 Rubberbands and the US Dollar
Der Invest
Informant
Randy Buss
22 December, 2004
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.
21 December, 2004
Randolph Buss
http://www.dinl.net
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Disclosure
and Disclaimer Statement: This document is intended for informational
purposes only. DINL is not a registered financial advisor in
the USA. Not advice or intended as advice. The author has not
received any payment or reimbursement of any nature for writing
this article. The author's objective in writing this article
is to raise awareness within the reader and to further their
understanding of international and/or monetary issues and to
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Investors are recommended to obtain the advice of a qualified
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© Copyright 2004 DINL / R. Buss
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