Dollar is Merely Retreating in Good Order

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Remember the famous German general von Kluck, from whom we get the expression, ‘you dumb kluck?’ Von Kluck was chasing the French down the Marne in 1914. Victory looked like it was close at hand. The French were pulling back. Von Kluck, who had orders to attack Paris, decided instead to pursue the French army. He was convinced that they were beaten. All he had to do was keep the pressure on…and they would surrender.

Some of his field commanders, however, noted that they were picking up very few prisoners. Normally, an army that is beaten throws off many discouraged and confused soldiers. Since there were so few, the commanders reasoned that the French army was still intact; it was merely retreating in good order and could turn and surprise the Germans at any time.

The commanders were right. France’s aging general, Gallieni, who was in charge of the Parisian garrison, realized that the Germans were making a fatal mistake. By pursuing the troops down the Marne, rather than attacking Paris, they exposed themselves to a counteract from the city itself.

“Gentlemen,” he is said to have said to his staff. “They offer us their flank.”

The French took the offer. They attacked. Using thousands of taxicabs, they moved troops to the Marne Valley as fast as possible and caught the Germans unprepared. The Battle of the Marne turned the German army around and ultimately cost them the war.

We bring this up now because we have a feeling that the dollar is not broken. It is merely retreating in good order. At $1.49 per euro, it is not at the record low you’d expect after so much negative press. And it is not giving up more ground. Instead, it is holding.

Yesterday, the dollar price of stocks went down. The dollar price of oil and gold went down too. The dollar has not yet counter-attacked. But the dollar bears are vulnerable. We wouldn’t be surprised to see them hit hard in the weeks ahead.

Of course, in the very long run, the dollar bears will prove to be right. We have little doubt that the coin shooter who finds a cache of US Treasury bonds in the year 3,400 – like Mr. Herbert in 2009 – will have tears in his eyes. Though perhaps not for the same reason.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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39 Comments on "Dollar is Merely Retreating in Good Order"

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Ned S
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It is a form of protectionism. And preferable to actual protectionism. American policy makers can and will begin reversing the process when it suits them. Who will bail out the Fed – The world. Because in the same way that specific American banks were deemed too big to fail by America, the world pragmatically deems America too big to fail. (Central bankers deal in money; Not morals.) IMO.

Justin
Guest

Pure speculation

Jack Fids
Guest
PURE SPECULATION…? As in PURE w/o any flaw or pure as in no basis for it…? Ambiguous statements by those accustomed to knee-jerking w/o restraint benefits nor informs no one! I fail to see where the world banking institutions have any choice ONE…… & TWO it is a damned sneaky plan to bankrupt China AND India in one single action to announce that the FED nears collapse within hours! The chaos created in Asia would be without equal and their only recourse would be to attack militarily or negotiate, thus giving the FED exactly what it would demand…namely a complete… Read more »
Ross
Guest
Below is Denningers call on Market Ticker joining that underground dollar bull movement and I am going with him. I still have that counterparty fear because market makers outiside the loop are in deeper than capital even after GS front running the mugs on their side. quote If you want to speculate on this outcome levered bets on radical dollar appreciation look like one of the best choices out there, followed closely by bearish levered bets on commodities. I would not consider such a speculative play that is not characterized by defined risk, as this analysis is based on nothing… Read more »
Lachlan Scanlan
Guest
Thats the problem Bill. Everyone knows that the dollar is doomed in the longer run. So when we get a bounce in the USD, after a little while everyones going to be looking at the long term doomed dollars they have on the one hand and eyeing off the increasingly discounted commodities they could be owning on the other hand. How long will they wait? I’m not sure but not as long as last year I’ll bet. A short sharp rally followed by worsening dollar punishment and PM’s and commods’ nearing “da moon” I reckon. Just a bit of speculation… Read more »
Ned S
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Buy a house Lachlan … Even if it is a 70k one on the west coast of Tassie. Hey, what can you lose – 35k if a greedy old man like Steve Keen is right maybe? And at least you’ll have somewhere to call home in Great Depression II. Or a property base to build on if he is wrong.

Pete
Guest

Ned?

