Watch the Dollar Itself and Not Media Coverage

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.

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Significant news came out for the U.S. dollar around the market close on Friday, a time when many traders were already gone for the weekend. China once again wants the dollar dumped as the world reserve currency and replaced with Special Drawing Rights. These would consist of a basket of currencies. While the dollar would be part of this basket, its world role would be much diminished and demand for dollars would drop significantly. Its value would subsequently follow. This is at least the fourth time in the last several months China has brought this up and they obviously are not going to let it go. So, is this important story receiving major coverage this morning? Don't hold your breath for that to happen.

The trade-weight dollar of course fell on the news Friday and DXY, the ETF that tracks it, closed at 79.88. Any close below 78.33 could potentially cause a huge sell down. The dollar has managed to barely stay above this level for weeks now. You would never know it though if you just read media headlines. One after another after another has mentioned a big dollar rally, the strong dollar, and dollar going up. What price quotes the headline writers who wrote these were looking at, I have no idea. They are obviously not the ones that the rest of us watch.

The first two articles I saw this morning were, "Crude Oil Slips, as Stronger Dollar Weighs" and "Dollar Holds Gains". The trade-weighted dollar was down when I read these articles. Crude oil was of course up, although it fell as low as 68.36 overnight. It then rose to 69.74 just before U.S. stocks opened. The media also got their reporting on the U.S. bond market wrong too this morning with "Treasuries Gain Support From China, Month-End Buying". Treasuries were down shortly thereafter. While you shouldn't trust financial media headlines in general, there seems to have been a concerted effort to report the U.S. dollar is rallying lately even though nothing in the real world supports this story. Why is the U.S. mainstream media constantly pushing this pro-government viewpoint?

The U.S. dollar will eventually fall apart, although this is not going to happen all at once. It is likely to be a long drawn out process that lasts years. There could easily be more than one sharp drop that lasts only a few weeks or even days along the way. There will also be periods of stabilization and rallies, where you will hear the crisis is over, everything is better now, no need to worry anymore. Unless major long-term fundamental policy changes (like a balanced budget, an end to excess money printing, and/or backing the dollar with some hard asset) take place, any improvement in the value of the dollar will only be short term. In those times of temporary dollar improvement, just remember the following quote from Fed Reserve Chair Ben Bernanke, “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” Yes, there is a free lunch - at least for the Fed. Unfortunately, everyone else will all be getting the bill in form of inflation. Personally, I have no intention of paying it.

NEXT: Market Behavior Next Few Days Critical

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

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.