What Does A Falling Dollar Mean? Consider This…
First of all I wanted to thank my colleague, Bo
Harvey for filling in for me yesterday and providing an exceptional column, I
trust you all enjoyed it.
The current dilemma facing the dollar has been written about quite a bit
lately in the press and specifically in investment/trading columns. To be sure,
there are arguments on both sides. However, the overwhelming majority of writers
seem to think that the weak dollar is not only NOT a problem, but actually a
good thing. I am not here to say one way or the other, the marketplace is simply
too large to draw such black-and-white conclusions. However, as I often do, a
reference back to history usually offers a glimpse as to the most likely
outcome.
Last April, one of my favorite commentators, Marc Faber, wrote a brilliant
piece titled: The Curse of Empires.
The article had relevance then and even more now. The basic argument/thesis was
that throughout history, empires (Babylonia, Greece, Rome, Spain and Britain)
have ultimately sputtered as a result of devaluing their currencies, and
ultimately run-away inflation. Some perspective will illustrate this.
Until 27 BC and the rule of Augustus, Romans only used pure gold and silver
coins. In order to finance Rome’s vast infrastructure expenditures, Augustus
ordered that all government-owned mines in Spain and France be exploited 24
hours a day, a measure that dramatically increased the money supply (just like
Easy Al and Fed Governor Beranke and his “printing press”) and led to higher
prices. Augustus, realizing this dilemma, cut back the coinage in circulation
dramatically. Despite cutting back the supply of money, the supply was simply
transferred into the coffers of the royal treasury.
Fast forward to the rule of Nero. By this time, the accumulated fiscal
surpluses in the coffers had been spent and the large trade deficits Rome
maintained with its colonies led Nero to debase the currency. “In AD 64, he
proclaimed that henceforth the aureus would be 10% lighter in weight.” (GDB
4/02.) Additionally, Nero also minted a coin that contained 10% copper. This
translated into a coin that was “worth” 25% less than the old one. Nero even
went as far to try to re-mint the old coinage in circulation. This only resulted
in “hiding” the coins or wealthy individuals emigrating to avoid such a foolish
policy. I suspect that in the years to come Mr., I mean, Sir Alan
Greenspan will be proven to be just like the Roman emperors before him.
The Debasement of the Roman Denarius
Issuer                       Year                           %Silver
Nero                           54                               94
Vitellius                       86                               81
Domitian                     81                               92
Trajan                         98                               93
Hadrian                       117                             87
Antronius Pius             138                             75
Marcus Aurelius          161                             68
Septimus Severus        193                             50
Elaganbalus                 218                             43
Alexander Severus      222                             35
Gordian                      244                             28
Philip                          244                             0.5
Claudius Gothicus       268                             0.02
Source:Â Rolf Bertschi, Credit Suisse
Private Banking
The Roman Empire’s problems were numerous, including continuous border wars,
internal discontent, a heavy dependence on imported goods which led to chronic
trade deficits, etc., etc. All of these problems required vast amounts of money
to solve, and each time more currency was issued. History shows that the
far-reaching efforts of an empire led to its undoing.
While the circumstances were slightly different, the British Empire
ultimately gave way to a devalued currency and higher interest rates. From
1915-1988, the British Pound/Swiss France fell from a value of nearly 25 to just
over 3. Simultaneously, interest rates on Long-Term Government Bonds went from
3.5% to 15%.
I think it is fair to say that America in many ways resembles the empires of
old: far-reaching, great influence, economic vitality and the “bill” to show for
it. As Mr. Faber says; “It is expensive to be an empire.” The point is simple. A
falling dollar is NOT good for our economy. Sure, the argument is that it will
help our exporters, but export business accounts for less than 10% of our
GDP. More importantly, our situation, like so many historical comparisons, has
uncanny similarities to those before us. I want to be perfectly clear. This is
not a “sky is falling” article, but before we go arriving at conclusions based
on sound-bites, make sure you are well armed with adequate information. Do not
listen to this type of nonsense which I read the other day:
“Moreover, the dollar’s
decline is not a bad thing. In fact, for a long time, the dollar’s
overvaluation was one of the imbalances that contributed to the slowdown in
the US economy. It had to be adjusted, and that is happening now.”
Well based on that analysis, Mexico, Argentina and any other country that has
devalued their currency in the last five years should be the at the pinnacle of
economic growth. Sadly, that is not the truth.Â
So, enough of my viewpoint. It is simply something to think about and draw
your own conclusions. In the meantime, we need to focus on trading. Luckily
these longer-term macro developments do not directly effect our ability to make
profitable trades, it is the longer-term positions that run the risk, which is
why I remain on the sidelines and simply trade.
Regarding HVT, the plan remains the same,
be selective. Each day I continue to find a handful of opportunities in the
opening hour, and very little thereafter as the range typically narrows and
liquidity becomes an issue. The fact is we are trapped in another trading range,
this time between 919 and 925. While yesterday’s selloff down to 911 shook
things up a bit, the S&Ps managed to close back in the lower portion of the
range, 919.
The one area that may offer some hope is the gold sector. I will be the first
to admit that it is hit or miss, but when these stocks trade, they trade
well. Naturally, developments in the bond market, and more importantly, the
dollar, will dictate how these issues trade.
| Support/Resistance Numbers for S&P and Nasdaq Futures |
||||||||||||||||||
|
My new trading service,
“Dave Floyd’s Trading Room,” through which I offer live real-time
audio commentary, analysis and alerts, is now available. I encourage you to check
it out.
Click here for more information.
As always, feel free to send me your comments and
questions.
P.S. I also have a new trading module
available which teaches how to trade my HVT style through bar-by-bar chart
simulations.
Click here for information about the module.