As we approach that all important 0.80 dollar index support level, and while everyone is betting 100% on a relentless fall in the dollar, it might be smart to ask if the U.S. can be successful in devaluing the dollar further at this time. Bob Hoye, for one, believes it may not be. In his latest "Pivotal Events," he makes a good point when he observes that U.S. policy makers are behaving in a very unusual manner. They are actually encouraging everyone to bet against the dollar either by their statements or by their omissions.
Mr. Hoye stated, "Thus our general observation that 'the world is long inflation and short U.S. dollars.' Speculative booms and busts are nothing new, but what is rare is the dedication of today's policymakers in promoting speculation against the deliberately depreciated dollar. There hasn't been anything to this degree since England's South Sea Bubble or France's Mississippi Bubble in 1720. Yes the tech bubble in 2000 was wild, but the street and policy makers had little doubt that the boom could be sustained.
"Now, the desperation to keep the depreciation and the boom in whatever-is-hot is becoming very intense".
In other words, the Fed and other policy makers are continuing to fight deflation. What is there after the housing boom to keep the party going? The consumer may still be spending, but one wonders how much longer it can go on, especially when you read articles like the front page story in the New York Times on November 21, about how banks are suddenly doubling interest rates on credit cards and how that is quickly throwing many overly-indebted borrowers into greater debt.
With the dollar approaching that $0.80 level, we may soon know whether the deflationary views of Bob Hoye (who Ian Gordon and your editor agree with are correct, or whether the wider held inflationary views prevail. If the dollar breaks through support and falls dramatically lower, what happens then? Do foreign creditors dump the dollar, forcing interest rates to rise dramatically and sending the U.S. housing industry and all of America into bankruptcy?
Or, as Bob Hoye suggests, will a dollar-short world suddenly began to liquidate "stuff" in order to scramble for dollars to make good on their huge dollar debt? Hoye maintains that after a major bubble like we have experienced, the senior currency strengthens, not weakens. He also says history supports a correction in the equity markets in the third year following the bursting of the bubble, as we experienced this year. Of course, all that is made more difficult in that we have now had bubbles manufactured to bail out other bubbles, the latest being the housing bubble. Can another bubble be found to keep the party going when Americans are so extremely over indebted and when foreigners see fewer and fewer legitimate reasons to invest in America?
Ultimately, I am betting deflation wins, and I believe that day is much, much closer than most people think. That is not to say we don't want to keep our eyes open with respect to inflationary forces. Indeed, I said last week that as we get set to approach 2005, I expect to start the year with a somewhat more aggressive inflation-hedged Model Portfolio by allocating Treasuries to the Rogers Raw Materials Index Fund or to energy stocks. But ultimately, I remain convinced this major 70+ year Kondratieff cycle will end as they all do, with a devastating repudiation of debt that leaves cash and gold as the only stores of value as the price of virtually everything else collapses in a rush for liquidity via the dynamics of John Exter's inverted pyramid. That is why we are continuing to hold deflationary items in our portfolio, like the Prudent Bear Fund and U.S. Treasuries. Of course, as we discuss elsewhere here, gold is actually the best asset to own during inflationary and deflationary periods of time.
TRADER ROG'S CORNER
Winners and Losers
Common sense tells us we had better be ready. Investors and traders who were on the right side of the trade in 1929, made it through the 1930s with flying colors, a decent life, and their personal treasury intact. This is the choice we all have right now. Things always take longer than expected. This has worked in the favor of those who have been dragging their feet instead of jumping in and getting busy to solve this problem with the right trades and investments right now.
Precious metals and their stocks have proven themselves over the last several months. While preparing for a small retreat at this time, they could again fool us all and march ever upward. That is the direction. That is the trend. Periodic relapses are standard chart action. Gold and silver are the last resort in the coming scenario. You can be a winner or you can be a loser. If you stand there and understand the problem while taking no action, you are a loser. If you do not believe what we are saying, you will be a loser. Winners will move now. They will pay off debt, move to a safe place, buy gold and silver coins and stocks, and generally duck the perfect storm headed our way. Time is short. Now is the time to begin. If you have little, take little steps, and move toward self-sufficiency.
Do you really think Greenspan will give you a ride in his limo when your SUV is gone? Will he provide food for your table or give you a ride out of the country on his private jet? Would Greenie pay your high interest payments on that monster house he encouraged you to buy? You are on your own. Very soon Greenie is gone with the wind to some faraway place where gold is king and peace reigns forever, far from all those clamoring sheeple who believed him. -Trader Rog
November 27, 2003
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
http://www.miningstocks.com