Tiger's not out of the Woods Yet - But the US Dollar Might be

Since early March the dollar has been dropping faster than Tiger Woods' endorsement deals...will; and Congress has been taking a 9 iron to the greenback like scorned Swedish women to SUV windows.

So here's the deal. Normally the stock market dictates the direction of the US dollar. Investors flee to currencies as a safe haven from a falling stock market. (Joe's dog, dog wagging the tail) Lately however, the US Dollar has interestingly been calling the shots and dictating the direction of the stock market (Joe's dog, tail wagging the dog). Indeed, steep drops in the dollar are strongly correlated with a rising stock market due to the fear of inflation. These increases in the stock market are reflecting the nominal value of the dollar, not the real value. Even if the market goes up, the value of your retirement could still be dropping (Joe's dog, tail not wagging at all anymore, but drooped in between its legs and hunkered down in depression).

This can't last forever, however. Despite the Federal Reserve's loose monetary policy and Gov's best efforts to whack the greenback and spend its way out of trouble, (Tiger Joe Woods, yes, Joe's his middle name, or it should be anyway) it appears the US Dollar free fall may be over for now. Why? Just this week Japan - the number two economy in the world - announced a large scale quantitative easing policy (or government spending) which should dilute its currency relative to ours. (Japan wants a weak currency because it strengthens their exports) Also, Japan's debt to GDP ratio is actually MUCH worse than ours right now, so it's bad debt position coupled with a ramped up quantitative easing plan should help soften its currency. So there you have it. The stage is set. The top two economies in the world in a race to see who can beat down its currency harder and faster and turn it into fertilizer. (Joe's dog, tail now straight up in the air, squatting position).

Another interesting phenomenon that happened Friday after I initially wrote this post, was the dollar's surge on a much improved November unemployment report. The diminished job loss announcement launched the dollar like you-know-who's tee off because of rate increase speculation. Ben has previously stated he wouldn't raise interest rates until jobs were actually increasing rather than decreasing. This may or may not happen soon. It will be interesting to see if the jobs report for December drops down again, or if the trend line of improved job numbers continues. Construction and manufacturing job losses were still quite high, but government and health care jobs both saw increases last month.

What does this mean for Joe? An increasing dollar value would ease inflation fears, but also throw cold water on Gold Bugs somewhat. I recently posted a comment on Marketwatch.com to short gold, and received 6 thumbs up and 34 thumbs down, so who knows, I might be way off on my Gold projections. A strengthening dollar would seemingly drop the price of gold, but the future of the US Dollar is very uncertain and fragile still.

What else does this mean for Joe? Joe doesn't have a dog, but could use the companionship since JoAnn hasn't accepted his latest offer yet to marry him before hyper inflation gets a hold of ring prices. Since he believes the dollar might start to stabilize, he's nervous now that she has a pretty good counter argument. The pressure's on for Joe Shareholder. Doggonit.

Ben Begs the Chinese to Become Communist

This past Sunday, Fed Chairman Ben Bernanke emerged from his black helicopter, straightened his black tie, pulled down his black sunglasses, nodded for his bodyguards to open his black briefcase and then delivered a speech on world trade. Within the speech, he specifically cited a need for a "rebalancing" of world trade and encouraged China to spend more and the US to save more. This echoed what the United States Treasury (Joe Oxymoron) Secretary Turbo Tax Timmy Geithner (Joe Oxymoron, minus the oxy) said a few weeks ago about rebalancing world trade.

So what were our fearless leaders really saying? It's unlikely Ben Bernanke really cares whether US citizens save more. If that were the case he'd simply raise interest rates to incentivize (Joe, is that a word?) saving. No, he doesn't care. What he's really doing is begging the Chinese to stop exporting so much and start importing more US products for the "greater good" of the global economy. (Jo-seph Stalin) In other words, the United States is asking the Chinese to become more communist? (Joe upside down world, with Chinese up and US down) If we analyze further, however, we realize he doesn't really care about the global economy - he cares about the US of course.

Here's why

If the Chinese export less and the US slows the import flow, then our trade deficit will improve. If the US trade deficit improves, our GPD will go up and we'll escape depression 2.0. The weakening dollar will help achieve these desired trade effects because a weak dollar makes it more expensive to import, and less expensive to export. When we understand what Ben's doing to the US Dollar (Joe Shell game), it's easy to see the true motives behind his remarks.

So what does this mean for Joe? The Chinese have to be upset about our monetary and fiscal policy aimed at destroying the US Dollar. Therefore, Joe decided to hedge against a future Chinese invasion and take up karate lessons. He told JoAnn he's going to learn hand-to-hand COMBAT just in case; and asked JoAnn if she'd like to help him prepare by giving him hand-to-hand CONTACT while they go for a walk. JoAnn simply told him since there may be some angry Chinese out there, and since he hasn't actually taken any hand-to-hand combat lessons yet, that she'd be safer inside.

