Tuesday, December 2, 2008

Fall Dollar Fall!!!--But Slowly Please

Is the title of this post Un-American or insane? It is neither. It is actually what needs to happen in the short term. During the summer, we were in this vicious cycle where the falling dollar was causing the price of oil to increase. The dollar/oil correlation got all of the HEADLINES. But quietly, the falling dollar was helping our corporations as their exports were increasing. With this recent dollar rally, I think we are going to see some companies report worse than expected numbers as that "leg" that was propping us up in the summer is gone. So will the final quarter of the year show awful domestic results combined with potentially worse than expected export results? I believe that it is quite possible. Now given today's action one might argue that we have factored in the worst possible numbers through the end of the year. I am just not convinced that we are immune to all bad news between now and the first quarter of next year.

I am convinced that the recent deflationary action is going to be much shorter than most expect. You can list a plethora of excuses as to why this time is different---that the banks needed the TARP to reflate...and the list can go on. But I don't buy any argument for the long term. The simple fact is that anytime (and I challenge anyone to post a comment proving me wrong) we have seen massive liquidity injection----inflation follows. HERE I WILL ARGUE THAT THIS TIME IS DIFFERENT---DIFFERENT BECAUSE WE HAVE NEVER--EVER SEEN THE ENTIRE WORLD PARTICIPATE IN ADDING LIQUIDITY.

I believe that we are in a technical trading market. I have been open that I have gotten hammered on my SDS. Why haven't I closed the position? Because I have not seen anything that has fundamentally changed. Are some stocks cheap? Yes, but there always some undervalued equities around. The question is are stocks as a whole undervalued? Not in my book. Just as I believe wholeheartedly that liquidity injections will cause inflation, I believe that the market will rally BEFORE THE ECONOMY SHOWS IMPROVEMENT. But that doesn't mean that I think we are to that point right here. We have so many obstacles to overcome in this economy and market. I am very concerned that if the dollar continues to rally and the credit markets unclog---we could see inflation start to really take hold before our economy begins to recover. I know all of the counter arguments 1)that you can't have inflation if jobs are declining 2)that it takes growth to spur inflation 3) this time is different because we have all learned our lesson and are going to forget about buying on credit and all open savings accounts 4)this latest cycle proved that when we sneeze the rest of the world gets a cold. 5)and so on and so forth. BUT WHAT IF THIS TIME IS DIFFERENT?

What if because China is paying for their infrastructure stimulus (better than a hand it to the consumer stimulus) with reserves and not debt (which they are) and they recover faster than we do? Will that lead to higher prices? And then will the dollar fall? Fall Rapidly? And we know from this summer that a rapidly falling dollar can lead to an even more rapid oil price increase. (No problem, we will just get our OPEC friends to increase production and drop the price right?) WE NEED THE DOLLAR TO SLOWLY DECLINE NOW!!!! Right now while Chinese growth is not a problem. Right now where it will show up in exports and save some jobs. The government should sell dollars immediately. That would be better than the TARP, certainly better than a automaker bailout, and even better than a good ole stimulus check arriving in your mailbox. We need our companies to be able to sell things we make abroad. Why would this be better than an automaker bailout? Because it would not reward inefficient past behavior that simply cannot be bailed out. I would never want to see one single individual lose their job, but the legacy costs that are facing the automakers are simply UNSUSTAINABLE.

Yes we are better than the rest of the world and I am proud that our dollar showed so much strength through this recent global economic downturn. Further I believe that we need a strong dollar over the long term to maintain our prosperity. BUT OVER THE SHORT RUN WE NEED A PULLBACK. A RETRACEMENT. WHATEVER YOU WANT TO CALL IT THE DOLLAR NEEDS TO DECLINE. BUT ONLY FOR THE SHORT RUN.

I submit to you that the DOLLAR is much more important right now that are the technicals of the market. The fundamentals of this market depend on it. Watch the dollar, there has never been a point in history where it has been this critical.