The dollar is dead

Posted by Ray on February 21, 2011 under Main | Be the First to Comment

We have witnessed the Middle East go up in flames and the troubles in Europe start to percolate again, but the dollar is not doing anything. I am only surprised that it is happening so soon, I thought there was more time. While I highly doubt that anyone will rush back into the greenback it could happen. The world’s faith in the US has been shaken by our inability to seriously discuss our deficit and debt problems. A perfect example is the latest round of talks encompasses cutting some tens of billions of dollars from a mere 12% of our total budget leaving the entitlements and military spending off the table, is it any wonder why no one trusts us to seriously address our debt issues?

If people are not buying dollars what are they buying? Gold and silver. The prices do not lie and both metals have moved significantly over the past few weeks as the Middle East began to demand regime changes. All the while the USD has basically treaded water or moved slightly down. Not only does the lack of interest coincide with the latest budget battle but it also coincides with the fact that we are right in the middle of QE2 which was frowned upon by most nations. The double whammy of our inability to seriously deal with our debt and our very own central bank monetizing large amounts of our debt, over mythical low inflation figures I might add, makes other countries stop and think about how to allocate their assets during times of uncertainty.

Overall the US total debt and monetary policy is also inflationary which makes an inflation protected asset more attractive than UST’s and dollars. Why would investors choose gold and silver over TIPS? Because no one trusts the government to actually track inflation honestly which is why you are seeing lower inflation expectations in TIP yields right now. Again, gold and silver fit the bill as an alternative as a flight to safety. Granted, gold is considered safer than silver, but lately silver has picked up more prestige and I believe silver will make some spectacular moves in the near future. In other words, gold has likely picked up more of the safe haven assets than silver but it is clear that both metals have outperformed the dollar and may be replacing the dollar until something else comes along.

So, is the dollar dead? I think it is one its way if we do not address our debt and annual deficits this year. The deficits are so bad, so outrageous and so dangerous that ignoring them for one more year may be devastating. Our total national debt, officially, if 100% of GDP and our unfunded liabilities is tens of trillions of dollars… we got serious problems. Adding insult to injury is the whole QE situation which is debt monetization no matter how you slice it. This shows weakness and is highly inflationary which will drive foreign investors away from the USD. Why would you buy an asset today that you know will be worth less in the future? You wouldn’t and either will other countries when it comes to USD’s.

The fact that we have had a few governments get toppled and a few more on the way in the most volatile region in the world and the dollar has not rallied is kind of scary. Instead we have seen commodities continue to rally, stocks (I guess the only source of our economic success) go straight up, and the dollar trend a bit lower. In the meantime gold and silver are being treated as currencies and when turmoil kicks up they go up in value. I have known for a long time that the dollar is in trouble and would blow up because we have a lack of leadership in Washington who do not want to make hard choices and the Federal Reserve who seemingly has lost its mind and has missed every major issue with our economy over the last 10 years who has decided to monetize our debt.

This will end with high inflation and the fact that the Fed disagrees is exactly why you should agree with me. Gold and silver make sense, own them physically, along with other soft commodities. I fear that the dollar has seen its best days and while I do not know exactly what will come in the longer term I do know it will not be pretty. I think you will know who to blame by then, I hope at least.

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You must remember this period of time

Posted by Ray on June 29, 2010 under Economy | Be the First to Comment

All the talk about the double dip recession is being blamed on not enough stimulus, but that is not true since there is a lot of money being spent right now because of the stimulus. The final spending of the stimulus funds will end this year, right near the elections ironically enough, but it is clear it did not work. We now have Paul Krugman out railing about a deflationary depression because governments are cutting back stimulus efforts. My question to him is, if stimulus is the answer and we are spending it now why are we seeing disinflationary forces? His excuse does not hold water. It is the massive government intervention that is causing the problems, not a lack of stimulus, but too much stimulus.

