Currency markets are in a state of panic. The U.S. dollar strength continues and seems like it rules the roost these days.
We have observed a U.S. dollar decline trend set in back at the end of 2001. This was the beginning of a serious and long-term downtrend. Except for 2005, 2008 and part of 2009, we have consistently seen the U.S. dollar decline across almost all currencies. But we all know that no asset class moves in a straight-line fashion when in a trend. Hence, among the long-term decline trends, we see pockets of moves that are opposite to the major trend in place.
The U.S. dollar strength in 2005 was based on the sudden announcement of the one-time reduction for U.S. companies to pay taxes on their foreign income. This led to most U.S. companies with profits overseas to bring the money back home.
The 2008-09 U.S. dollar strength was based on the dramatic collapse of the U.S. stock markets and the Great Recession (from which we have not yet recovered). It made no logical sense to buy U.S. dollars and U.S. bonds as a "rush-to-safety" trade. Yet it occurred, since the world markets were not yet fully developed to absorb world liquidity flows.
Since the great decline, we have not fully recovered yet. Granted, the United States believes we are seeing green shoots today of a "hopeful" recovery in progress, I must remind the readers that we saw green shoots back in 2009 only to see the recovery die in a few months.
I suspect the same will happen here again.
I come from the school of training where we see a sustainable recovery when we make significant and sustained change to causes of the decline. The 2008 collapse was due to excessive credit and unbridled greed. The debt levels were unsustainable and spending was out of control. Asset bubbles were everywhere, including housing and stock markets.
The primary cause we did not see a total collapse was the wanton printing of money that central banks undertook globally.
Well, let's review what we have so far.
The Federal Reserve is still printing money at the rate of $1 trillion per year. Deficits are still growing at over $1 trillion per year. The Fed is buying nearly 100 percent of U.S. debt. Growth is still hovering between 1 and 2 percent and is being driven by U.S. government spending. Unemployment is still excessive — 23 million Americans are on food stamps and 48 million are on government aid (in one form or another).
We seem to rejoice in jobs being created in the range of 150,000 to 180,000, but if you peel the onion, we can see manipulations of that number. Banks are recreating collateralized debt obligations again (the same ones that led to the grand collapse of 2008).
Does this look like a sustained recovery? Does it look like we have learned our hard lessons?
Yet Dow Jones Industrial Average is at record high levels, and housing is growing again rapidly, with prices rising 10 percent or more, across the nation.
This illusion is causing the U.S. dollar to gain strength. While I do not know for sure, I suspect that the house of cards will come crashing down this fall when we cannot sustain this fake recovery.
One currency that is particularly hard hit is the Indian rupee. While India has its own problems, the currency is now in record-low territory. I believe that it is about 10 to 15 percent undervalued and as the U.S. recovery illusion fades, we will see a sharp increase in the rupee value.
There are mutual funds available that can help you participate in the Indian rupee uptrend when this happens. It may take a few weeks and will require a steel-lined stomach, but we have a possible winner here for the brave-hearted.
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