Could the U.S. Dollar be Headed for a Collapse?
Wednesday, November 11, 2009 | Teeka TiwariRating:
Mixed messages can be baffling in personal relationships, but they can be paralyzing in financial markets. Case in point: After delivering a series of bearish indicators -- each one larger than the previous one -- we saw the Dow Industrials (Symbol: INDU) turn around and break out to new highs!
We've seen similar reversals since the March lows. But the quality of this reversal is far-below what we've seen thus far.
In previous sell-offs, we saw between three and six sectors posting sell signals while the rest of the market plowed higher.
This time, 38 of the 46 sectors we follow at Sector Hunter are on a sell signal!
Money Talks, Even if the Dollar is Cheap
The market internals are radically different from the picture that the Dow is painting. If the new high in the Dow is "for real," why hasn't it been confirmed by a new high in either the S&P 500 (Symbol: SPX) or the Nasdaq (Symbol: NASD) yet?
The declining U.S. dollar is being used as an excuse to snap up the big American export names. The logic is twofold:
- First, it is presumed that a cheap dollar will make our products cheaper to foreigners buying them in their own currency -- thereby stoking demand.
- The second is that, as the big multinationals repatriate their Euros, yen and francs back to U.S. dollars, they will get a currency-bump boost to earnings as they convert their foreign currency denominated earnings back into U.S. dollars.
And of course, we have the effect of the "carry trade" at work. That is, people borrowing U.S. dollars on the cheap and then reinvesting those dollars in higher-yielding assets such as equities.
Does this mean that, if the dollar rallies, the markets will fall? It's certainly beginning to feel that way.
While, over the long term, the dollar look like it wants to go lower, it's currently very oversold. And, at the minimum, the dollar is due for some type of counter-trend bounce.
What Happens When the Money-Printing Press Runs Dry?
The other side of the dollar trade is the impact it's going to have on the U.S. consumer. If no hard floor is put under the dollar, aren't we going to experience horrific commodity-price increases here in the United States?
In a booming economy, I guess that's no big deal. But in a prolonged recession, it's got to feel like an economy killer. Hello, 1970s all over again?
No wonder gold has been going bananas to the upside. The buying power of the U.S. dollar is getting annihilated. "Print Baby Print" is just not a viable domestic economic policy.
The government is priming the pump in desperation -- pushing full-steam-ahead, praying and hoping that the real economy catches up before the bill has to be paid.
And they want to spend another trillion on healthcare while fighting and paying for two wars! No wonder the U.S. dollar is getting hammered.
Weak Dollar: Bad for U.S., Good for Everyone Else
The truth is, a cheap U.S. dollar policy is great for the rest of the world, but lousy for us. Everything we buy becomes more-expensive as the dollar gets weaker and weaker.
The best hedge for this type of scenario is clearly commodities. Dollar-denominated commodities will rally dramatically if the U.S. dollar continues on its downward spiral.
This is an area where you want to get some exposure if you believe the U.S. dollar is on its way to becoming the U.S. peso.
If you don't feel like going through the learning curve of trading futures, though, you are in luck.
Stretching Your Investment Dollars
These days, virtually every major commodity can be purchased in the form of an Exchange-Traded Fund (ETF). Everything from Australian dollars (Symbol: FXA) to feeder cattle (Symbol: COW) can be traded via ETFs.
Look at oil prices; they recently hit $80 per barrel! You think that's demand-driven?
Think again -- that's a weak U.S. dollar pushing up the price of the world's largest-traded U.S. dollar-denominated commodity.
It makes me sick to see the shameful pillaging and wasting of this country's wealth by our government. Lest you think I am being biased, I'm fully aware that sin is shared on both sides of the aisle.
Our children's future is getting bought, sold and mortgaged as we speak. There is no question that taxes are headed much, much higher.
Prepare yourself, because your wallets are about to get scoured to pay for the mistakes and indulgences of other people. And U.S. dollar-denominated commodities just may be the best hedge against all of this future uncertainty.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
