This report takes a somewhat more philosophical look at the state of the US in general, and the US dollar by default. It is important I believe to be aware of where we are in the big picture, so as not to be confused by reference to shorter time frames that may no longer be relevant. The following view may prove inaccurate, if correct however, it is important to recognize this new state of affairs as soon as possible. It is this “view of the world” that has supported my bullish China, commodities, Euro, and Australian dollar calls of the last few years.
It is true the US dollar has fallen a long way and deserves to bounce, but something is still not right! Hard to put my finger on it, but early on after 20 years or so of the decline of the Roman empire it probably looked like a good time to buy Rome. I am not trying to be clever it is just that it is possible the US dollar, while at the bottom of its trading range of the last 30 years, may also be now at the top of its trading range of the next coming 30 years.
If as I suspect the world has forever and irreversibly changed, in that capitalism which needs to expand to survive, and has only ever been previously founded on a fantasy of the level playing field, has just now in the last ten years respectively discovered the vast still untapped potential of greater Asia, and for the first time in capitalist history, any history, actually has created a level playing field via the internet, free trade, and global financial markets: What value then, is the previous premium the US once held as a result of its dominance, even control of global capital, technology, and military power? We could go further and mention a prior US image value of world leading standards in many industry and business areas such as accounting, which have now been clawed back to a state of simple global standards that are held everywhere. If all those prior premium and perceived values no longer exist as a US advantage, how much is the US dollar really worth? What is its sense of self value.
My point is that much of the "good will" value that previously existed, or was relevant, has now evaporated as the rest-of-the-world has come on line in so many areas over recent years. The advent of the now clearly established sea of balanced global portfolio flows, as opposed to the prior US centric model, are a direct result of the overall levelling of the economic playing field. This is a function of there now being greater expectations of profit elsewhere in the world, and a significant degree of fear and confusion with regard to this once premium stock called the USA.
This now multi-year trend lower in the value of the US dollar is a bigger more significant long term historical price shift than any of us can envisage. There is a saying that if you are inside a pressure cooker it is hard to figure out where the pressure is coming from. Lloyd Rees, a renowned Australian artist once said, "the beauty of living in the midst of neverendingness". Perhaps we could add that what we are now experiencing in financial markets, is the blissful ignorance of living in the midst of the most important repricing of any market within a thousand years.
The power shift, and increasingly the wealth shift, toward Asia, particularly China, is palpable. This event, or process, is for the first time perhaps so huge, that even though we have reached a point of understanding of it, it is still just starting!
This runs counter to the usual contrarian approach to markets, where once an opportunity is fully recognized, it is time to go the other way. On this occasion we may just have to accept we do not grasp in real time just how large a historical re-pricing of the USA is occurring. In coming years we may see the Euro trade against the once mighty greenback at levels of 1.85 and 2.15. We may even see the Euro at 2.45 to the US dollar in ten to fifteen years time.
Right now, it is as when any medium changes state or collides with another, such as ocean to continent, there will be a lot of turbulence, rough water, and hopefully also some good surf. In the medium term then, the view here remains that the US dollar can continue to fall to Euro 1.64 from current levels. It may possibly reverse from there as deeply as Euro 1.52 or 1.48 again, which would be about the right correction should actual co-ordinated intervention occur. Such intervention is highly unlikely at current levels however. After such a post intervention correction/rally in the US dollar, I would nevertheless continue to expect, after 3-6 months consolidation, a further resumption of the US dollar down-trend to Euro 1.85.
On an immediate practical level I therefore suggest continued caution in regard to buying the US dollar. In fact while what I believe to be very strong technical support in the Euro market at 1.5280 holds, I suggest continue to approach all markets from the point of view that the USA could remain the worst performing economy for the next 12-18 months at least. With Paulson and Bernanke now being aware that on top of everything else, potentially higher oil prices near US$147 could send their economy into a severe recession or depression, they will fight like never before. Given this awareness, they/Bernanke will not under any circumstances be raising rates. That is why Chairman Bernanke will make very aggressive hawkish statements as a form of “talking” down inflation. Yet this strategy, of jointly talking up the economy while attempting to talk down inflation, runs a great risk, that in time their talk comes to be seen in similar kind to previous and blatantly hollow strong dollar policy comments.
In summary the view here is that the balance of global wealth and power has only just begun to shift, and therefore the US dollar remains tremendously overvalued. While some repeatedly speak of the US dollar being at the bottom of its range of the last 30 years, I prefer to highlight it is potentially at the top of the range of the next 30 years. My stop loss for practical purposes on this view is at or just below that Euro level of 1.5280.
