The Dying Dollar: Rumours and Misinformation

Thursday, October 15th, 2009

Martin Wolf writes an interesting column in the FT.com October 13, 2009:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

This is an idea that we have covered at some length during the course of the year, so it is a dear subject for us to feature, as it goes hand in hand with the raging debate between equity bull and bear, and deflationist vs. reflationist.

During the first quarter of this year, when equity markets were tanking the dollar was strengthening, and that was a direct result of the market taking a large long position in the dollar, via cash instruments and other short term government securities. By February 2009, the Fed’s cash position had reached such an untenable shortage because investors and banks were hoarding it, that the Fed and Treasury Department were forced to resort to Quantitative Easing (QE) measures that added $2-trillion of printed liquidity into the credit market. Most in the market missed the fact that there was, at the time, a panic among monetary authorities that the physical supply of cash would run out.

With the Dow benchmark crossing over 10,000 yesterday, and other markets attaining commensurate or higher levels, is it any surprise, given that US$450-billion has moved from money market funds alone to be re-invested, that the dollar is faltering? In the simplest of terms, the global equity markets’ slingshot recovery has led to a slingshot devaluation of the dollar.

Superficially, the shortage of cash in February was deflationary. In the present, the flood of liquidity from QE, plus the US/UK Zero-Interest-Rate-Policy, are fueling re-investment in risk assets, and driving the dollar to an out-of-balance devalued state. To put it mildly, if this is the current basis for long term inflation, it too, is rather shallow.

The most likely scenario at this stage would be monetary intervention - and that means that while gold may continue to rise a little bit further from its current highs, it is due for an IMF selloff in concert with the G20, all of whom have a vested interest in seeing the greenback at higher levels against the Euro, Yen, and RMB.

The less likely scenario rests with whether or not the Fed can convince its public that the economy is expansionary, thus enabling them to reinstate an interest rate, which too, would raise the dollar’s value and repatriate cash from assets to the money market.

Our suspicion is that the Canadian dollar’s recent run and that of other non-dollar centric currencies would end upon either scenario.

Therefore, there may be a strategic currency-based opportunity in buying US dollar denominated assets, and preferably in short term government securities. If you have the stomach for it, the real opportunity may be in longer dated US government bonds, as either intervention or re-instatement of interest rates would result in lower long term yields.

Tags: Alternative Arrangements, Avw, Bull And Bear, Canada, Cash Instruments, Cash Position, Collapse, D1, Death Bed, First World War, Global Monetary System, Gold, Gold Bugs, government securities, Hawks, Img Src, liquidity, Martin Wolf, Misinformation, Monetary Authorities, Mongers, Openx, Qe, Random Number, Rumours, Treasury Department, Trillion
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Jeremy Siegel: Did he get it wrong?

Thursday, October 15th, 2009

Jeremy Siegel is professor of finance of the Wharton School at the University of Pennsyilvania. But he is perhaps best known for his 1994 book Stocks for the Long Run, in which he explained why he believes buying and holding stocks is the best approach to investing.

In Part 1 of an interview with John Authers, investment editor of the Financial Times, Siegel is asked whether he got it wrong against the backdrop of last year’s market crash.

Click here or on the image below to view the video.

In Part 2, Siegel explains why the ageing populations in developed countries mean investors need to put money into emerging markets, or risk losing out.

Click here or on the image below to view the video.

Source: John Authers, Financial Times (here and here), October 14, 2009.

Tags: Backdrop, Book Stocks, Buying Stocks, Developed Countries, Emerging Markets, Finance, Financial Times, Investors, Jeremy Siegel, John Authers, Market Crash, Money, Money Markets, Populations, risk, S Market, Video Advertisement, Video Source, Wharton School
Posted in Emerging Markets, Markets | No Comments »

The Inflation Story - What is the evidence?

Thursday, October 15th, 2009

This post is a guest contribution by Paul Kasriel* of The Northern Trust Company.

There is a growing concern about an inflationary threat in the U.S. economy given the enormous monetary accommodation the Fed has put in place. As expected, there are differing opinions about this issue. First, the unemployment rate in September was reported as 9.8%; the all inclusive unemployment rate is 17% (see chart 1).

Wages are unlikely to be the cause for a large increase in inflation in the near term because widely used measures of wages pressures are trending down (see chart 2), given the lack of demand in the labor market. By the way, the Federal Reserve tracks these variables to form its assessment of inflation.

Second, the operating rate of the nation’s factory sector was 66.6% in August, close to the record low mark of 65.1% registered in June 2009.

Third, financial institutions are not lending (see chart 4) implying that a stalled credit machine supports expectations of a non-inflationary environment in the near term.

What is the indication from the market based measure of inflation expectations? Inflation expectations as measured by the difference between the yield on Treasury securities and TIPS are below the pre-crisis levels (see chart 5).

In sum, the overwhelming evidence presented here points to a Fed worrying about inflation in the early part of the next decade. It is important to note that concern about inflation is the long term story. Paul Kasriel has published a detailed analysis of the long-term outlook for inflation (Greater Risk over the Next Five Years - Inflation or Deflation?)

Source: Northern Trust - Daily Global Commentary, October 8, 2009.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Tags: Commercial Banks, Crisis Levels, Deflation, Economic Strategies, Financial Institutions, Global Commentary, Growing Concern, Inflation Expectations, Inflation Rate, Inflationary Environment, Loan Institutions, Next Five Years, Northern Trust Company, Overwhelming Evidence, Paul Kasriel, Savings And Loan, Strategies Corporation, Term Outlook, Treasury Securities, Unemployment Rate
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