It isn’t like Steve is alone. Even if Steve’s suspicions are not realised, there are plenty of other reasons that housing is in a bubble.

FYI – a bubble means it is not sustainable in the long term.

So that is pretty awful advice as it doesn’t provide context.

Here’s the context:
– buy anything you want without debt, because you are risking your own currently existing money.
– buy anything with credit and you are risking future money, aswell as relying on future credit conditions (interest rates, insurance, ability to pay debt, etc)

Ned S
Guest
You’ve still got to get the basics right Pete – And a house to call home is part of the basics. Be it ever so humble. At the risk of being “marked down” for revealing too much about my personal circumstances maybe (which I don’t give half a fig over) I bought in early 2008 (after returning from o’seas) fully expecting a whack – I got lucky – Krudd helped me out – But either way I’m up maybe 10% and have lived rent free since. Sure it’s a “bubble” – But bubbles can resolve themselves via other means than… Read more »
Lachlan Scanlan
Guest
Howdy Ned. Whats wrong with us chatting into the weekend? No mans an island eh (home alone today) “And such an outcome is starting to look likely.” At least in the short term nobody could prove you wrong on this Ned, however the implications of this answer longer term would be such as improving employment, business conditions and wages growth to ensure a reversal in private credit conditions. If government spending is used longer term to fill the current void then I believe inflation will occur in the presence of worsening business conditions. In this scenario housing prices will be… Read more »
Greg Atkinson
Guest

Or you could move to one of those country towns that were offering free land. I wonder if that is still happening? I reckon even here in Japan $70 would get you a home out in the sticks somewhere, maybe on the side of a “quiet” volcano but maybe that is safer than dealing with the sharks? ;)

Ned S
Guest
G’day Lachlan – It is all pretty confused and confusing at the moment. Deflation or inflation? Asset price increases or decreases? (Even in which countries?) And even more important, “when” might such things happen? 2010 when the Oz gov does some tweaks based on Henry’s tax review? 2011 as the American Alt A loans start to bite? 2012 as the Financials cop some regulation? Or just maybe China stimulates again? 2014 as ever more boomers retire? How will immigration to Oz impact on all of this over the period? Could Asia have its own credit bust up and recession etc… Read more »
Pete
Guest
Ned: I just think it is poor advice to recommend property – without context. If you are encouraging anyone taking on debt in the midst of a bubble, that seems irresponsible to me. If they have the cash though, that’s another story. You never know who reads this stuff. As for the ‘bubble’, you generally know my thoughts on this. If the Gov plays games and tries to prop up property (with immigration), this country may wind up being a less-than-wonderful place to live in, due to: – unaffordable housing – increased support costs for waves of immigrants – increased… Read more »
Dan M
Guest
Have to agree with Pete. If you can buy a house with minimal debt, fine. It’s a bad financial decision, but not a disaster. However, taking on a big mortgage for a non-productive asset is just stupid right now. Deflation: houses go down. Inflation: houses go down, at least in real terms. Interest rates will see to that. Ordinary essentials of living will rise, cost of money will rise, money left for housing will fall, probably a great deal. Maybe some idiot’s 95% leveraged $1m house will still be worth $1m in 20 years, but that will be small comfort… Read more »
Ned S
Guest

I spoke in terms of a property for $70k fellahs – Specifically in an attempt to give context – And even highlighting it perhaps – In that there aren’t many properties around for 70k. But without wanting to say outright “Debt is bad” – When for people who have more financial savvy than me, debt can obviously be good.

Ross
Guest

Dan M, in the US under severe inflation where consumers have mainly fixed rate loans the Fannie and Freddies and then later the banks and wrappers go under. If it happens in the US as a result of the excess liquidty then deflation will follow as a result of the inevitable emergency stability measures pushed by the bankers. If that happens our current account also receives its call. Inflation won’t happen in Australia because it involves a sovereign call as a result of our guarantees. There is deflation around all the corners

Ned S
Guest

Interesting Ross; Ta – For mine, you, CA, BP and GA are the wisest financial voices on DRA (with Dan getting my vote for compassion).

Greg Atkinson
Guest

I don’t think Ned was giving advice to anyone, just sharing with us his personal observations. Goodness me, the DR writers push gold every second day without any context and few people seem too worried!

