Crash Proof vs. Conquer the Crash
I was thrilled to see Peter Schiff on Bloomberg TV this afternoon, since I knew he’d be all fired up and really let loose on the bailout. I was not disappointed, as he advised Americans to get all of their assets out of the country, and, maybe in a slip, ended by saying “get out of America.” He and I couldn’t agree more on politics (Ron Paul) and about the future of the land that used to be America — currency failure, war, Fascism, and all-around ugliness — and I used to basically believe his investment thesis (get out of the dollar ASAP!) until Mish and Prechter’s more nuanced analyses won me over to the deflation first then inflation camp about 12 months ago.
The crux of the matter is the difference in scale and pace between the Market’s deflation and the government’s inflation, and fact that the bankers’ credit inflation machine is broken.
Dollar carry trade still unwinding.
I turned bullish on the dollar vs the euro and pound a few months ago, and have been short-term bearish on oil, gold and other commodities since this spring. Shorting oil and gold last June was as contrarian as you can get — that is, contrary to the contrarians, since their views on a dollar flameout had become mainstream (see Mainstream Contrarianism Crushed).
Since then, commodities have tanked across the board as America’s script made a huge breakout rally against everything on the other side of the dollar carry trade. After a move like that, you have to expect some retracement, and that is what we have been getting for the last few trading days, as oil, gold and the Euro have each made up roughly half of their losses against the dollar.
Play it again, Bob.
I am still going against the grain here and using this as another chance to make the very same play. Anti-dollar sentiment feels almost as strong as this spring, as you would expect on the news that hundreds of billions to trillions more of our government’s notes to pay nothing will be issued to finance this bankers’ coup. The reason for my position is partly trading psychology (the WSJ reports that “Large speculators were net short more than 40,000 contracts in the euro and 49,000 contracts in the British pound, the most negative they’ve been on those currencies in the last 52 weeks”) and partly the fact that the carry trade has a lot further to unwind, since dollars were being handed out in buckets for so long against so many asset classes. He who sells what isn’t his’n must buy it back or go to prison, and there are still buckets and buckets of dollar debt out there that must be repaid or go to money heaven. Either way, it increases the value of the surviving dollars as people desperately need them to pay off debt and keep the lights on.
The US government will have the strength to enforce its legal tender laws for some time to come, if it can do nothing else, so the dollar will still be good for all debts public and private. And now that people are going broke left and right (broke means no money), those who still have some dollars safe in Treasuries or mattresses will find that they can get more and more for them, commodities included, at least through this initial phase of the depression.
Gold: don’t leave home without it.
The speed and magnitude of the bailout at this early stage of the depression is surprising, even though nothing about the substance of Paulson’s (and by Paulson, I mean the cabal that he represents) actions surprises me in the least. It will be interesting to see if these programs can speed us through deflation in a year or two, rather than the two to five years I had been assuming (Japan’s deflation lasted nearly a decade, but they were not as hell-bent on destroying their currency as Paulson and Bernanke are ours). At any rate, when the next inflation comes, it is the big one, so I would not want to risk being completely without hard assets at any time from now on.
Disclaimer — I have no idea how, if at all, Prechter and Mish are playing the dollar and commodities or anything right now, so just because I cite their ideas here don’t assume mine are in sync with theirs. And, as always, don’t trade like me! Don’t trade at all! It’s too dangerous out there. I’m not an investment advisor, and I may have long or short positions in any of the securities, commodities or currencies mentioned on this site. See disclaimer page.