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Tuesday, March 11, 2014

Is US Dollar Under Duress

Its no secret that America's luster has been tarnished since 2001, and arguably since Nixon.
With (Russia) Putin's Hubris, and China's economic duress, either acting aggressively to take down the USA is not out of the question.

USA has had the benefit of being the world's reserve currency since World War 2.  This benefit in the last decade has turned into an albatross.

No matter what the USA has done with it's finances, the world adjusts it's currency valuations to ensure their currency parity is in line with what politicians and economists believe is a health exchange rate.

Even countries, like Russia, who may prefer USD to falter, are compelled to be compared by the US dollar since their trading partners do keep their currencies locked to USD.

The net result is the USD has had it's valuation tied to its trading partners, and in turn countries that don't want USD to be world currency reserve have no choice but to maintain parity.

However, we are starting to see some unusual pressures continue to build.  I posted previously on various countries having local currency problems.  That combined with potential with aggressive countries may look for an opportunity to attack the US dollar standard puts America at risk.

Further, a market PREVENTED to freely trade by suppressing interest rates, changing accounting laws since 2009 in place since the great depression, giving banks 85 billion dollars a month (yes giving) for 2 years, and other aggressive measures will have an unintended consequences.

What I fear is a USD decline that once it hits a certain point, a run for the door will happen.
If/when that happens everyone will be trying to put their money into assets to stabilize their wealth.

Natural resources, and now crypto currencies are good candidates for storage of wealth.
Now to the charts, lets take a first look at the US stock market, S&P 500.  Does anyone believe the economy is stronger than 2000 by a longshot? Than 2007?  If you don't then you must ask, how can the market be valued this high?  Answer is simple, accounting rules changed and various unintended consequences of free money.


Now lets take at look at US Dollar valuation since 2000.
Hmm, the US dollar was 50% higher in 2000 than now.  At that level, a market at 1500 in 2000 is equivalent of 2,250 today.  So we have not yet broken the highs of 2000 even though the first chart indicates we have.

OK, so we get it, USD is lower, market looks higher, but in real valuation it is not.  Big deal right?  Things move around.

Now lets take a look at US 10 year interest rates, notice we hit a bottom around June 2012, as I posted back then!  It was a golden opportunity to bet against US bond values as we hit.  So far that was a correct call.

Lets take a look at Gold, old school alternate storage of wealth.  Remember I HATE gold = money, but it still needs to be raised here:

Gold has been recently rising since end of December.  Also gold is near its long term up trendline.  Notice the 25/50 weekly SMA lines are starting to turn up, if they cross it usually means the asset is on an upswing.  But we are no there yet.

What about Bitcoin? Despite its original exchange blowing up and going bankrupt, its valuation is holding steady, dropping from 800 to 650 from the scare. Not bad for something that just recently exploded from 20 bucks to 1200, going to 800 before the crisis hit.

So what does this all mean?  The market is going higher but still hasn't surpassed the USA wealth of 2000, not by a long shot.  The USD if it ever crosses below 70, it is a very strong indicator we are in a new world, probably an epic crisis, based on USD valuation over last few decades.
US Interest rates may have bottomed for my entire lifetime in June 2012.  If the rates break out of the range we are in now up, we can see a generational shift from decreasing costs of debt to ever increasing costs.
Gold is still trending higher, relatively stable since before 2006 with a nice steady rise.    Bitcoin for all the shouting about its a crackpot scheme has been fairly well.  No where close the reaction the US economy had with the bankruptcy of Lehman brothers.

One thing should be a takeaway, the market valuation ever higher is an illusion considering how much money is being pumped to prop it up compared to 2000.  The USD value alone tells a story about USA wealth.  With rates seemingly past the least costly in 60 years, Gold and Bitcoin holding well, the USD may be headed for troubled waters from its enemies.

Good luck

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