I am in disbelief how anyone could not have seen these problems coming, the signs were everywhere. Employment was the best indicator, but look at money velocity, what you can piece together at least, and declining credit combined with higher foreclosures, bankruptcies and weak retail sales it is clear as day that at best we stabilized at less bad and at worst we are heading for really tough times. This is not something I wanted to happen I think you would be hard pressed to find anyone wishing pain and suffering on anyone, but the signs were all there. Not to mention the implications of Europe tightening its belt and trying to force China to revalue its currency, talk about insanity, we took it to the next level.

So, Krugman may be right and we may have a deflationary depression, but I am sure it will last for only a little while. Because Bernanke will not stand for a deflationary depression, which is ironic considering Ben is the Great Depression expert and he is creating another one, and he will print our way out settling for an inflationary depression. The unfortunate part is Mr. Krugman has the reasons wrong for the depression we are in and he doesn’t seem to understand that you cannot cure debt problems with more debt, it just doesn’t work. Our debt is so large that is will now be a complete drag on GDP which means lower growth, the new normal anyone? Again, his reasoning is flawed because we just spent $1T, give or take between all the programs, on stimulus and we are not even done spending and he is calling this a deflationary depression because there is no stimulus? Maybe he likes to confuse the less informed or something, but talk about being wrong, wow.

My point is that you need to remember today, what is going on, the money that is being spent, what politicians are saying and blaming because they will, whichever party, will point to right now saying we should have done more or we should have done less. The fact of the matter is we are doing both, stimulus is declining and we are not adding more to it, and keep in mind that the data we are all looking at is still coming from April or May when much more money was being spent. All that data, even further back then April, is also showing significant decline in economic activity when the stimulus was running full speed ahead. To clarify, just because the spending is slowing now don’t blame the negative data on that since the data was generated prior to the slowdown in stimulus spending. Furthermore, employment never recovered or even showed significant improvement given the price tag.

Will the decline of stimulus spending hurt? Yes, a lot, but it needs to stop somewhere. The problem with the stimulus is that it is cruel because it extends the bad periods much longer than they should have lasted by blocking the markets from finding a true bottom. The more you spend, the more it distorts reality and lures people into a false sense of security, but when it stops the real pain begins because those fooled may have to lay more people off and readjust for a post stimulus world. So not only do the long-term unemployed receive the proverbial shaft, but newly hired employees may also receive the same treatment after they thought they caught a break.

Right now you can see what worked and what did not, but in a few months many might not remember. They may point to the 5.6% GDP print and say remember how good things were then? Well, they weren’t that good to the unemployed or those in bankruptcy or losing their homes, but that is how it will e framed and there will be cries for more stimulus. Those cries must be rejected and the only government stimulus that must continue is unemployment insurance. You cannot dump millions of Americans who are not unwilling to find a job it is that no jobs exist for them.

We tend to have very short memories and forget things quickly because of who knows what, I blame TV. You cannot forget what is happening right now because if you do they might talk you into another round of stimulus or God knows what else. We are in trouble, I know this, but we tried Krugman’s way and it failed, let’s give it the “let’s not give it the college try” and see what happens. Besides all of that, we simply cannot afford more spending especially for mediocre results, I am being generous here. While Krugman is grabbing the headlines for using the “D” word, let’s not forget I started using the term depression months ago based on the employment figures, food stamp numbers and the way foreclosures and bankruptcies were growing because I was paying attention and not traveling to my vacation house in the tropics unlike some BY Times economist.

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How crazy is crazy?

Posted by Ray on June 2, 2010 under Economy | Be the First to Comment

A few things have been out there that just blew me away over the past couple of days. The first was when I saw a video of Jim Cramer advocating for the Treasury to issue $2T in 30 year paper to solve our debt issues. The second is that some talking heads believe that we will get a 700K print for the NFP, non-farm payroll (employment report), on Friday. It leads me to believe that most people in the world have just lost their mind or at least lost touch with reality. There is some logic to the aforementioned items, but reality just does not work like that and when one throws out an idea make sure it is feasible first or make sure it is a clean number, as in the 700K NFP on Friday.

