $95 paper loss gives you a loss of $45. So if you were diversified in cash you suffered a loss of $45 / $500 = 9% net of the dollar gain.
Although a 9% loss is unpleasant for all of us, it is hardly earth shattering to anyone who's been around the stock market via a 401k, mutual fund or brokerage account for the past ten years.
Thus, there is no need to panic. Rather, John H. Cochrane, a professor at the University of Chicago, gives some fascinating advice in today's Wall Street Journal. Cochrane, like Warren Buffett, argues that smart investors should be buying now. Cochrane suggests that the ratio of dividends to price or dividend yield indicates that current valuations are mediocre and that in light of recent history, this may be a buying opportunity, although not an excellent one. Whether to buy depends on your personal circumstances, cash flow, risk preference, time of life and the like. Cochrane argues that when the dividend yield is high and reaches six or seven percent, the market is low and stock prices historically have increased during the ensuing seven years, but when the yield is low and falls to below 2% as it did around 2000 the market is high and stock prices have declined during the ensuing seven years. Currently, yields are middling.
However, Cochrane's analysis does not contemplate money supply policy, which influences both the dividend/price ratio and stock prices. When the Fed is increasing the money supply, as it has, then yields are going to be relatively low and stock prices are going to increase over the ensuing period. The Fed has pumped money into the system repeatedly during the past 35 years, so Cochrane's chart shows a secularly declining dividend/price ratio since 1950. Moreover, the chart suggests that average returns since 1971 have been greater than average returns between 1945 and 1971. The lowest returns occurred around 1967, several years prior to President Richard M. Nixon's removal of the international gold standard. The highest returns occurred around 1946, not long after World War II and around 1982, upon the advent of President Ronald Reagan's "supply side" economics. Increasing money supply may be the causal variable that both reduces dividend yield and increases future stock returns.
Thus, the cyclical ups and downs need to be interpreted in light of the long term trend. What are the political ramifications of the stock market's depending on perpetual injections of money and what are the policy implications?
In order to reach 1981 levels, a huge amount of liquidity will need to be injected into the system. But there is already much waste in the economy in terms of bad real estate investments, unworthy purchases on credit and the like. To compensate for these the Fed will need to give the economy much testosterone. This would cause the dividend/price curve to continue to decline. However, there is the risk of intensifying the above-average inflation rates that have characterized the recent past. If Americans are willing to live with a declining stock market, then perhaps the Fed will restrain inflation and stop the dividend/price trend from following its 63 year long downward pattern. If the main point of American society is to increase the stock market, then more injections will be needed, and increasing welfare transfers from cash earners to stock holders will ensue, likely intensifying the already massive inefficiencies in the American economy.
Which will it be? Paper wealth? Or real wealth? Further monetary expansion? Or deflation and permitting the termination of badly managed firms?
Wednesday, September 17, 2008
Gold, Stocks and The Dollar, Oh My!
The past month has been rather confusing on the investment front. I had been in gold stocks and they plummeted like the dickens into Hades. Presumably gold went down because the dollar went up and oil went down. Now mostly in cash, I watch gold shoot up as the S&P 500, the Nasdaq and the Dow take their own ride into perdition. What new torments await investors in the first rung of hell? Does the Dow decline further and gold continue upward? Has the dollar ended its six-week ascent? Are foreign central banks and the Fed playing games with the dollar? Why would the dollar ascend and gold and oil decline weeks before the bankruptcy of Lehman Brothers and the subsidy of AIG and Freddie Mac? Do we have a free market, or a pretense of one, with the Wicked Wizard of the East making sport of it? With the Dow down better than 700 points this week, is it good idea for the Wizard to remain behind the curtain, pulling strings?
Sunday, November 11, 2007
Savings Accounts in Foreign Currency
Jim Rogers was on Bloomberg radio on Sunday morning at 6:25 am and he was talking about the dollar declines, Helicopter Ben's humming propellers and the Chinese stock market. Two of Rogers's ideas that caught my attention were investments in agricultural commodities and in the renminbi, the Chinese currency. Unfortunately, it is inconvenient for small investors to purchase Chinese currency because of the Chinese government's low-valuation strategy. However, where you can invest easily is in various currencies through Everbank. The minimum deposits range from $10,000 to $20,000 (for the indexes). Unfortunately, Everbank does not offer renminbi cds, but they do have 15 other cds including Hong Kong.
Powershares has commodity index products including a DB agriculture fund.
It is unfortunate that I cannot trust the dollar now, but given the irresponsible history of the Fed, I would rather keep my savings in another currency and/or secure it through commodities tracking investments.
Powershares has commodity index products including a DB agriculture fund.
It is unfortunate that I cannot trust the dollar now, but given the irresponsible history of the Fed, I would rather keep my savings in another currency and/or secure it through commodities tracking investments.
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