Please consider Dollar Rout by Peter Schiff, July 15, 2010.
Peter Schiff has proven to be a huge contrarian indicator on commodities, on China, on foreign investments, and on the US dollar. I suspect this video will be no different.
In the video, Schiff makes a case that it was impossible to see these bounces coming. I disagree and have called for several of them.
Political Alignment vs. Investment Decisions
Politically I align with Peter Schiff. The financial sector bailouts were obscene, as are all of the stimulus efforts. There will be hell to pay for both.
However, investment-wise I cannot and do not agree with Schiff. His hyperinflationary rants are simply unfounded. The reason he cannot see the forest for the trees is he fails to consider the role of credit in a fiat-based credit world.
Credit dwarfs money supply. Much of that credit cannot and will not be paid back. Schiff got that part correct, in spades, predicting as many others did a collapse in housing. His mistake was in assuming the dollar would crash with it.
Think about that for a second. If the dollar crashed to zero, the number of dollars it would take to buy a house would be infinite. There has never been a hyperinflation in history where home prices crashed and barring some war-zone anomaly, I doubt it ever happens.
If hyperinflation was in the cards, the correct response would be to buy as much real estate as possible given real estate only requires 5% down. That amount of margin is hard to come by in any other play except derivatives.
Are we "Trending Towards Deflation" or in It?
For a recap on the inflation-deflation debate, please see Are we "Trending Towards Deflation" or in It?
One of us took into consideration the role of credit, one of us didn't.
Technical Euro Bounce
The reason for the recent bounce in the Euro is without a doubt a pledge by European governments to adhere to various austerity measures. Another reason is purely technical.
The Euro plunged nonstop, nearly straight down from 1.50 to 1.18. For currencies that is an enormous move in a short period of time.
Roughly half of that move has corrected. The time to be bullish on the Euro was at the 1.18 to 1.20 level, not now (although I suppose the Euro could bounce a bit higher still).
Fundamentals of Euro vs. Dollar
Looking ahead, a key question for the Euro is whether or not the European governments adhere to their austerity measures (I rather doubt it).
A second factor is the alarming rate at which the ECB is supporting Spain. How long can that continue?
Spain calls on ECB for record funding
Spanish banks have called on a record amount of funding from the European Central Bank (ECB) in June amid mounting volatility on financial markets as noted by the Telegraph article Spain calls on ECB for record funding
[Spanish banks] borrowed a total of �126.3bn (�105bn) from the ECB last month, which was a 48pc jump compared with May and the largest amount borrowed according to Bank of Spain records since 1999.US Has Problems, But Who Doesn't?
Spain followed Greece into the eurozone debt crisis as concerns over its deficit triggered credit downgrades from ratings agencies and forced the country to agree to tough austerity measures in an attempt to bring the nation's finances back under control.
When it comes to the US dollar, it is very important to acknowledge problems elsewhere, something Schiff repeatedly does not do. There is also an enormous property bubble in China and insolvent Chinese banks that needs to be factored in.
In isolation, there is certainly there is no good fundamental reason to like the US dollar, just as Schiff says. However, one cannot view these problem in isolation and make any reasonable investment decisions out of them!
The fact is, there are fewer reasons (right now) to like the Euro. Most importantly, Europe has a huge structural problem of a currency union but no political union. There is a reasonable possibility the currency union dissolves.
With that structural overhang, the Euro is likely to have difficulty gaining traction.
What Matters Now?
Down the road, Schiff is correct that the problems facing the US dollar are enormous. However, investors must separate down-the-road conditions from what matters now.
What does matter now is the continued consumer credit implosion that dwarfs monetary printing and fiscal stimulus. That not only affects US stick prices but commodity prices as well, and in turn currency prices of commodity producing countries.
Factor that all in, and the possibility of the US dollar rising to 1.15 or even to parity vs. the Euro is not out of the question.
In the meantime, the US is back in deflation factoring in credit-marked-to market. Hyperinflation remains a pipe dream.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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