US Dollar to Weaken?

Dear Friends,

This news article from Bloomberg today, entitled "Pimco Says Dollar to Weaken as Reserve Status Erodes is one of the most significant information on the US Dollar, that I have seen for quite some time.

Why? Because PIMCO is the largest Bond Fund investor in the US, and Bill Gross is the Bond King of the world. So, when PIMCO or Bill Gross makes a statement, I listen.

The message bears an extremely high significance in my mind because it is very rare that PIMCO or Bill Gross comes out speaking negatively against the US Economy, its Government, or its Currency. PIMCO and Bill Gross tend to be politically correct, and is more diplomatic than most other fund managers in their public views. So, when they say something so negative, it is actually quite alarming.

Nevertheless, don't panic, and rush to sell all your US Dollars straight away. This is a Long Term Structural Issue for the US Economy, and I agree with their opinion. BUT, there is time to do the necessary, i.e. to hedge against such a High Impact Uncertainty.

Currently, the US and the World Economy is still in Asset Deflation Mode, with the exception of the stock market, which is in a Strong Bear Market Rally, albeit a potential downward correction in the short term.

Property Prices will continue to fall, and Consumer Demand will remain lethargic at best, and is more likely to drop further, with time. Thus, Commodities Prices in general, will fall lower, in the longer term, albeit swings to the upside, due to Bear Market Rallies.

What is becoming clearer, and will become even clearer, is that Consumer Price Deflation will also be experienced, at least in the Short to Medium Term. Until and unless the US Dollar weakens significantly, the US and World Economies are slipping deeper into the Great Recession, and possibly into an Economic Depression.

I am not talking about the Technical Statistical Positive Growth of 0.3% achieved after the economy has fallen off the cliff which economists call an "Economic Recovery".

It is really amazing how it takes two quarters of negative GDP growth to officially confirm a Recession, but a mere 0.3% positive growth in a single quarter to announce an Economic Recovery.

The real truth is that the Pains of the people will continue, irrespective of what the statistics say. Business conditions will remain lethargic at best, and Consumers remain cash strapped, and heavy losses will persist in the housing market.

Job Losses are slowing down in momentum, which is good news, but ..... job losses persist, even if less people are losing their jobs compared to a few months ago. A reduction in the momentum of job losses does not equate to a turnaround in the economy. It does have the potential, but it is way too early to make such audacious claims.

Worst, when analyzed as a total economic system, the signs are still very unhealthy.

In conclusion, I stand by my view that for the Short to Medium Term, the Economic Outlook is one of Asset Deflation and Great Recession bordering on Economic Depression.

However, I do agree that there will come a time when the US Dollar will face some form of Currency Devaluation Crisis, due to excessive printing of money, and when this happens, then the Stagflation Scenario will materialize.

The challenge is in getting the timing right. To hedge against Stagflation, we need to invest in Precious Metals like Gold and Silver, and even buy some stocks that are commodities / mineral resources based.

However, in an Asset Deflation Environment, like the current Great Recession, which can easily plunge into an Economic Depression, holding any Assets, be they Precious Metals or Stocks or Properties, will result in Losses from Dimunition in Asset Value.

This is why we have to be extremely careful in ascertaining the right market timing.

Frankly, I need to warn that it is indeed audacious to suggest that we can time our Portfolio Management Strategy so well. Economic Statistics tend to be conflicting, and if anything, tend to confuse us more than illuminate our understanding.

However, the KEY to the Golden Doors between the two Conflicting Investment Scenarios, i.e. Asset Deflation vs Stagflation is the World Interest Rates. Before a US Dollar Devaluation Crisis, which usually precedes a Stagflation Scenario, the Major Governments of the World will do its best to avert such a crisis.

The Key Tool available to fight a Currency Devaluation Crisis is the Central Bank Interest Rate. By raising Interest Rate, a Central Bank hopes to attract investors into buying its currency, and thus, stem the tide that would otherwise have been disastrous.

I would highlight that by the time a Currency Crisis is about to happen, such an effort is unlikely to work. Nevertheless, I have not seen a Government that will not try, using this policy, to fight off the crisis.

Thus, I stand by my earlier analysis that World Interest Rates have to rise first, before a US Dollar Devaluation Crisis leading to Stagflation will materialize. Nevertheless, it is important to note that by the time World Interest Rates rises, the US Dollar could have, and in all likeliness, would already have devalued to some extent.

BUT, there is a major difference between the normal fluctuations of a currency, strengthening at certain times, weakening at other times, as opposed to the whole world deciding with a single minded view, that the currency is in deep trouble. Right now, the world views are still quite divided.

If and when the World Views are starting to converge in one direction, the US Dollar Devaluation will start to gather momentum, and the Federal Reserve will provide us with the first sign of trouble, i.e. a raise in Interest Rate. Whether the raising of the Interest Rate is explained as due to an improvement in economic conditions is immaterial.

What is significant is that Interest Rates are being raised, for fear of Stagflation, which is just another way of saying the Federal Reserve is starting to show concerns for a Currency Devaluation.

If there is no concern for Currency Devaluation, most Governments will persist with a Low Interest Regime, because it lowers the Government Budget Deficits Funding Cost, and thus, the Government has more money to spend.

In conclusion, my opinion is to persist in holding cash, but be nimble enough to protect ourselves, at the first sign of trouble, i.e. when US Interest Rate starts to rise, or is likely to rise.

Best wishes,

Ooi