Pete
Guest

But Greg, DR don’t suggest borrowing money to buy gold.

Currently the ‘standard’ way of purchasing property is using credit. We all know this – so there is a clear distinction to make if that is not intended.

Anyone who has a couple of thousand dollars can buy gold. In fact, you don’t even need that much (although there’s not much point owning $400 worth of gold).

Lachlan Scanlan
Guest
Morning Ned . I have to laugh as you mention all the economic events coming up on the future radar. Its funny how everyone here just loves all this economic/investment chaos, in a sense its like watching a reality TV show. But better we all get our thrills from the real deal rather than mind numbing episodes of Neighbours or something. Commodity charts look very bullish in the face of generally poor economic outlook, in part leeding to my conclusion of some unhealthy variation of inflation (prior to deflationary collapse). Granted the market looks due for correction now but I’m… Read more »
Ned S
Guest
I had a chat with an American on a flight from Singapore to Dubai in 2005. He was heading back to work in Iraq – Where he drove fuel tankers. The expression on my face on hearing that must have seemed to him to require a bit more info as he hastened to add that it wasn’t as dangerous now as he only drove “empty” ones and that he was only doing it on a three year contract to get his house paid off. He obviously didn’t like long term debt either – Good for him. And assuming the opposing… Read more »
Ned S
Guest

You too Lachlan – I’m going to go down to the local creek and grab some weed to set up a couple of fish tanks today – That’s way more fun than trying to fathom the unfathomable mysteries of the financial world. Cheers!

Pete
Guest
Ned: Nice stories. People taking risks to earn lots of money that they chose to spend on houses. And a nice tale about Storm Financial clients. Know anyone who was knee deep in Centro or Backcock and Brown shares? (while we are on the topic of extremes). I would hope that someone of your age would be able to buy a place debt free, or close to it – given that you have had both plenty of time and very favourable market conditions over an extended period. Unfortunately for others, the favourable market conditions are not going to continue indefinitely.… Read more »
Ross
Guest
Ned/Pete, on asset classes and share portfolio investment and longs, the danger is most often a lack of active management of the portfolio. And if I had the time, I would like to chart recommendation performances of vanilla advisories from the likes Commsec and Huntley’s which even in this bull market I believe is shocking (and with Commsec their advisory’s always support their trading bank’s exposed debt positions). So you need to do your own research and read well limiting yourself to specific corners like CA. Since early to mid 08, mine have been in ag and infrastructure engineering services… Read more »
Ned S
Guest
I don’t know anyone who did the Centro or Babcock thing Pete – As a Queenslander Storm was reasonably close to home for me though. I am not even sure if the American would have lost all that much – I have a vague recollection of him saying he was from Iowa or Idaho (???) – one of those states with short little names starting with an “I” – depends whether prices there boomed and crashed like elsewhere maybe) – I was more focussed on his job so wasn’t paying too much attention to other details at the time. I… Read more »
Greg Atkinson
Guest
Ned I would rather own a home than two cars but it seems pretty common these days for households to want a home, two cars, mobile phone plans and the overseas trip these days. At the end of the day I reckon it is all about living within your budget and giving yourself plenty of wriggle room if anything goes wrong. I don’t see debt as evil as long as it can be managed and used wisely. What truly worries me about the situation in Oz is that there are a lot of people who have never experienced a severe… Read more »
Pete
Guest
Thanks Ned. Greg, I agree very much with your comment. Although, “I don’t see debt as evil as long as it can be managed and used wisely.” is easier said than done. For instance, when we say “managed” what do we mean? Within an interest rate range of 6.5% to 10.5%? Or all the way to 20%? I strongly doubt that most people can manage debt ‘wisely’, given that interest rates have so many variable factors: – changes in cash rate (RBA) – changes in currency exchange rates (affects interest rates on overseas credit) – changes in bank risk appetite/tolerance… Read more »
Ross
Guest
Pete
Guest

Pretty interesting Ross (and very concerning if our Gov starts doing that proportionately as much as the US is)

