Is The Bear Market Rally Over For The Dollar?
Jay Taylor
No doubt, since the dollar is the world's reserve currency there is no
other market price that is more important in the world. The very long term
trend of the dollar-vis-à-vis other currencies and real money-gold has been
down. But for virtually all of 2005, the dollar has been in a cyclical bull
market as seen in the chart on your left.
In recent months, I have become a Paul van Eeden fan. Having a great deal
of respect for this native of South Africa, I am making a habit of reading
his short weekly missives. I would encourage you to do so as well at
www.paulvaneeden.com. In Paul's weekly commentary titled, "China Sees the
Writing On The Wall" he points to some comments by Mr. Yu Yongding, a
member of the monetary policy advisory committee to the People's Bank of
China, that are intended to prepare China for a cessation of their support
of the dollar. Might those comments have had something to do with the
dollar breaking below recent up trends last week? More importantly, might
the cyclical bull market in the dollar? Might the dollar make another run
down in 2006 toward its all time low of 0.82 on the Index?
When I cheer for higher gold prices, my very smart and loving wife, Teresa
frequently responds by saying, "Be careful of what you wish for." The Bush
administration has been pushing for China to let their currency float so
that America can compete more effectively with China. Trouble is, a weaker
dollar/stronger renminbi is not likely to solve America's woes. Fact is we
are fat, out of shape, hedonistic, materialistic, spoiled rotten, an
increasingly heathen nation that is on the way down. Americans clearly
want to believe in the tooth fairy like falsehoods being handed to us by
helicopter Ben Bernanke like the one in which he suggests we can create
wealth and prosperity simply by printing endless amounts of money and then
distribute them from helicopters. Might the Chinese now be recognizing this
pernicious attempt at global theft to be a last gasp desperate effort on
the part of America to keep its empire in place? Might they now be
recognizing long before 99.9% of Americans do, that we along with our
currency are doomed and as such preparing to exit the dollar over the
months to come?
Given the hedonistic direction of American over-consumption, eventually I'm
sure that will happen. Whether the sharp decline noted in the chart above
is the start of that inevitable global exit from the dollar or something
less serious in the short term remains to be seen. But Paul van Eeden is
right. The handwriting is on the wall. America and its phony currency,
which it has foolishly used to fund our economic orgy is sooner or later
doomed. If now is the beginning of a serious decline in the dollar, then
lookout for higher-much higher interest rates and downward pressure in the
stock and bond markets. In turn that could lead to faster and faster
printing press money and with Helicopter Ben in charge. That should then
result in even higher rates of inflation and higher interest rates. At some
point these terribly pathological policies end with a deflationary
collapse. For now, however, our Inflation/Deflation Watch is strongly
pointing toward more inflation in 2006.
Our Inflation Deflation Watch Posts a New High at 110.11
Our government's CPI number registered the biggest monthly decline in 56
years, but that resulted largely from the significant drop in gasoline
prices, which fell from their post-Katrina high of $3 per gallon. However,
as the Arizona Republic noted, this decline won't last for long. In fact,
gas prices are already on the rise. The official government CPI number on a
year-over-year basis is now something like 3.8%-only a smidgen higher than
the 3.7% consumer price rise of last year. That compares with a rate of
4.7% a couple of months ago.
Again we would like to point out that the government's numbers are
historical. Our Inflation/Deflation Watch has selected 17 variables
(gasoline is not one of them) that we think should provide some advanced
notice of higher inflation rates going forward, as reflected in the CPI in
2006 and beyond. Of course, the government can and does fiddle with their
stats on an ongoing basis, and they do not figure asset prices are
inflationary. And even when everyone knows they are, as in the case of
housing, they simply take it out of their index.
What we know for sure is that when stocks or housing or commodities or what have you are rising like crazy, it reallocates wealth away from the middle class that generate it by working hard, playing by the rules to market
slicksters who are cleaver at speculating which way the markets will move
in the future. We think when a society as a whole begins to speculate and
"play the market," or even worse, "play Lotto," it is a sign of decline. If
we are right about that, America is declining in spades, and the record
high trade deficit this past week, by the way, provides even more evidence
that that is exactly the case with our once-vibrant, free market,
democratic republic.
In any event, our Inflation/Deflation Watch reached a new high this past
week since we first began calculating it on January 31, 2005 thus
indicating an accelerating inflation rate as we head toward 2006. Given
that the 17 variables contained in our Watch are leading rather than
trailing indicators, we believe our Watch is predicting higher rates of
inflation in 2006 and thus we plan to take on a more aggressive inflation
hedge in our Model Portfolio in 2006.
Leading the inflationary charge this week were the following equity
sectors: retail +2.48%, Housing +2.91%, and autos +1.37%. Gold's 4.71%
decline relative to commodities and its 2.80% decline relative to the U.S.
Dollar also added to the inflationary reading of our Watch this week. And
the most direct measure of global inflation in our Watch, namely Global
U.S. Dollar Liquidity saw its rate of annual growth increase by 1.24% this
past week. The measure of liquidity combines the U.S. dollar monetary base
as reported by the St. Louis Fed plus U.S. dollars held by overseas banks.
It is now growing at an annual rate of 9.79%, just shy of the annual rate
of growth we are seeing in our Inflation/Deflation Watch.
This 9.79% growth rate is a far cry from the more than 21% rate of growth
put in place by the Greenspan Fed during the summer of 2004, and which
served to inflate the housing bubble. But our sense is that policy makers
will not be able to reduce this annual rate of money growth much below
nearly 10% without throwing the global economy into a recession/depression
thanks to he enormous indebtedness of America and most importantly the
American consumer.
The last time Greenspan made a feeble attempt to return the dollar to a
sound footing and to leave the air out of the stock market bubble was in
2000 and 2001. In May of 2001, the U.S. Dollar global liquidity was growing
at a mere 1.54%. That exercise in responsible money management was
extremely painful. It resulted in trillions upon trillions of stock market
value disappearing into thin air from which its value came and it also
raised fears on the part of the Fed that the U.S. could be heading toward a
deflationary spiral. Clearly the current Fed, especially under Helicopter
Ben Bernanke will steer clear if possible of allowing our phony monetary
system to deflate to anything like those monetary growth rate numbers.
Otherwise, he would not be following his own design for avoiding a replay
of Japanese deflation and/or the Great Depression of the 1930's. If he
follows his ideas in his paper, "Deflation, Making Sure It Doesn't Happen
Here" we can count on this guy perpetually inflating the dollar until it
reaches a total collapse.
December 17, 2005
Jay Taylor, Editor of J Taylor's Gold & Technology Stocks
www.miningstocks.com
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