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BEING STREET SMART 

by Sy Harding

MORE ON THE PLUNGING DOLLAR! April 18, 2008.  

My column of last week on the need to halt the plunge in the U.S. dollar brought a full mailbox of comments.

Most were on the order of explaining how we got to this point; the Fed, the greedy banks, and foolish borrowers, and expressing the opinion that we’re in such a mess that nothing can be done about it. Armageddon lies ahead. The Fed cannot raise interest rates to support the dollar because of the worsening U.S. economy. Global central banks cannot intervene in currency markets to buy dollars, as I suggested they might, because they are already overloaded with dollar-denominated assets (thanks to the record U.S. trade deficit). Those assets are declining in value as they hold them, and they sure won’t intervene in currency markets to buy more. Instead of ranting about the plunge in the dollar, why I am not railing about the incompetent Fed that gave us first a stock market bubble, then a real estate bubble, and now this mess?

Well, I try to be ahead of the curve.

So I railed about the stock market bubble in 1999, and devised a strategy (our Seasonal Timing Strategy), that would allow us to continue to participate in the bubbly market (but only in its favorable seasons), and yet be protected from the coming bear market that I was convinced was right around the corner. I even wrote a book about it, 1999’s Riding the Bear – How to Prosper in the Coming Bear Market. (The strategy works. It tripled the performance of the S&P 500 over the nine years since, with no down years even in the bear market).

In late 2005 and early 2006 I ranted about the real estate bubble that had formed, and how it would end, in plenty of time for home-owners, real estate investors, and speculators to get out near the top with big gains.

When the real estate bubble did begin to burst, I ranted in early 2007 about how economists and Wall Street were wrong in assuring investors the problems would be confined to the real estate industry. And when it spread to the mortgage industry I railed about why they were wrong in thinking it would not spread to the overall economy. When it spread to the overall economy I showed why they were wrong to think the economy would not slow all the way into recession.

So I have ranted plenty about what led to this mess we’re in, but did so while there was still time to prepare.

It’s wasted effort to complain about what caused events after they have taken place. I’ll leave it to others to reprise the causes and come up with plans on how to prevent recurrences.

The rest of us need to always be looking ahead. Otherwise we miss the recoveries, or the next problems.

It’s a little like the guy that ignores the warning signs and falls into a raging river. Instead of dwelling too late on how the warning signs were there, he had best focus on what to do next.

And I believe the next problem is in the commodities bubble, and the plunging dollar that is now adding to the inflation problem at a pace that needs something done about it now, before it is too late.

At first, the dollar’s decline helped the U.S. economy pull out of the 2001 recession, and then helped it continue to grow, by lowering the prices of U.S. exports to foreign countries, and raising the prices of foreign imports into the U.S.

But at this point the U.S. Dollar Index has declined 40%, and the negatives exceed the positives. Oil-producing states are getting antsy about being paid in a currency that keeps losing its value. Already there are signs of global diversification way from dollar assets. Eurozone countries are complaining that their economies are being more seriously impacted. The IMF (185 countries) is worried that millions of people in poorer countries will die of starvation this year because of the high cost of food.

I don’t know what will be done, but something must be done.

The most obvious is intervention in currency markets by global central banks, buying dollars and selling their own currencies. That might not only help the cause of lowering inflation, and the bloated level of their own currencies against the dollar, so their trade situation would be improved. Buying the dollar at such depressed levels might also be great investment timing, if their actions then launch the dollar into a new upleg. In the late 1990’s, central banks sold huge amounts of gold from their reserves, in effect buying dollars. That took some of the steam out of commodity speculators, helping to drive inflation down, and the dollar up. The high-priced gold they sold dropped in price and the beaten down dollars they took in rose in value. Buying low and selling high?

And if the U.S. economy and stock market continue to show signs of recovery, you can bet the U.S. Fed governors will be on the edge of their chairs, anxious to raise interest rates to battle inflation.

With their recent decline, U.S. treasury bonds are already anticipating that interest rates won’t be cut much further.

No one could see what the catalysts would be that would burst the stock market bubble, or the real estate bubble (or any previous bubble in history). But it could be known that they would burst.

I don’t know what will burst the commodities bubble, and reverse the decline in the dollar. But I am convinced they will be the next major reversals to take place, the next situations investors will soon need to re-positioned for.

Sy Harding is President of Asset Management Research Corp., and publisher of the financial website www.StreetSmartReport.com, and the free blog www.SyHardingblog.com. He also authored the timely 1999 book Riding the Bear - How to Prosper in the Coming Bear Market, and 2007's Beating the Market the Easy Way - Seasonal Strategies that Double the Market!

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