Benson's Economic &
Market Trends
Wither the Dollar
Richard Benson
June 4, 2004
Virtually all
market analysts and financial writers are single-mindedly focused
on the Fed raising the price of money and credit. The market
is constantly told to fear the Fed tightening. Meanwhile, we
are in the middle of one of the largest increases on record in
the quantity of money as measured by M3. From the start of 2004,
M3 has increased at an 11% rate, or almost $400 billion. At this
rate of growth, M3 should surpass $10 Trillion over the next
12 months. While the Fed already has the markets and future interest
rates priced for a 1/4 point rise in the Fed Funds rate in June,
and another 1/4 point rise in August, the markets are not
focused on the inflationary consequences of the massive increase
in the supply of money or its downward effect on the value of
the dollar.
The Fed has turned the "financial bubble machine" back
on. First, they wanted to put a quick end to the unwinding of
the "reflation trade" which was causing a spike in
bond prices and a strengthening in the dollar. This put the financial
markets close, once again, to a crash. Second, the Fed needs
to play the last policy cards - beneficial to the economy and
the current Administration - to use the direct creation of money
to:
1) tempt a reopening of the reflation trade; 2) keep inflation
running higher than nominal interest rates; 3) push real interest
rates even lower; and 4) use the raw creation of dollars to weaken
the dollar. Given the law of supply and demand, a rapidly
rising supply of dollars will lower their value, if everything
else remains the same. The Fed has just created $400 Billion
of fresh money so surprise, surprise - the value of the dollar
is moving down!
Moreover, everything isn't all "smiles and roses"
for the dollar. The fundamentals causing the falling value of
the dollar are:
i) record trade deficits and inflation rising faster than interest
rates; ii) a slowing U.S. economy as the tax cuts and mortgage
REFI's are petering out; iii) Europeans unable to cut interest
rates on the Euro below 2% now that their inflation is up to
2.5%, and, most critically, iv) explosive U.S. money growth.
Why is the Fed so interested in letting the dollar go? Other
than for political reasons, a falling dollar helps domestic firms
compete abroad and actually hire more Americans. Moreover, a
falling dollar means that more Americans are likely to buy goods
made in America. In addition, we are entering vacation season
and travel is a big business. More foreigners will come to America
to avoid the "bomby" weather in Athens for the Olympics
and many Americans will remain in the 50 states for their
summer holiday.
For the short term, it's likely that a falling dollar will boost
top line revenues for U.S. businesses and increase their bottom
line earnings as foreign currency profits show up as more dollars.
More money, revenues, and profits, can help keep the equity markets
"juiced up" through the election and until early 2005,
when the Fed will need to respond to inflation concerns in a
serious way. Indeed, as long as the Fed doesn't have to take
any real action until after the election, who really cares that
a falling dollar and rapid money growth will encourage an increase
in inflation? Savers will care, but they just don't count in
a finance economy!
The massive boost to money growth will spill over and be felt
in the prices set in the financial and commodity markets. When
oil prices are high, and the Fed's only response is to accommodate,
it is unlikely that higher oil prices will result in much of
a cut back in the spending on higher priced beef, chicken, milk,
ice cream, copper, cement or anything else. With the Federal
Reserve dedicated to getting the rise in nominal GDP up to 10%,
and keeping M3 growth double-digit, it is inevitable that general
prices will rise. Indeed, double-digit money growth is far more
consistent with a CPI heading towards 5%, than holding at 2%.
When we examine money growth since 1995, we are reminded of the
Wicked Witch of the West who cried out in a shrill voice, "I'm
melting." For the average American pocketbook, this "melting
and shrinking feeling" means we will need many more dollars
to buy gas, food, 100 shares of stock, or a house. Thank God
the bank has just extended the line on our credit cards and sent
us blank checks for our home equity loan.
At some point, the markets will pick up on what money growth
actually means for present and future inflation, and realize
the Fed is getting "way behind the curve" in raising
interest rates. When this occurs, we will position for a big
"Humpty Dumpty" fall in the dollar. All the Fed
has to do is keep the markets focused on everything but the truth
until after the election.
We plan to vote in November but when it comes to the financial
markets, we will be ready to vote with our feet at any time.
Richard Benson
President
Specialty
Finance Group, LLC
Member NASD/SIPC
2505 S. Ocean Boulevard
- Suite 212
Palm Beach, Florida 33480
1 800-860-2907
eMail: rbenson@sfgroup.org
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321gold Inc
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