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I’m going to stray a bit from my normal go-through on the markets. I’ll still give a brief update, and then I’m going to go into all this confusion. If that doesn’t interest you, then after the update, simply skip ahead.
OK. The currencies, which had backed off their lofty Monday values on Tuesday, remained in a tight range yesterday afternoon and overnight. This morning, Germany business sentiment, as measured by the think tank Ifo, showed a fourth-consecutive improvement in the business climate for Germany. Here are the Ifo readings for the past four months:
Oct. 106.5
Nov. 106.7
Dec. 107.3
Jan. 108.3
I think this plays well with my thought that things will settle down and stabilize a bit in the eurozone this year. Given the improvement in manufacturing that I reported yesterday, and the improvement in the Ifo, I would think that the European Central Bank (ECB) would think twice about cutting rates further. But then, I’ve said that a couple of times before and the ECB with its new president, Mario Draghi, went ahead and cut rates any way!
Oh, well. As I said above, the currencies are range trading, with the euro a quarter cent below 1.30 this morning. I don’t know how many times I watched the euro climb above 1.30 yesterday, only to fall back below the figure and then do it all over again.
First of all, ever since I began managing the risk of the currency book at Mark Twain Bank in 1992, I have been a believer in “trends”: weak trends, strong trends and no gray area. The dollar would go into a weak trend for a fundamental reason and not come out of the trend until that fundamental reason was corrected or well on the way to correcting. And then a strong trend would begin for another fundamental reason, and so on.
I believed that trends are what move assets, not charts. A trend, however, is not a one-way street. And those of you who have heard me speak over the years know that I always make a point of that. I never believed the dollar would collapse, or even remain in a weak trend for longer than previous trends lasted. The longest trend was a weak dollar trend that began with the meeting at the Plaza Hotel in New York City. The Plaza Accord sent the dollar on a weak trend that began in 1985 and lasted 10 years.
We have just passed the 10-year mark for the current weak dollar trend. So it’s time to rethink all this, right? Can the dollar remain in the weak trend for longer than 10 years? And what could bring it out of the weak trend? Remember, the fundamental reason it went into the weak trend to begin with: exploding debt. In 2001, the debt to current account level hit 4.5%, which was an indicator that the dollar was about to experience a currency crisis, for historically, that had been the case.
What has happened to that so-called exploding debt in 2001? The explosions have gotten larger and larger and larger, until they are completely off the charts! I like to tell people all the time that the U.S. needs to go down the road to debt reduction before the dollar can leave the weak trend. But the U.S. hasn’t even found that road!
So the other day, I was sitting at home, reading, and I just fell right out of my chair. The thought entered my mind that maybe, just maybe, the dollar is in serious trouble, even more serious than having the reserve currency title stripped from it. The total of unfunded liabilities in this country today is greater than $117 trillion! And in three short years, those unfunded liabilities will be greater than $143,685,000,000,000! And if the taxpayers are tapped to pay for this, they will have to cough up $1,175,537,000 apiece!
I was looking at these numbers and thought if the markets think Greece can’t pay its debts, how are we going to pay for this? The answer that most people that follow this stuff give is we’ll just print dollars to pay out debts. And that’s where the rubber meets the road with dollar value. It just won’t have any…
Read more: Gold Temporarily Loses its Uncertainty Hedge
