A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR
by ilene - May 17th, 2010 3:59 am
A DEFLATIONARY RED FLAG IN THE $U.S. DOLLAR
Courtesy of The Pragmatic Capitalist
If the chart below doesn’t grab your attention then few things will. In my opinion, the performance of the dollar is the surest evidence of the kind of environment we’re currently in. The surging dollar is a clear sign that inflation is not the concern of global investors. This is almost a sure sign that deflation is once again gripping the global economy and should be setting off red flags for equity investors around the world.
The recent action in the dollar is eerily reminiscent of the peak worries in the credit crisis when deflation appeared to be taking a death grip on the global economy and demand for dollars was extremely high. The recent 16% rally in the dollar is a sign that investors are once again worried about the continuing problem of debt around the world and they’re reaching for the safety of the world’s reserve currency – the dollar. As asset prices decline and bond yields collapse this is a clear sign that inflation is not the near-term concern, but rather that the debt based deflationary trends continue to dominate global economic trends.
This is exactly the kind of market action we saw leading up to Lehman Brothers. In 2008 the dollar rallied as signs of deflation began to sprout up. This was an instant red flag for anyone who understood the deflationary forces at work (and a total surprise for the inflationistas). The dollar ultimately rallied 26% from peak to trough. Coincidentally, the dollar had rallied 16% from trough to peak just prior to the Lehman collapse when the dollar surge accelerated.
Of course, the inflationistas will argue that gold is rising in anticipation of inflation. In my opinion, this is incorrect. First of all, if inflation were a major global concern the Goldman Sachs Commodity Index wouldn’t be almost 65% off its all-time high and just 33% above its 2009 low. Second, and perhaps most importantly, bond yields around the globe wouldn’t be plummeting if there were rampant inflationary fears. For a much more detailed analysis on the reasons why inflation is not a near-term concern please see here.
As for the gold rally, I think it’s clear gold is rallying in anticipation of its potential to become a future reserve currency. The…
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Forecast 2010 – 2015: An Introduction
by ilene - January 11th, 2010 8:51 pm
I’m really looking forward to Jesse’s next installment. – Ilene
Forecast 2010 – 2015: An Introduction
Courtesy of Jesse’s Café Américain
I am in the midst of preparing a forecast for the next five to ten years for the United States economy, and by extension the world because of the intertwining effects of the dollar reserve currency and US consumption in the global economy. And of course the US position as the world’s sole superpower.
Before I do that, I thought it might be useful to see a recap of my last five year forecast, to set the playing field as it were, as a sort of an introduction. The next forecast will be similar in format and style, but may be a little more complex, because the US, and the world, are at a critical crossroads in history.
The greatest struggle in writing this sort of thing is to keep it brief, to prevent it expanding into a lengthy treatise that examines too many particulars, too many possibilities. Forecasters often succumb to the temptation to throw out many specific predictions and possibilities, in the hopes of ‘hits’ that will be remembered, with misses forgotten, without giving sufficient weight to the probabilities. In addition, clarity and consciences are always the challenge in writing non-fiction regarding complex subjects.
Please keep in mind that this forecast was published on my old website at the beginning of 2005, when optimism was running high, the maestro was still on his throne, black swans still an uncommon topic, and the US was in a fresh bull market in stocks with a growing housing bubble that very few would admit, and many would vehemently deny. This forecast is being written in darker hours, when some of the horsemen have already been unleashed.
I have edited out extraneous contemporary detail, and most of the charts which are dated, except for one. I edited out some grammatical errors and awkward phrasing. The timeframe has been ‘compartmentalized’ to five years, from a more open-ended original, because at the time I wrote in 2005 I did not imagine I would still be at this blogging effort five years later. I have also renumbered the footnotes and eliminated several for the sake of simplicity and relevance.
`Humpty Dumpty sat on a wall:
Humpty Dumpty had a
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The Sound of One Hand Clapping – What Deflationists May Be Missing
by ilene - October 12th, 2009 12:23 pm
I meant to post this article by Chris Martenson a few days ago, and now Mish has responded to it directly, so I’ll post this and then Mish’s one hand clapping analysis next. – Ilene
The Sound of One Hand Clapping – What Deflationists May Be Missing
Courtesy of Chris Martenson
This is a piece that I wrote in response to a request for a guest post over at ZeroHedge. It ran there yesterday garnering some nice attention and a diverse range of comments beneath.
Based on some of those comments, this article represents nothing more than my attempt to find an explanation that matches the data.
My central thesis to this crisis, developed a few years before it even hit, is that the economic troubles are the symptoms, while the money system itself is the cause.
My views on this are expressed in the opening of an article that I initially penned in 2006 but updated in 2008:
Within the next twenty years, the most profound changes in all of economic history will sweep the globe. The economic chaos and turbulence we are now experiencing are merely the opening salvos in what will prove to be a long, disruptive period of adjustment. Our choices now are to either evolve a new economic model that is compatible with limited physical resources, or to risk a catastrophic failure of our monetary system, and with it the basis for civilization as we know it today.
In order to understand why, we must start at the beginning. While it was operating well, our monetary system was a great system, one that fostered incredible technological innovation and advances in standards of living, two characteristics that I fervently wish to continue. But every system has its pros and its cons, and our monetary system has a doozy of a flaw.
It is this: Our monetary system must continually expand, forever.
The article above provides the big-picture backdrop that drives my long-term vision and thinking. I raise it now so that you’ll understand that I principally view the economic world through a monetary lens.
The hot topic of the day is "Inflation or Deflation?" and the camps are firmly divided into groups of inflationistas and deflationistas. When asked which camp I am in, I reply "Yes." Some would say that puts me in the…
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WARNING: Deflationary Collapse Dead Ahead
by ilene - September 15th, 2009 11:35 pm
WARNING: Deflationary Collapse Dead Ahead
Courtesy of Karl Denninger at The Market Ticker
The Video Version:
For those of you who prefer text……
You have heard me talk about this before.
I have written Tickers for more than two years.
I have sent multiple petitions to our Congress, and you have signed them.
I raised an unbelievable amount of Hell when TARP was under debate, arguing that we must allow those banks that are underwater to collapse and we must force the bad debt from the system.
The fact of the matter is that you have been lied to for the last decade about our economic state, and if we do not divert from the road we are on our economy, our monetary system and our government WILL COLLAPSE.
Not "might collapse."
Not "might get bad."
WILL COLLAPSE.
It is a mathematical certainty, and here is the proof.
First, I present the graph of our economy – GDP and Debt, from the 1950s onward. This chart you’ve seen before (click any of these for a larger copy)
Now I want to present two charts – the first being a simple mathematical chart of two functions – a GDP that grows at 5% annually and debt that grows at the actual compound rate it has grown since 1953, 8.7946%.
I started both debt and GDP at the same value, $10,000, for the purpose of this series (even though in fact debt was higher than GDP.)
You’ll notice that due to the fact the debt isn’t a constant (and neither is GDP) these are not exact matches – but they’re pretty close!
Now let’s go forward 20 years, maintaining the same assumptions. That is, if you and your wife or husband, or boyfriend or girlfriend sleep together tonight and conceive a child, this is what our economy will look like in terms of debt and GDP at the approximate time they go to college:
You think so eh? Debt outstanding will be six times greater in 20 years. GDP will be three times greater, but having started from a much lower level, will of course continue to lag.
Do you really believe that those interest payments can be made?
Look at that chart.
Now look up above at the top chart.
That is reality right here, right now, today.
Tell
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site