Monday, December 29, 2008


The old saying "You can't fight the Fed" has never been more true than it is today. It may have just taken on a little different meaning. You can't fight the Fed in this environment because their relentless printing of money will cause the value of the dollar to decline. Maybe it really had to be done to save the banking system (but right or wrong printing money will have the same effect--it will decrease the value of the dollar). I hate to continually make the weak dollar argument as it almost seems unpatriotic, but you cannot deny the effects of the Fed's recent actions. I have gotten many responses arguing that the dollar is still the world's reserve currency and will remain so as we pull out of this crisis. But is this time different? I would argue that it is. Let me say one more time that China is still growing (growth is declining, but growth is still growth). Is China poised to gain some of the market share of the "reserve currency"? They are positioning themselves to do just that.

First lets examine why we have been the world's reserve currency. First and foremost we have had a system that was characterized by stability and TRUST. Yes our system was the most trustworthy in the world. Have we compromised that lately? I would argue that these scandals are not helping our image ( and are thus weakening our credibility) and would accept the argument that the U.S Government has never and will never default and that strengthens credibility. So while our government debt will still be a safe haven, some of our corporate bonds may not be as attractive to foreign investors. China is doing a nice job of developing their own financial markets and at some point may give us a run for our money competing for the corporate debt financing. We don't have to lose our position as the world's reserve currency---but could still see a lower dollar as we lose "market share". When China runs a deficit, they have had surpluses for many years so I would argue that periods of deficit spending may actually bode well for their economy and ultimately their currency. We, on the other hand, do not have a surplus fund to fall back on, so when we run deficits, they have to be financed. Now I think that deficit spending can be healthy for an economy for short periods of time (I understand that this is not conventional wisdom and I will write more on this subject at a later time) but we look to be in the deficit mode for quite some time. Like it or not the dollar will get weaker.

Natural Gas made a nice move today and I look for that trend to be headed up. I also like the agriculture commodities right here. I like the DBA and think that while this might not be the sexiest trade on the board---it will be a very profitable one. I try to boil things down to make common sense judgements and this is one almost a no brainer. When we talk about developing countries one argument that we always hear when prices decline is that "they will never develop to our level as consumers". Ok, I will buy that argument---but they are going to eat. As they develop and have better healthcare and longer life spans, they will need more food. I think the DBA could gain 20% this year.

Since our Presidential Election we have almost had a honeymoon period where we factored zero for geopolitical risk. The images from the latest Middle East conflict are changing that and I think we are going to see a huge gain in oil. Look at the facts, we have a Russian economy that was totally being held up by high oil prices. Do you think that the Russian leaders are desperate? Putin's party remained in power for one reason and one reason only---the economy had done well under their rule. They have lost the economy over the past 6 months and if they don't get oil up soon, they will risk losing everything. Believe me, any saber that they can be rattle will be rattled over the next 6 months. Rising oil will have a negative effect on the dollar and it just starts a vicious cycle.

My favorite currency is the Swiss Franc and I like the FXF. Again, this is not a sexy trade, but slow and steady will win the race and I think this one will give steady gains.

My SRS trade worked out nicely and I took half of my position off of the table today. You can't not take profits from quick gains like this one.

Again, I wish I were sitting here with a dollar bullish story to tell, but I just can't see it. From the increasing political risk to the relentless printing of money to the fiscal stimulus to come---I see the dollar getting weaker. I don't expect it to move in a straight line, I expect volatility in everything that I have called. While I am a commodities bull, I know that we will see some sharp pullbacks in these trades. I just plan to be disciplined enough to profit from rather than get shaken out by these pullbacks.

I have said several times that I think there is a lot of money on the sidelines. Use smart money management techniques because volatility is the only certainty in these markets.

We are pleased to announce that we will be bringing you an interview with Walter "John" Williams of on the week of January the 12th. John makes a compelling case for hyperinflation and always produces a very interesting and informative interview.