Simon Black: "The Market Is Telling Us That The Dollar Is Finished"

Tyler Durden's picture

Some unpleasant perspectives for dollar bulls (and manna from heaven for the M.E. genocidal maniacs) from Sovereign Man's Simon Black.

The market is telling us that the dollar is finished

There’s major shift occurring right now in financial markets.

Sure, the food and freedom riots that are spreading across the globe
are a major indicator that civil unrest follows very closely behind
resource shortages and economic turmoil… but there’s something else that
I’ve noticed recently– it’s a sea change in the financial system.

In the past, major crises normally caused investors to seek safe
haven assets, and everything else equal, the dollar would rise. They
call it a ‘flight to safety’, and investors would flock towards the
perceived stability of US Treasury securities.

In 2008, for example, the Lehman collapse spurred the market to go
rushing into the dollar. The pound, euro, S&P, oil, and gold all
went into freefall, and the dollar surged. Anyone holding cash felt
pretty smart, and the market paid tribute to the US dollar as the
world’s safe haven currency.

There were a lot of reasons for why this happened. The US government
likes to claim that it has never failed to pay on its debts. Of course,
even the most cursory analysis would lead one to conclude that they
trade debt for inflation… and more debt.

Regardless, when financial markets were collapsing in 2008, investors
made a rational decision to accept negative real rates in the dollar
(effectively paying a fee to hold short-term treasuries) over other
currencies and asset classes.

It was the lesser of all evils at that particular moment and should not be conflated with ‘confidence’.

The other big reason for the dollar’s 2008 surge was that many of the
world’s financial markets were leveraged to the hilt… in dollars. When
Greenspan started slashing rates in 2001, investors around the world had
been able to borrow cheap US dollars and park them in higher yielding
assets abroad.

This global carry trade helped produce huge returns in emerging
financial markets as investors borrowed four to six times their dollar
equity at 2% to 8% and invested in China at 20%+.

When those markets began to melt down, however, the dollar loans
needed to be repaid, and investors went rushing back into the dollar.

The dollar sat atop its altar for about six-months from September
2008 through March 2009, at which point risk tolerance reversed and the
dollar began steadily losing ground again.

When European sovereign debt woes surfaced later that year (and in
earnest in early 2010), the dollar surged once again… but that time it
was a little different.

Sure, the dollar rallied against the euro and other European
currencies… but gold rose as well. I remember writing about this last
year, suggesting that the simultaneous rise in both the dollar and gold
indicated the market’s changing attitude towards what it considered a
‘safe haven.’

Clearly the dollar was beginning to fall out of favor.

Fast forward to today. Mubarak. Gaddafi. Khalifa. Al Said. Ben Ali.
Etc. There is no shortage of turmoil right now… yet we are seeing the
dollar get clobbered while gold, silver, and smaller currencies like the
Swiss franc rise. This represents a major shift in the way that the
market views risk.

It’s true that nothing goes up or down in a straight line… but long
term, the market is telling us that investors are washing their hands of
the dollar as a safe haven asset.

So what happens from here?

In the long run, the law of one price will prevail; the US dollar
cannot become so cheap relative to other currencies that a multimillion
dollar home in Malibu only costs the equivalent of six month’s wages in
Switzerland… or that a new Corvette equals the price of an electric
bicycle in Singapore.

Foreigners will swoop in and mop up US inventory long before that
happens, not to mention foreign governments will manipulate their own
currencies in order to avoid missing out on a 300 million-strong
consumer market.

We’re already seeing this now as the ridiculous game of international
capital controls tries to masquerade as a free market. I suspect the
regulatory environment will only worsen as the political lemmings follow
one another off the cliffside.

(yes I know it’s a myth, but so is the notion of fiat currency as sound money…)

What about commodities? Investors looking for safe haven assets may
opt for things like oil and wheat which have functional value… but I
suspect that governments will step in long before we see $200 oil to set
a ceiling price, or begin attacking speculators once again.

Ironically, this makes precious metals among the most attractive safe
haven alternatives– the fact that they have no real functional value is
a net positive.

As a caveat, I am not a gold bug, but the regular lamentations by the
PM bears (gold is just a paper weight that has no function, you cannot
eat gold, you cannot fill your gas tank with gold, there is no way to
value gold, etc.) may turn out to be beneficial.

It is simply BECAUSE you cannot eat gold, cannot fill your gas tank
with gold, etc. that governments will be more concerned about regulating
high oil, wheat, and soy prices. If gold has no real benefit to the
masses, the political consequences of high gold prices are less
significant.

In other words, $20 wheat means blood in the streets. $2,000 gold
only makes for pithy headlines, and its significance is easily dismissed
when highly regarded sages like Warren Buffet dispute the notion of
holding precious metals (nevermind he bought oodles of silver in the
late 90s).

We’ll talk about this much more on this later, especially why the
euro will likely fall first, and how the renimbi will continue to rise
as an alternative reserve currency.