Tuesday, December 30, 2008

The dollar has to collapse...or does it?

Trying to find a dollar bull right now is like trying to find the proverbial needle in a haystack. Everyone seems to assume that the Feds actions will condemn the dollar to the depths of hell. I’ll be quick to point out that the Fed has been on this course for almost a year now and the dollar has continued to rise.

Let me just say I’m skeptical. First off when everyone is thinking the same thing then no one is thinking. It feels like everyone is on the same side of the boat right now. That alone would make me nervous to be short the dollar.

Sure the Fed is printing like crazy but where is the money going? Well most of it is going into the banking sector. However the banking sector is basically crippled and any money flowing this way is just going to plug the enormous holes in their balance sheets. I don’t see the banks lending when they are still using any money to just stay solvent. If the money is stuck in the financial sector how is it supposed to get into the system and cause inflation?

I’ve thought for some time now that the world is entering Kondratieff winter. During this period the world will go through massive debt destruction. Sound familiar? During this period cash will be in short supply causing the value of currencies to rise. Sound familiar?

Even if banks were able to lend, who would they lend to? Real estate is still overpriced and lending standards have tightened. The first time home owner is now priced out of the market. Sure I guess it’s possible that banks could loosen lending standards and reflate the sub prime market. Do we really want to go through that again? Isn’t this lesson painful enough already? Are we really willing to going down that road again? No I would say the odds of reflating the housing bubble again are slim.

So we aren’t going to push money into the system through that vehicle anymore in my opinion.

How about lending to business?

Well we are in what will likely turn out to be the most severe recession since WWII or worse. What business is looking to expand in that environment? I doubt we are going to see a big demand for money from that front. I suspect business is now close on the heels of the banking sector. I expect in 2009 we are going to see massive small and medium size business failures.

In the first half of the year commodity based companies were looking for capital to expand. With the collapse of the global economy and subsequent crash in commodity prices I think that one is now off the table too.

I think 09 is going to be all about unemployment. People without income tend to hoard cash. Basic economics 101 too much demand and not enough supply equals rising prices.

Ultimately I do think we will see the dollar collapse but I think we have to get through the debt destruction phase first.