U.S. Dollar Bubble Inflating?
Wednesday, December 10, 2008 | Teeka TiwariRating:
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Bailouts, bailouts, bailouts every where we look we see more bailouts. A recent Fortune article put the number at 7 TRILLION dollars. Now even for the United States of America that is a lot of money. Right now we are running the printing presses 24/7, churning out greenbacks at a rate we haven’t seen in years.
So the strength in the U.S. dollar has been truly stunning. With all these extra dollars flying around, you’d think the dollar would be in freefall. If it wasn’t for the simultaneous meltdown of every financial market in the world, we surely would have.
Panic and fear is still rife among the world's leading allocators of capital. How do we know? How else can you explain Tuesday's 1-month Treasury auction. We saw $120 billion chase $32 billion of 1-month Treasuries that were yielding ZERO percent interest!
If that’s not scared stiff, full-fledged panic mode, then I don’t know what is.
The U.S. dollar is the only reserve currency big enough to hide out in. And that’s exactly why the U.S. dollar hasn’t crashed. Safe haven buying has been driving the dollar up to levels it hasn’t seen in years.
But like every party, eventually the music will stop. As the global economy stabilizes, we will begin to see money rotate out of low-to-no yielding Treasuries back into stocks and other debt instruments. When it happens, it will be swift and sudden. The dollar will look like it just hit an air pocket; it will plummet with a fury that we have never seen before.
The investment implications of this are that we will see massive inflation. Commodity prices will go buck wild. Now hold your horses, we are not there yet. Many people are looking for a recovery in Q2 of 2009, but I haven't totally bought into that thinking.
We may have another solid year of frightened capital and slow-to-dead business activity ahead of us. As such, the dollar could stay strong for a time, even lulling some very smart people into a false sense of security that somehow the business cycle has been beaten and that inflation is a thing of the past. Look how long the credit bubble lasted. The point is we are experiencing a U.S. dollar bubble and all bubbles must eventually get popped.
What this also means is that, as we look farther out the cycle, interest rates are going to have to go up in order to fight inflation. I’m not suggesting that you start allocating capital along this thesis right away because we still have a large chunk of time to go through before this becomes an issue. But you need to at least have an eye on this highly probable future outcome.
Under this type of a scenario, the only way to make real money will be in direct commodity exposure. Gold, oil, agriculture, etc. will all see their prices increase dramatically. So while the commodities may look dead, what I think we are seeing is more of a hibernation. At some point, business activity will pick up again. At some point, the world’s investment capital will come out of its Treasury nesting mentality and hungrily scour the world for investment returns.
When that happens, the U.S. dollar could collapse under the weight of the Treasury's bloated obligations. As money flees the Treasuries market, we will have to jack up rates to attract money into our bonds to continue to service the epic mountain of debt that we have accumulated during this financial crisis.
The other side of this potential outcome is that the U.S. embarks upon a new leg of fantastic economic growth. Under this scenario we would see real estate values rise, thereby obviating the need for many of the current government guarantees in place. We’d also see expanded tax revenues and that would make up the shortfalls of a weaker dollar and could potentially stay the need to jack up interest rates.
But in order for this to happen, we’d need to experience a transformative technology that would unleash a brand new earnings and productivity cycle. Something akin to the integrated circuit, the graphical user interface or the internet.
At this time, I know of no transformative technology about to sweep through our economy, do you? If you do, I’d love to hear to about it.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
