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“Advertising is the rattling of a stick inside a swill bucket.”

George Orwell

Commentary & Analysis
Dollar-Doom Fear Mongers Are Out in Force? Is the dollar doomed again?

The sound of the dollar-doom promoters selling snake oil from their swill buckets is growing loud of late. The last time these perceptive purveyors of doom where this noisy were when the dollar was putting in a bottom back in 2008. Is it déjà vu all over again or is there a hint of merit in their story this time?

Before I share the reasons why I believe this dollar bull still has legs, let me say a few words about the dollar doom promoters.

Besides the pithy quote about advertising, Orwell also said: “Who controls the past controls the future; who controls the present controls the past.” I think promoters understand this better than most of us. They make it clear they control the future with declarative statements adding an air of inevitability to their forecasts. They use just the right mix of fear to control their readers present; they dangle the greed carrot so deftly the past from this crowd remains unexamined. For if one were to examine the past, especially as it relates to the fabulously failed forecasts from the dollar-doom crowd, the jig would be up for our swill stick swingers.

The current ramblings from this crowd haven’t changed over the years. The usual players are still in place.

You know them and have seen them many times screaming “buy gold and sell the dollar” on TV and radio ads, ranting hysterically about “a currency war around every corner” no matter if the US dollar is high or low, and my favorite is the setting of ridiculous time-lines for, and I kid you not, the complete disappearance of the US dollar as a currency—that’s a whopper of a lie even bigger than the go-to “the Chinese yuan is going to replace the US dollar as reserve currency very soon,” implying one just flips a switch and reserve currency status disappears; and when that happens crisis is guaranteed they say

[Note: I do believe the Chinese are making solid strides in their quest to internationalize the yuan. And if, a big if, economic growth remains on track, the yuan’s reserve status growth will surprise a lot of people. But this is a time-line measured in years, likely decades, and not an overnight event. If you wish to see more on this topic and why reserve status isn’t all what it’s cracked up to be anyway for the US, I suggest you read this piece from the venerable Prof. Michael Pettis; excerpt below.]

If the RMB becomes more widely used as a reserve currency, it could certainly result in lower foreign demand for US government bonds, but not lower Chinese demand. This, however, would not be bad for the US economy or the US government bond market any more than it would be if the PBoC were to reduce its demand for US government bonds. China, and this is true of any foreign country, does not fund the US fiscal deficit. It funds the US current account deficit, and it has no choice but to do so because China’s current accounts surpluses are simply the obverse of China’s capital account deficits. This may not seem like an important distinction in considering how lower demand will affect prices, but in fact it is extremely important because any change in a country’s capital flow can only come about as part of a twin set of changes in both the capital account and the current account.

I share this summary of flawed forecasts and biased rationales in the hope you will view the dollar-doom crowd with the skepticism they deserve.

As I said, the last time I saw the dollar fear mongers so busy was just as the US dollar was putting in a multi-year bottom back in 2008. I remember the day, as I was waiting for it to turn higher. It was March 17th, 2008, the day the US government “saved” Bear Sterns. I suspected at the time the credit crunch represent a major global macro sea-change event; and it was most likely a very dollar bullish setup—a major multi-year trend change type of setup.

My understanding of global macro money flow indicated global rebalancing was upon us, i.e. the thing those economists said they wanted to see in order for better quality growth in the global economy. (I am sure you have noticed many of the same economists who wished for global rebalancing are the same who’ve been screaming for governments to do more in way of stimulus to “stop it.”)

So, instead of letting the market do what it does best without interference—clear away dead wood—the neo-Keynesians’ (I believe Keynes would have blushed at their excess) have “saved” the market and locked us into prolonged stagnation at best, and at worst helped set the stage for another crisis:

So, if we continue to be locked into this nasty feedback loop of more debt and less demand wouldn’t it be logical to believe there is a lot more left in this rebalancing process? I think so. And I think this is why the dollar has legs, albeit overdue for a decent correction based on the technical picture:

I would add one more piece of evidence that dovetails nicely on this global rebalancing view; it is from a source who has proven quite good over the years—Mr. Stephen Jen, now co-founder of SLJ Macro Partners LLP in London [Mr. Jen was head of currency analysis for Morgan Stanley where I followed him closely and learned a great deal from his writings. He said recently in a story carried by Yahoo (Bloomberg feed) there is a $9 trillion short position in the US dollar and that will be plenty of fuel to keep this bull raging [my emphasis]:

“After years of accumulating a huge amount of debt in dollars, borrowers will need to figure out how to repay” given the currency’s recent gains, Jen said. “People will either repay early or start hedging actively. There’ll be huge demand for the dollar that is much more than what’s consistent with growth or interest-rate differentials.”

Obviously anything can happen. But I’m placing my long-term bet on rebalancing and demand flowing from the massive dollar short position no matter how loud the shrill from our boys selling newsletters and books from the darkest depths of their swill buckets.