Greg Atkinson
Guest
Hi Pete I treat debt as a liability that impacts cash-flow. So managing debt to me involves being able to handle repayments even if interest rates rise and being able to pay it down if required. I know this seems a pretty basic approach but there are plenty of companies that have treated debt as almost a bottomless pit of money and have amazingly been able to borrow more even when they were not cash flow positive. As you said, debt is other people’s money but sadly some of the way loans have been pushed in the past seem to… Read more »
Pete
Guest
I agree Greg. I guess my point was that it is easy to say “as long as you manage debt” but I have heard that a lot from people that I am sure cannot manage extremes in debt – such as sharply rising interest rates. The idea of people “managing debt” with a tolerance of only say 2% is pretty poor in my opinion. And the idea that debt is so great because it gives you the prosperity of the future – right now(!) sounds like pure consumerism to me. I don’t think consumerism should involve debt. And as you… Read more »
Ned S
Guest

I’d like to live in a mansion. I really like your car. (With BB’s boy saying a while back one of his life ambitions was an attractive blonde wife.) Get yourself a prenup (namely a Binding Financial Agreement aka BFA in Oz.) Just could be the only half decent financial observation I’ve ever made on this site … :)

Greg Atkinson
Guest

Pete I agree with your rant :) In many ways debt has led to people becoming more greedy and created a culture where we start to think we “deserve” things rather than have to work for them.

I have always been worried about the way that equity in a home has been marketed as some sort of cash pool people can use for just about anything.It just sends the wrong message in my opinion, but then again maybe I am just not “hip”.

Ross
Guest

Unfortunately, people have their positions, the global macro economy is a sea of western debt and now we (govts and people) have to ride our positions. Savings short term will fuel the deflation, spending or reflating will break fiat currencies. Today’s VIX follows wheat last week. http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN2623102820091026

Oil is sharply down. Chaos that central planners can’t control, they are just fighting their corner and looking more like the communist central planning committee at each turning. They are on the streets protesting against bankers in Chicago today.

Ned S
Guest

Pete, two questions if I may:
1) Do you have a “Plan B” for home ownership in Oz if house prices here don’t fall significantly (and if so, what is it)? and,
2) Do you have an exit strategy from gold/bullion (and if so what is it)?
Thanks in advance.
(Or telling me to mind my own business is OK too.)

Pete
Guest
Ned: 1) The way I see it, either a) house prices fall and the market resumes normal operations, or b) house prices are propped up and Australia becomes an economic abomination that is not a nice place to live. Either way, I will buy a house to live in, if the price is right. I would even invest in property…if the price was right. At the moment, they could hardly be further from right. Maybe I will be renting for a very long time. 2) I don’t own any gold bullion. I ‘probably’ will within approximately 12 months time, assuming… Read more »
Ned S
Guest

Thanks Pete – Appreciate the reply. I’ll chew on it for a while if that is OK – I know I’m not the “sharpest tool in the shop” – Cheers.

Ned S
Guest
Pete – One of the thoughts that has gone through my head (amongst lots of others) is that what we are looking at just could be “the new normal” re Oz house prices – State governments reliant on the income from them, C’wealth gov reliant on the CGT and tax turnovers from the building and allied industries, Oz pollies who are way more interested in What could happen to my property portfolio if prices drop than Is it hard for an existing Aussie to get a house, Do existing Aussies have what it takes to compete with new Aussies etc… Read more »
Pete
Guest

If that is the case Ned, then we will have realised 1b).

Debt requires servicing. Large debt requires a lot of servicing. Debt levels will only continue to increase over the longer term if interest rates are falling.

But that is a catch 22. Because if interest rates are falling, the capital required for the debt will be harder to come by.

Perhaps I could coin a term “peak debt”. I doubt i’d be the first though.

Ned S
Guest

Another thought that flicked through my mind Pete is just what happened to Yank house prices back in periods when she was booming (the 1910’s maybe; or the 1950’s maybe – As opposed to the 1930’s and 40’s) – Too much to research I’m afraid. One day maybe … So many questions; So few answers … Given that as one wise man said “It is always different!” Hmmm … Shutup Ned … I promise not to write anything else until COB Friday when me and Lachlan might chat :) :) :) !!!

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