Yes, intervention in the currency markets is a distinct possibility, but I suggest nearer Euro 1.64 levels than where we are at the moment. For now I remain US dollar bearish.
Clifford Bennett (Sonray.com.au)
Sources: Here
It is true the US dollar has fallen a long way and deserves to bounce, but something is still not right! Hard to put my finger on it, but early on after 20 years or so of the decline of the Roman empire it probably looked like a good time to buy Rome. I am not trying to be clever it is just that it is possible the US dollar, while at the bottom of its trading range of the last 30 years, may also be now at the top of its trading range of the next coming 30 years.
If as I suspect the world has forever and irreversibly changed, in that capitalism which needs to expand to survive, and has only ever been previously founded on a fantasy of the level playing field, has just now in the last ten years respectively discovered the vast still untapped potential of greater Asia, and for the first time in capitalist history, any history, actually has created a level playing field via the internet, free trade, and global financial markets: What value then, is the previous premium the US once held as a result of its dominance, even control of global capital, technology, and military power? We could go further and mention a prior US image value of world leading standards in many industry and business areas such as accounting, which have now been clawed back to a state of simple global standards that are held everywhere. If all those prior premium and perceived values no longer exist as a US advantage, how much is the US dollar really worth? What is its sense of self value.
My point is that much of the "good will" value that previously existed, or was relevant, has now evaporated as the rest-of-the-world has come on line in so many areas over recent years. The advent of the now clearly established sea of balanced global portfolio flows, as opposed to the prior US centric model, are a direct result of the overall levelling of the economic playing field. This is a function of there now being greater expectations of profit elsewhere in the world, and a significant degree of fear and confusion with regard to this once premium stock called the USA.
This now multi-year trend lower in the value of the US dollar is a bigger more significant long term historical price shift than any of us can envisage. There is a saying that if you are inside a pressure cooker it is hard to figure out where the pressure is coming from. Lloyd Rees, a renowned Australian artist once said, "the beauty of living in the midst of neverendingness". Perhaps we could add that what we are now experiencing in financial markets, is the blissful ignorance of living in the midst of the most important repricing of any market within a thousand years.
The power shift, and increasingly the wealth shift, toward Asia, particularly China, is palpable. This event, or process, is for the first time perhaps so huge, that even though we have reached a point of understanding of it, it is still just starting!
This runs counter to the usual contrarian approach to markets, where once an opportunity is fully recognized, it is time to go the other way. On this occasion we may just have to accept we do not grasp in real time just how large a historical re-pricing of the USA is occurring. In coming years we may see the Euro trade against the once mighty greenback at levels of 1.85 and 2.15. We may even see the Euro at 2.45 to the US dollar in ten to fifteen years time.
Right now, it is as when any medium changes state or collides with another, such as ocean to continent, there will be a lot of turbulence, rough water, and hopefully also some good surf. In the medium term then, the view here remains that the US dollar can continue to fall to Euro 1.64 from current levels. It may possibly reverse from there as deeply as Euro 1.52 or 1.48 again, which would be about the right correction should actual co-ordinated intervention occur. Such intervention is highly unlikely at current levels however. After such a post intervention correction/rally in the US dollar, I would nevertheless continue to expect, after 3-6 months consolidation, a further resumption of the US dollar down-trend to Euro 1.85.
On an immediate practical level I therefore suggest continued caution in regard to buying the US dollar. In fact while what I believe to be very strong technical support in the Euro market at 1.5280 holds, I suggest continue to approach all markets from the point of view that the USA could remain the worst performing economy for the next 12-18 months at least. With Paulson and Bernanke now being aware that on top of everything else, potentially higher oil prices near US$147 could send their economy into a severe recession or depression, they will fight like never before. Given this awareness, they/Bernanke will not under any circumstances be raising rates. That is why Chairman Bernanke will make very aggressive hawkish statements as a form of “talking” down inflation. Yet this strategy, of jointly talking up the economy while attempting to talk down inflation, runs a great risk, that in time their talk comes to be seen in similar kind to previous and blatantly hollow strong dollar policy comments.
In summary the view here is that the balance of global wealth and power has only just begun to shift, and therefore the US dollar remains tremendously overvalued. While some repeatedly speak of the US dollar being at the bottom of its range of the last 30 years, I prefer to highlight it is potentially at the top of the range of the next 30 years. My stop loss for practical purposes on this view is at or just below that Euro level of 1.5280.
Yes, intervention in the currency markets is a distinct possibility, but I suggest nearer Euro 1.64 levels than where we are at the moment. For now I remain US dollar bearish.
Clifford Bennett (Sonray.com.au)
Sources: Here
