A report from the world's biggest bank, HSBC, tells us the dollar's days are numbered.
"The dollar looks awfully like sterling after the First World War," said David Bloom, the bank's currency chief.
"The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK - debt is racing up to 100pc of GDP," he said
The Telegraph reports:
"Crucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's 'mercantilist mindset' of recent decades is about to be broken by the spectre of an inflation spiral.
"The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.
"A monetary policy of near zero rates - further juiced by quantitative easing - is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.
"What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt."
That said, we repeat a headline from Seeking Alpha:
"Dollar shorts should look out."
We agree with HSBC and the Telegraph: the dollar will probably slide - especially against Asian currencies - for the next few decades.
But that's the long term. In the relatively short term we still face the shock of another leg down of the credit contraction crisis. Risk is likely to make a comeback. When that happens - and it could happen in a 'Red October' - the dollar will seem like a relatively solid refuge. This is what happened last year. We wouldn't be surprised by a replay of that 'flight to safety' we saw at the end of last year.
But we know what you're thinking: what? When did the dollar become a 'safe currency?' Of course, it's not safe. But when the end of the world approaches, it will seem safe.
For a while.
Until tomorrow,
Bill Bonner
for The Daily Reckoning Australia
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
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.
Comment by Ned S on 23 September 2009:
Which would seem to support a thought I had a while back that the inflation/deflation debate just could depend on what country you in.
Comment by Dan on 23 September 2009:
I predict the elimination of all currencies and the replacement with an international unit of money, but not precious metals based. It'll be fiat again but totally regulated. Probably even cashless.
The death of the US dollar (and the crippling of the US economy) seems to be a necessary event for this to come about.
Comment by Julie on 23 September 2009:
I heard last week the UN is calling for a global currency...wonder if 'Aunty Helen' is in the thick of it ?
Of course New World Order conspiracy theorists and followers of the Bilderberger meetings predicted decades ago that eventually we would see national currencies disappear and a one global unit take it's place...and yes, they speculated it being a cashless currency as well. Am new to your forum here, but hope to learn a lot
Comment by Lachlan Scanlan on 23 September 2009:
I dont think the dollar will rebound strongly this time. The dollar dumpers will be standing ready to offload.
Comment by Ross on 23 September 2009:
Lachlan, I have signed onto Bill's latter lines on the USD some time ago as you know. My trading equity money gets pulled the minute the USD starts going backwards and in my longs I am seeking those where I have as little hot money investors alongside me. I am myopic on these hot money flows, they have created liquidity in the US but it isn''t being lent by banks into the US domestic economy. It is therefore central banker induced funny money, your US central bankers as one stop combined off balance sheet&ratings agency vehicles.
While it all hangs together for Bernanke & Summers the USD might drift down. But when the US economy doesn't do what they want (and how can it without the credit that they have pushed outside their own borders), or alternatively they stop that flow credit to foreign shores, it all hits the fan. When it hits the fan collateral doesn't cover the loans, or nervous investors redeem which drives deleveraging and reverse flows from other shores and reversals in "risk" currencies.
So that is my line, perhaps if you can describe events in a similar fashion that might drive that long unimpeded USD slide you expect. All that USD swap money that funded UST purchases coming out might be one way, but foreign purchasers are down to about 25-30% already and all they do is monetise in response, and when they monetise that same USD finds is just feeding that same loop I talked about earlier.
Comment by Ross on 23 September 2009:
Lachlan, got a call on this post. I meant the minute the AUD goes significantly backwards (not usd) I will sell my equities that are known to have hot money in them (appreciated quickly in parallel with the AUD).
Comment by Lachlan Scanlan on 24 September 2009:
Hi Ross
Im not as hot money literate as you've come to be. I see you've studyied money flows closely to guide your investment decisisions.
It must be difficult to decipher whats going where with precision, but then your obviously hard at work on it.
When you post I often read your posts several times in order to grasp
the full meaning so I have some Q's below..
Ive had a eye out for a dollar bounce and actually since back in June when the markets had been off for a while and the USDX was beginning to rally. When the stocks rally took off again I was short. Got hammered by the HF trades, hot money and MSM tripe etc etc...if what I read is correct. Thats my own inexperience (held too long before covered). I learnt that markets can move against the fortunes of underlying economies...for a good while too. Just add hot money.
I believe equities will have to come off soon. I know another high risk time coming up now into October. I assume the fallout from Alt A's /Opt.Arms defaults peaking early next year will bring about the end if something doesnt cause it sooner.
I think it possible US bonds will receive diminished support this time. My gut says we'll get a suprise but I cant possibly submit supporting evidence. Ive seen a lot of calls for the equities rollover plus ensuing dollar support. However I wonder if we'll see a breakdown of some inverse correlations eg S@P500:USDX etc.
I feel that a lot more dollar holders will be convinced of their need to diversify out(on strength) than just a year ago.
Questions:
(1)"hot money investors alongside me"....are you refering to US banks hot money into Aussie equities?
(2)"I am myopic on these hot money flows, they have created liquidity in the US"......are you refering to claims of bailout money into US equities?
Will be out bush for a few days Ross and check for reply when back home.
Happy studying.
Comment by Ross on 24 September 2009:
Lachlan, on 1? yes absolutely. On 2? No, rather bailout money into merchant banking liquidity and the merchant bankers have been index trading to make the broader equity markets and front run from them, but that hasn't required much liquidity in the scheme of things, the liquidity has mainly been shipped offshore.
For goldphiles, the great fed conspiracy theory is oulined here: http://www.zerohedge.com/article/fed-hiding-gold-swap-arrangements-foreign-central-banks If there is an ounce of truth in this you can be sure all the reserves are worried by a general fiat currency collapse led by the usd. But then again the IMF is just a US fed & state dept subsidiary anyway.
Comment by Dan on 24 September 2009:
Ross, the 'conspiracy theory' is no theory: http://finance.yahoo.com/news/Federal-Reserve-Admits-Hiding-bw-2550373789.html?x=0&.v=1 - smells like a dead possum in the roof.
Comment by Ross on 24 September 2009:
Dan, it is still an allegation by an interested party. lets see before we all set about buying ammo as our post crash currency. Remember too there are many claims on each ounce of physical gold in the markets and a desperate & determined govt is an ugly thing.