Aug 11 2008
Dollar Strength or Dollar Bailout?
While we know nothing goes straight up forever and that there are always corrections in any fundamental trend that develops, ala the inflationary one (which = dollar weakness), we were slightly taken aback that July 15 ended up being the starting point for the correction in the trend. Mind you, that was within days of the implied insolvency problems over at Freddi and Fannie, and the announced support coming from the Fed and Treasury (after all, they must work together to create that cash from somewhere since the U.S. Treasury is running massive deficits already…).
So who on earth suddenly finds the implied inflationary consequences of this, the run on IndyMac bank, the reality that the FDIC has well over 100 banks on its insolvency watch list, the fact that Merrill is using qausi-Enron accounting to keep toxic waste off the books via Level III accounting gimmicks (a type of asset for which the regulators have repeatedly delayed “clean up” regulations form going into effect since the consequences would be so severe), etc. etc…
Well, who on earth is thinking this is somehow a good thing for the dollar? Why would this imply a deflation of the loss of value vs. tangible assets that can’t be printed so easily? Why, as colleague James Turk asks, has the Dollar Index suddenly and mysteriously reversed course?
Well, the truth is now seeping out. The powers that be have delayed data several weeks (we suspect to provide some cover given the dire straights they’re in), but now the truth is seeping out. There’s been absolutely no contraction of money supply as some suspect (the M’s are marching along, onward and upward) and the Fed clearly didn’t raise rates as some of its leaders threatened in order to fight the “commodities bubble”. Interest rates for 1-year savings still remain well below even the official CPI figure we’ve long ago discounted as a laughable gauge for inflation.
So what is it? In the face of ever worsening news, in recent weeks we’ve seen massive central bank action in support of the dollar, with the U.S. at the epicenter by dumping euros and buying dollars from its own reserve accounts — with U.S. paper in the Fed’s coffers jumping $52 billion in three short weeks –a 38.4% annualized rate! That’s up from a prior annualized rate ending July 16th of 17.3%. That doubling is going to give your currency a bounce, even if short-term!
This may have bought some time, but that’s about all. Feel free to buy on the back of that intervention and the bump its caused. It has triggered and overdue correction in commodity prices, energy, and taken the wind out of a precious metal rebound. But the fundamental trend remains in place.
But, the U.S. is in the midst of a massive insolvency crisis thanks to gargantuan government / Fed-induced misappropriation of the finite stores of capital in the United States. The withdrawal from such large misallocations will be severe, but there’s little to be gained by denying the addict to cheap and easily invented money and credit that he’s not got a problem, or that all will be OK by simply shooting up with more of the same junk that got him in such a bad way.
If you need proof, consider that July was another month of record foreclosures for California. Likewise, so far in the line of credit shoes yet to drop, we’ve only seen the system attempting to work (write) off the massive (and still developing) losses from subprime market. Yet to come to an economy near you are problems with:
- Near prime mortgages
- Prime mortgages
- Home equity loans
- Commercial loans
- Credit Cards
- Auto loans
- Student loans
- Muni bonds
- Corporate bonds
- Derivatives
- CDOs
- CDSs
- Who knows what else lurks beneath???
No. There’s far too much yet to unwind, especially as the consumer continues to experience ever more stress as the economy slows: Eight months of falling employment, production, income, retail sales, and GDP (which keeps getting downward revisions…) will continue to take a toll.
Besides, while gas prices have dropped, a $3.85 national average still ain’t something to write home about!
Stay Vigilant and Think it through.
