Rubberbands and the US Dollar

By: Randolph Buss | Wed, Dec 22, 2004
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A little apology for my one day respite yesterday - it was on the drawing board but then I got sidelined on a few things. That's what happens to one-man shows once in a while. This lapse is reserved only for the Chief Editor. Anyway, we were able to update the site with a few "Christmas-y" items - sort of cute, I like it. Plus, my webmaster deserves much credit for her long hours, patience in dealing with me and her "artistic" inputs.

As well, it gave me time to check out a few of my older charts and review and read tonnes more of paper on the overall economy.

One of the interesting things I keep coming across is the talk of excessive debt. The US government is, as we all know, now owner of the greatest debt in its history. Consumers likewise. But nevertheless the broad markets are rising. "Why is that?", I ask myself. I will take a stab at it although it may not be what you think.

I think the answer is twofold : morality and no choice

These two issues, to my mind, are interlinked. In keeping with the parameters of the this letter, ie. time and length, I will simply put the morality issue down to the Gold Standard. By going off the Gold Standard in 1972, the US essentially lost a moral financial compass. That Gold Standard basically was a tool for the US Dollars to be tied to something tangible and real and known to hold value. Gold. Gold has been a currency for thousands of years. Not conch shells, not glass pearls, not fur skins. Hence, without a Gold Standard, US Dollars could, and have been, and are being printed indiscriminantly. "You need more money?" Here ya go, a fresh new $100 bill - we just printed it. In the words of P.T. Barnum "There's a sucker born every minute".

Thus, the financial morality associated with the government and its responsibility to the people was breached and abbrogated. This has continued, unabated, at times somewhat under control, since 32 years of US hegemony. The world was made to suffer under the presses of the US Treasury. Seeming wealth printed out of thin air. Facit : The US Government has no financial morality towards its own people. In fact, it is promoting a reckless ending in unsustainable debt. How does the US government even service the debt that it has, around $320 billion, or $320 thousand million per annum? It creates more paper. And sells it to foreigners (the suckers).

So, the consumer, being rather "shaped" by the government, just as children are shaped by their elders, has watched how an immoral government simply keeps spending and spending. Where is the attempt by government (Congress) to even address these issues? There isn't any - they are the problem. So consumers, with government as a willing protégé, simply mimic what they see. They spend and spend. But they cannot simply create "wealth" out of thin air - they need to work for it, and pay taxes on it. Saving is nigh impossible.

Secondly, why do the consumers not hunker down and pay off their debt? I would venture that it is a cocktail of wishful thinking , that "somehow all this stuff I bought can be paid off", a feeling of hopelessness and a feeling that maybe the only way to get richer is to "invest" in the market - things will simply go higher. The housing will go higher, the tech stocks will always go higher, etc. They are doing simply what they have been taught to do - don't question the government - just keep spending. This is a moral hazard of the highest degree.

Now, looking at the charts below, we see a few interesting things : it seems one of the biggest effects of the Bush re-election has been a renewed pumping up of various markets. Both the housing and consumer spending have been rocketing higher since the beginning of November, in fact, both have risen 10% since then.

What is going on? Are we in a re-newed bull? Of course that might be or it could be the much talked about decenial cycle of years ending in "5" being up-market years. However, I don't feel comfortable with any of those explanations. Firstly, I think this is a very precarious market right now and it surely seems to be a professional market right now. I think the "normal" investor has sort of packed his bag up for this year and is going out to do the Christmas shopping (see consumer chart) and spend more money. Just spend, goddamit. Secondly, based on current valuations, the market, I believe, would have a difficult time to move higher and maintain SUSTAINABLE highs. Now, just because everybody says that the market is unlikely to move higher from these values does not mean that it won't. It just means that it is unlikely.

My feeling is that whenever the housing market starts to settle, or roll over, the purchase-more-stuff-on-house-equity phase of consumer spending might also then be coming to an end, thus creating a double debt whammy of unpaid "stuff" needing to be paid off just when housing prices are losing value and turning south, and possibly your job being outsourced to India or China or the Czech Republic.

We are not there yet. At least not by looking at these charts. But, to my way of thinking, the farther along US debt builds up, the higher potential for an exogenous event, i.e. discontinuous event, which surprises the markets.

Finally, I take issue with some the best technical analysts "out there". Using historical data for a basis on which to imply future movements is admirable - given we have nothing else to go on - and hence claims by technicians that the US Dollar "rubber band is overstretched" and needs to bounce or correct in order to return to the median - yes, I believe that is ultimately true -- but, has the world's reserve currency EVER been stretched so far and based on such poor fundamental foundations? I believe it has not, or if so, I was not around during the Roman Empire and cannot verify this statement. Hence, just because IT SHOULD do the "right thing" and bounce up, and help all those starving exporters, does not mean that it will. Maybe the rubber band will simply break and create havoc and then we will return to a median.

Just because we would all like orderly markets, does not mean that is what we will get, simply because it is "logical" and "makes sense". Markets tend to be illogical and at times, nonsensical. Returning to the median might be very a very arduous journey indeed.


Randolph Buss

Author: Randolph Buss

Randolph Buss
Berlin, Germany

Randolph Buss, currently works in portfolio & asset management | commodity fund advisory & management | macro investment research as editor and publisher of his newsletter read in over 45 countries.

The full GMR and portfolio entries can be read at the homepage along with the full disclaimer. For those new readers, the Global Macro Roundtable (GMR) is conceived as a "real world" newsletter written by market analysts and not by unknown editors doing research for others. The GMR provides up-to-date analysis and gives the reader a variety of opinions on the investment markets and sectors. We are not here to massage our egos rather we are here to provide our readers with real-world research and investment opportunities. The markets know more than any body - we remain humble but alert.

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