Friday, December 11, 2009

Strong Dollar --> Low Prices

Anonymous said...
Strong dollar is having a positive affect for equities. Everyone was waiting for the DXY to break out to put a chink in the armor of the equity market. The GLD is getting whacked appropriately but it seems that not all paper assets are the same. Would you recommend covering some of my GLD short and leaning harder on the equities short as the two come back together. I presume equities have to come down or GLD has to move up, unless equities are pricing in something I don't see? A stronger economy would support a stronger dollar and thus higher free market bond yields. The government can't handle higher bond yields, so what gives FDR?

Yes, I think equities are pricing in something that you don't see: the dollars used to price them. It makes me chuckle when people say a strong dollar is good for asset prices, it's a little like hoping to be the biggest turkey at Thanksgiving. If the dollar strengthens in buying power by about a penny, stocks priced in dollars fall about 1%. Pretty straightforward.

That said, exchange rates, as opposed to dollar strength or buying power, aren't as straight forward. Exchange rates depict the price of paper in terms of other paper, but that tells you nothing about the buying power of paper itself (see: Deflation and Exchange Rates).

If our current global deflation is a race to the bottom, then the relative positions of the cars represents exchange rates. If the Euro car was in the lead but falls behind, it doesn't matter, deflation still races along; all the cars are speeding in one direction. So the USD's rate of exchange in any given currency, or which car is making a move today, is meaningless to the outcome of a broad currency starvation. A global bonfire is burning bank cash of all domination's.

Most people intuitively understand the benefits of counterfeiting, because they have a debtor's mentality. They never stop to think about burning cash, as an equal or better scam for creditors. Burning cash is easy to do, never suspected, and if you can get enough people to owe you money first, an effective way to collect their assets.

To answer your questions:

No, I wouldn't buy equities. "Sell and hold" until 2012, minimum, still applies. Today, stock prices are about five times higher than record breaking (talking P/E, as the actual price). The macro picture for stocks, and business in general, is dire. Deflation will continue to drain all prices, as has been raging since Dec 2005 (real estate), Oct 2007 (stocks), and March 2008 (precious metals, with a very small-percentage countertrend overshoot in gold being the only exception). Prices are in collapse.

With individual equities, there is a small chance a certain stock price could move against the deflationary trend, but it has to sprint up the down escalator to do so. Rather than focus on finding a stock capable of out-pacing the liquidity squeeze, just diversify short. Diversification is the name of the game when you are trying to play an inflationary boom or the resulting deflationary bust. What poor traders do not understand is that you must diversify long during inflation, and diversify short during deflation.

Concerning PMs, they are mostly dead metal, so even more so than real estate, they reflect the quantity of cash in circulation. So PMs are guaranteed losers during deflation, which is why so many people want to sell them to you. Worse still, Silver and Platinum are strong hybrid metals, with both precious and industrial characteristics. That kills their price even more as industry slows. Pt has collapsed; it has almost fallen to the price of gold.

All that is macro; the macro picture is easy and what most people should play--sell and hold, diversified--just the opposite of the inflationary epoch we recently exited. In the micro, I think we're nearing completion of a small, swift countertrend move in stocks, and might see the same in metals.

Unlike most traders (I'm guessing), I want to go way into the red here, to take advantage of low volume sales. I want to keep short selling, not buying; the more red I get in the short term, the more green I'll be in the long term. It's no different than any dealer taking orders short of supply, we want to sell at exorbitant prices and float the cash to do it, way way way in the red. I can't lose enough money right now.


  1. FDR,I was told of your blog and have learned a lot while reading it, but with that said,I still have more to learn. You have said cash is where to be during deflation.I am in bond funds currently and have done ok there because I was taught about PE ratios and know we're too high there in equites.So with interest rates low and the Fed needing to keep them low for the time being, should I stay in the bond funds until I learn some more about shorting or cash the funds in and bring the cash to the house ? Thanks in advance and thanks for your time on this blog for all of us who are learning.

  2. Hi FDR,

    Isn't it possible, even remotely, that the dollar might fail? If the government can't sell bonds to anybody and can't pay the bills--declares bankruptcy-- wouldn't that destroy the dollar?

  3. FDR is it possible that the dollar index might reverse now and get back below 72 on the USD index? If that happens dow might rally to around 11500 levels.Do you negate such a possibility? Morever it would also mean a lower lows on the dollar index?

  4. "FDR is it possible that the dollar index might reverse now and get back below 72 on the USD index? If that happens dow might rally to around 11500 levels.Do you negate such a possibility? Morever it would also mean a lower lows on the dollar index?"

    The dollar index could retrace a little, but I think the Dow has more likely started W3 down at or about the same point the dollar started up. I think the most likely scenario in stocks is that they fall then come back to a lower high, as the dollar retraces a bit on its way much much higher.

    PMs are due for a small W2 up, but as their trend is strongly down, a short stance with long view is the smart way to go.

    Subscribers to Portfolio Watch can see my limit order on silver and gold for the exact numbers.


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