Thursday, June 11, 2009

Disaster Stalks the Dollar

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Gold and silver were down this morning, while the U.S. dollar was attempting a recovery. The trade-weighted dollar fell back below 80 though and the precious metals started to recover. It must be requiring superhuman efforts on the part of the central banks to prevent a major drop of the currency at this point after the body blow struck by the Russians yesterday. The natural gas storage report was mildly bullish today. Oil trade remains listless although light sweet crude was above 72 earlier today.

As usual, the mainstream media is not informing the public about a major financial story that it needs to know about. Russia is the third biggest purchaser of U.S. treasuries. Yesterday it said it is reducing its holdings by not buying new bonds when the current ones expired. Put this together with China altering its holdings of U.S. treasuries from long term to short term bonds and this spells major trouble for the U.S. When our budget deficits were hoovering around $400 billion a year, we managed through great efforts to get foreign governments to lend us enough to support our proliferate spending. This year's budget deficit will be around $1800 billion. It is estimated that only 53% of U.S. federal government expenditures will be covered by taxes (when this number fell to 69% in Weimar Germany, hyperinflation devastated the country only 5 years later - the U.S. in is much worse shape currently). To cover our budget deficit, we need to borrow or print money to make up the difference. Just as our borrowing needs are skyrocketing, foreign lending sources are drying up. It is inevitable that U.S. money printing will be ratcheting up soon.

The Russian story is even more significant however. All the foreign bond holders know there is a lot of inflation on the horizon, but most haven't acted yet. The situation is analogous to a crowded theatre where everyone smells smoke, but is ignoring it because they are busy watching the play. Suddenly someone jumps up out of their seat, runs toward the exit and shouts fire once they get there. Is everyone else going to just remain in their seats or will there be a stampede to the exits? This is the danger the dollar is now facing.

Oil is drifting up today and natural gas is doing well. The natural gas storage report was mildly bullish with expectations for an increase of 108.5 BCFs and the actual increase coming in at 106 BCFs. Oil is getting closer to its Fibonacci retracement around 77. A spike up to or above the level would be a good sell signal.

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Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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