Tuesday, May 3, 2011

Reflections on a Less-than Golden Dollar



The image nearby reflects the St. Louis Fed's very long term chart of the US dollar vs. major currencies. It shows a downtrend which I am confident is statistically significantly different from stable. In that time frame, the price of gold and oil are each up 30-40 times. The Dow Jones Industrial Average is up about 13 times, but in those about 38 years from the beginning of the chart, dividends are significant. Perhaps the total return of the DJIA is very similar to that of gold.


What does the future hold? Who knows, but it appears to me that in a period of large governmental debts and negative demographics, one can simply hold gold for an extended period of time in one form or another rather than bothering with stocks, unless one is very "good" at choosing stocks. And if one likes stocks, precious metals stocks look OK to this observer.


I'd also like to get just a bit snarky, because some of the most prominent bloggers do what the MSM does, and pretend to give you the big picture while often merely providing concealed propaganda. I'm all for proselytizing, but I'm against presenting selective data. To that end, please consider a dollar chart presented by Barry Ritholtz recently. For some reason, perhaps the annotation on the chart, I am unable to upload that graph to this post, but rather than showing the Carter-era bear market in the USD and then the incredible surge in the first years of the Volcker-Reagan era, including the post-1982 period when interest rates plunged (but price inflation fell faster than rates), he chooses to begin in 1983 or so, after the broad dollar index had already risen by about 33%. Huh?


This by itself is unobjectionable, but consider the point of his post, which states that it is to provide a longer-term view of the dollar than a prior 15 year chart he had presented in a previous blog post. So anyone looking at this more comprehensive 38 year chart he presents gets to see two epic collapses, one under Ronald Reagan, the other under "W". Anyone who recalls Mr. Ritholtz's ardent embrace of candidate Barack Obama in fall 2008 and his attacks on those who disagree with him on the Fannie-Freddie-Community Reinvestment Act issue may wonder as I do if it is unlikely that the brilliant and well-informed Mr. Ritholtz simply inadvertently left out the evidence that the USD had two sustained periods of outperformance in the last 38 years, and both had much to do with Republicans. One period was in Reagan's early years (when the R's also held the Senate), so that the average of the dollar in his 8 years was much higher than when he took office. The other began on or about January 1995. That date is significant. It is when the candidates from the "change" election of November 1994 took office. You will note that despite a very large increase in interest rates in 1994 (not shown), the dollar was weak that year. It was only when the Republicans took office with a mandate from the people to shrink the size of government and balance the budget and actually began to act serious about that mandate that the dollar rose. It then kept rising throughout the rest of the Clinton (gridlock period) years and continued for the beginning of the GW Bush presidency. Then came 9/11/01 and a guns and butter policy, and the rest is history.


My take is that the politicians hire central bankers to take the fall for inflationary policies when the inflation becomes a sore spot with the public, and then the pols can take the credit for the natural vigor of the economy when an up-cycle occurs. That the long-term trend of the dollar has been down against the other major currencies has some significance, but I think the major point is that all currencies are politically managed in this era of fiat money. Please do not fall prey to price illusion, which is a mainstay of "Keynesian" economics. Please also be aware that adjusted for the price of gold, and even including dividends, the stock averages have not moved at all from their 2009 lows. I take that as a worrisome sign. Just as was the case in the summer of 2007, when the public felt that the country was already in a recession, the public has never after felt the love that the stock market appears to feel lately. They don't care if, their cost of living is rising 4% while their pay package is unchanged, rather than their living costs rise 10% while their pay goes up 6%. In other words, the money illusion doesn't really work anymore. Been there, done that. People "get it" after all these years of price inflation.


Terms of trade have moved against the US lately, as other nations ("emerging" and otherwise) have mostly not suffered from the massive malinvestment the US made in housing and related "stuff" to fill up the more numerous and unaffordably large homes that were created using Ponzi finance. The piper is now getting paid via a relatively lower standard of living, just as Austrian economists predicted. This will likely pass, but right now I see no reason for the 38-year trend toward relative dollar weakness against other fiat currencies to reverse, short-term fluctuations notwithstanding.


Copyright (C) Long Lake LLC 2011







No comments:

Post a Comment