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REPORTS OF THE DOLLAR’S DEMISE As commodity prices soared and the dollar plummeted against other world currencies, many, myself included, turned extremely bearish on the dollar. Many continue to be bearish on the dollar today but I am not one of them. The Dollar bears insist that the recent rally in the greenback, as sharp as it is, is only a vicious rally in an ongoing, long-term, secular bearish decline. They point to record low interest rates, a huge increase in the money supply, massive deficit spending and government bailouts as fundamentally negative for the U.S. currency. First-- the most common explanation, the unwinding of the carry trade. Those who borrowed dollars and yen over the last few years to fund over-leveraged investments either in higher yielding currencies or commodities such as oil have had their heads bashed into the wall over the last few months as they have been forced to unload their investments and buy back dollars and yen. Those speculators are unlikely to either have the appetite for risk or access to credit for another round of the carry trade anytime soon. This will result in less asset inflation and a stronger dollar. Second-- a severe slowdown in the global economy. While the U.S. Federal reserve is running out bullets, reserve banks from Australia to Europe to Asia have plenty of room to slash rates, a process that is already well underway. With some emerging countries on the verge of bankruptcy and asset prices plummeting worldwide, the dollar becomes a safe heaven or the lesser of all evils. Furthermore the significant slowdown in infrastructure and construction projects in places like Dubai and China will continue to place a significant amount of pressure on commodity prices such as copper. China, for example, which has been growing at 10% a year for the last 15 years is due for a breather. In Warren Buffet’s recent editorial in the NY Times he warned that because of inflation holding dollars was a losing proposition. Buffet’s argument, while true in the long term, does not necessarily ring true right now. The fact is we are at one of those rare periods in history where the dollar is appreciating against all assets including, real estate, equities, base metals, and even precious metals. Third--- an Obama presidency. When it comes to spending there is very little difference between the two parties in the United States. The Republican Bush Administration brought us a massive drug benefit prescription bill, a like-wise massive highway construction bill, and a war in Iraq that cost taxpayers trillions of dollars. The annual U.S. budget has grown to over three trillion dollars, an almost 100% increase in the last decade. Obama will be no different than Bush when it comes to spending. However, he will be different when it comes to raising government revenue. Even if Obama does not raise taxes on individuals making over $250,000, government revenue will increase due to the end of the Bush tax cut scheduled to expire in 2010. An increase in government revenue will be supportive for the dollar as it was supportive under the Clinton presidency. Furthermore, two of Obama’s key economic advisors, Larry Summers and Paul Volcker are true believers in a strong dollar policy. The holiday season is upon us. I wish all readers a joyful and peaceful holiday season. All indications are that 2009 will be an epic year of opportunities.
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