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.

'Good' News Drives Market Higher

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.

Our Video Related to this Blog:

The market rally continues today and is likely to do so for awhile because the momentum is on the upside. The mainstream media is doing its best to help continue the rally with the usual bullish hype. Today's bullish stories include a 3.4% rise in durable goods, the first after a six month record decline. U.S. mortgage applications are also up on the lowest mortgage rates since records have been kept. Such 'minor' bad news as Japan's exports falling 49%, with the biggest drops in exports to the U.S., and China calling for a new reserve currency to replace the dollar have been mostly ignored by the market.

The durable goods report is being interpreted as indicating the economy is improving. You can only believe this as long as you don't look beyond the headline number (most traders don't by the way, they just react immediately without getting the details). The big rise in durable goods was led by military aircraft and parts which were up 32.4% - this is 100% the result of government demand and not likely to be repeated. Heavy machinery was the next big gainer and was up 13.5% - not exactly a consumer item. Computers were up 10.1% and this would partially be accounted for by consumer purchases, although businesses are the major buyers of computers. Fabricated metal products were the only other item with a significant gain being up 1.5%. Autos and auto parts are still in heavy decline, but there was a little noticed $5 billion government bailout of the auto parts industry a few days ago that will act to prop up the industry.

The Japanese trade numbers for February gainsay any rosy interpretation for the U.S. economy that could be garnered from the Durable Goods report. While Japanese exports overall declined 49%, the biggest drop was exports to the U.S., with exports dropping 58%. Next biggest was the EU countries where exports dropped 55%. The drop in exports to China was less than 40%. While these numbers indicate a collapsing global economy, the collapse is by no means even. The U.S. is doing the worst and Europe is a close second, but Asia is holding up somewhat better.

The Chinese released a proposal a couple of days ago to replace the U.S. dollar as the world reserve currency with a Special Drawing Rights (SDR) linked currency system. Russia supports the idea. The U.S. dollar losing its reserve currency status would be devastating to the U.S. Reserve currency status keeps the value of the dollar much higher than it would be otherwise. The impact would be extremely inflationary since we would have to pay higher prices for all imports. Nevertheless, Treasury Secretary Geithner remarked this morning that the U.S. was "quite open" to the Chinese proposal. The dollar dropped like a rock for a short time thereafter. In case you have yet to realize that Geithner isn't exactly the most brilliant Treasury Secretary that the U.S. has ever had, this should remove all doubt. Someone should also tell China that a globally neutral currency has already existed for the last 5000 years - it's called gold.

The final piece of 'good' news today was U.S. mortgage applications were up 32%. Unfortunately, 79% of those application were refinancings for already existing mortgages. New purchases were only a small part of this number. Average mortgage rates fell to a record low of 4.63% last week. U.S. policy is doing its best to try to get housing prices back up to economically absurd and unsustainable levels (doing so the first time only led to the current Credit Crisis that has threatened the stability of the world financial system). The only way this can be accomplished is to create enough inflation so nominal house prices stay the same or go up. This will cause even bigger economic problems, so you should assume that this is one area where government policy will be 'successful'.

NEXT: No Longer Gilt Edged - the Inflation Implications

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.