Of Course the Government wants a Weak US Dollar

It's a stand off with the US Dollar held hostage. Ben Bernanke, the Fed, and US Legislators currently have the US Dollar grasped firmly around the throat with a gun resting against the poor greenback's temples, while China and the rest of our creditors are trying to negotiate a safe and harmless release.

The WSJ reported on Thursday that central banks in Korea, Taiwan, Philippines, Thailand, Indonesia, and Hong Kong have "intervened to slow the dollar's fall against their currencies". Why would they do something crazy like that? Simple, these nations depend on exports, and when the dollar is weak, importing costs more to US Companies. Vice Versa, when the dollar is strong, it becomes easier to import foreign products.

The weaker dollar is very alarming to the rest of the world for other reasons as well. "The Independant", a British news source (here), reported last week that a host of nations met together secretely without the US to discuss how to end the pricing of commodities such as oil in US Dollars. The proposed alternative to the US Dollar is a basket of currencies including commodities such as gold. Absent from the proposed currency basket was the US Dollar, which alarmed domestic currency investors and further intensified the US Dollar decline. So as we can see the US Dollar is in trouble. (Joe Letterman) With this much doubt and uncertainty (Joe weatherman, seven day forecast, especially the seventh day) surrounding the value of the US Dollar, we can cautiously assume this downward trend will continue. (Joe temperatures in the northern hemisphere, Joe real estate values, Joe employment, Joe anything, just pick something and it's probably going down right now)

As we mentioned earlier (here), Ben's monetary plan to escape depression 2.0 is to devalue the US Dollar. Are his devaluation plans working? You bet. (Cha, Joe Palin) The US Dollar hit a new yearly low last week and seems to be firmly entrenched in a downward trend. Below is the one year trend of DXY, the dollar index compared to a basket of foreign currencies.


So this is bad news right? The falling dollar is not good for America? Actually, there are many advantages as well as disadvantages to having a weak currency. Right now, the Fed and Government have incredible incentives to keep the dollar tumbling downward. The rest of this post will outline why this is so.

Advantages of a weaker dollar - as the Fed and Gov see it.

1. Exports are cheaper. Just as imports cost more to pay for foreign goods with a weakened US Dollar, exports become cheaper and exporting companies benefit. Timmy Geithner (Joe Turbo Tax), our current Treasury Secretary, is reportedly okay with a slumping dollar because it "rebalances" our trade deficit. The net trade deficit/surplus is an important component of a nation's GDP, and when a country's exports gain against imports, the final GDP number improves. Since an increase in GDP will most likely signal an end to the recession, It's no wonder that the weaker dollar and resulting increase in exports are considered very important to our current administration and Federal Reserve. Some could argue, however, that the gains in exporting are often offset by the increased costs of importing. (Joe zero-sum game).

2. Inflation leads to increased asset valuations. Indeed, a small amount of inflation is necessary for housing values to increase and to establish consistent economic growth. However, when asset values increase too quickly - as happened this decade - dangerous bubbles result and eventually pop. To deal with the depressed real estate values and their slumping effect on the economy, the Fed has been purchasing hundreds of billions of dollars worth of Mortgage Backed Securities off of banks' balance sheets since early this Spring. These toxic assets are simply bundled home loans whose market values are significantly less than what is owed. Remember, even though the Fed prints US Dollars and has the responsibilty of setting monetary policy, it is not a government-owned bank. Hence, motivation exists to make money through the increase valuations of these assets. (Joe Conflict of Interest)

3. Fixed-Interest Debt becomes Cheaper: Everything from credit cards, home loans, school loans, corporate debt for businesses and treasury bonds on the part of the US Government should become less expensive to pay off - and heaven help us, the US has a lot of debt right now to be paid down. American deleveraging, or the shedding of regular business and household debt, should continue for some time according to many economists. An inflated dollar would help this cause.

Bottom line, the Fed and Gov are not concerned about a falling dollar in the same way our Asian friends are. (Joe, trigger squeezing tighter, dollar starting to sweat, Asians too) The longer term consequences, which will be discussed in the next post, are of lesser concern to the Fed and the current administration because elections create incentives for politicians to be more focused on the short term rather than long. (Joe what have you done for me lately).

So how does this affect Joe Shareholder? Joe doesn't regularly export anything, and the left side of his balance sheet is blank. He does have debt from his three years at St. Joe's University in Philly, however. Even though inflation should allow him to pay off his fixed-interest debt easier, he is concerned that the negative aspects of inflation will offset the positives. (Joe, stay tuned for the next post) Speaking of fixed-interest, his interest in JoAnn has never wavered and is growing ever-stronger (Joe Six-pack abs). Not to let a good opportunity go to waste, he informed JoAnn that now would be a good time to purchase an engagement ring and book a honeymoon cruise since the weakness in the dollar could lead to inflated prices later. Not only that, but fixed-interest rates at low levels won't last forever. Additionally, it would help the economy if he were to buy her a diamond ring and jewelry stores would be able to feed their families. JoAnn told him thanks for the offer, but she was never into expensive rings anyway, and she would be more than happy with a simple honeymoon - should the right opportunity present itself.