First, Jim Cramer, the man I love to hate, but I respect the hedge fund manager as a take no prisoner SOB who got the job done, but this “I am going to make you mad money” thing, well, I think not. He has been giving out some decent advice lately, too little too late, but nevertheless, he has advocated high dividend stocks for sometime which is a good strategy as I see deflation. However, he said yesterday that the Treasury should issue $2T in 30 year paper while rates are low because we have too much short-term debt, he is right, and we will eventually have funding issues, he is right again. The issue I have is that the U.S. has $13T in total debt with much more coming so $2T does nothing to “solve our debt problems” and the bond market would reject $2T in 30 year paper. I mean come on, the market would demand a higher yield than 4.23% for that size paper. This is also the same guy who said, no more than 8 months ago, that Treasury should issue a 5% 30 year Retirement Bond as well, yeah right.

If one has been paying attention to the bond auctions they would notice that there is a reason Treasury is issuing shorter maturities, no one wants long-term paper from the U.S. government. Investors would just assume buy 10 year TIPS instead which offer some protection from the inevitable inflation risk that exists. Why would Treasury want to steepen the yield curve even more than it already is? If Geithner has half a brain he will try to move our maturities out to the 10 year mark and if Treasury swamped the 30 year they would move the yield up on the 10 year. It is just a bad idea and it impresses no one, period. I am surprised that Cramer would even say such a thing as he did run a ton of money, but, well, I guess I am not surprised.

The other hot issue of the day is the employment report due out at 8:30 AM EST Friday morning, it is THE report on the first Friday of each month. This month we are due for some really interesting data I suspect, especially given the smooth work last month in the Birth/Death model, I know I talk about that a lot, but it is important that you look at that figure and understand it. I see some estimates that we will see a print of 700K on Friday and, frankly, I would not be surprised, it won’t be real, but I would not be surprised at all.

The NY Post ran a story on how some Census workers were hired for a few hours, paid, fired and rehired which will boost the NFP figure on Friday. Are those accusations true? I don’t know, but it would not surprise me if they were. All I know is that it would be awfully tough to pull off a huge private sector growth figure with 460K+ weekly initial claims and with many blue chip companies announcing more layoffs, H-P is laying off 9K, seriously. There are still almost 6 people available for every open position which is not good news or bullish for new hiring. I am not saying it is getting worse, but I am saying it is not getting better.

There are specific area’s to watch and the first one is the actual unemployment rate, I think we will see it uptick to 10.2%, remember we now have an oil spill which impacted a very large area. Another area is the BLS Birth/Death model, obviously, which may add another hefty 200K to this month’s report. I also believe you must subtract all government jobs out of the report since they are temporary and we need private sector jobs to pay for government jobs to begin with. The U-6 report is also very important as it will show the under employed, which is a huge, and growing, problem in America that everyone turns a blind eye towards. Finally, temporary jobs are no longer a bullish indicator. Perhaps a year ago they were, but if they are not converting to fulltime employment by now they never will, sorry, but subtract them out.

The other painful part of the report is the time it takes to find a job, this is the heart breaking, in my opinion, part. The vast majority of unemployed are taking far longer than 6 months to find work, in many cases more than a year, this is the worst since the DOL has ever recorded, it started keeping records in 1948. Basically, those are Depression era numbers there are just no other times in our history where it took so long to find work and I can assure you people are not voluntarily staying unemployed to collect that whopping $400 a week unemployment benefit check. This is a major problem and it is not getting better, sadly, and you need to look beyond whatever the headline number is to see what the real situation is like. I am sure Joe Biden and President Obama will be patting themselves on their backs on Friday, but I can assure you that whatever the number is it will be the equivalent of Enron accounting.

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