Mohamed's US dollar

“If Mohamed will not go to the mountain, the mountain must come to Mohamed”

The Chinese have not allowed their Yuan to appreciate; on the other end, the Fed is raising interest rates, so the USD/CNY will not come down…

The USD (USD/CNY) should’ve depreciated; instead commodity prices are showing the weakness of the USD.

If you look at most commodity charts, you’ll see what I mean --commodity prices are skyrocketing. Or, from the opposite perspective, the USD is depreciating.

I guess it was the expected outcome, too much liquidity, and the Yuan/USD parity fixed (well… almost), the weakening of the USD had to show up somewhere…

The obvious consequence was the rise in asset prices, housing, commodities, etc; but the disquieting fact is --labour costs or wages will stay put, the Chinese effect!

It’s what I’ve been saying for a while, unfortunately US workers will fair poorly for the next few years; there’s no escaping to this economic maze: it’s either a depression, or what seems to be our present trajectory --higher interest rates combined with inflation.

BTW, there are abundant trading opportunities; but, be careful, commodities are looking top-ish --you don’t want to be the last guy buying in!

Happy trading guys!

Comments

[Joe Rotger]

Bill Gross from PIMCO, also reaffirms the notion of a prompt demise of the USD in his April presentation "*@?#»! Bond Trading
and the Tyranny of Indexation"

This is the link:
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2006/IO+April+2006.htm

The following is an excerpt:

"The democratization of credit mentioned previously has provided a major assist. But with the U.S. Fed now almost done and the BOJ removing quantitative easing and threatening a tightening cycle of their own, the carry trade and importantly the existing level of the U.S. dollar vs. the Yen and almost all currencies is at risk. As global real interest rates converge, the export potential of comparative economies should begin to dominate exchange values and it is there, of course, where the U.S. is so critically deficient. Japan as we all know is an export powerhouse. Less well known is the ongoing ability of Germany as the center of Euroland to command global market share. The ascendancy of China’s production for export is of course unquestionable. That leaves the U.S. with its increasingly hollowed out manufacturing core as the near certain loser in currency valuations going forward. To be blunt, the dollar must go down as it loses its carry."

Bottom line, now that all central banks stopped monetary easing, the hollowness of US exports becomes the dominant feature guiding USD exchange rates; triggering the start of the USD depreciation.

[vincent m]

Excellent point! A weakening currency is usually a sign of inflation. So if the currency does not depreciate assets must inflate.

[Joe Rotger]

Puru Xaxena at Safe Haven simply states "Cash is Trash"; checkout his interesting article here:

http://www.safehaven.com/article-5000.htm

The eye opener for me was the following excerpt, look at those multiples; it would seem that the commodities bubble is quite distanced from the needle. Also, watch closely the development of corn --lots of new ethanol production coming to market.

***Several analysts are now calling the end of the primary bull-market in commodities. Below, I present a list of some bull-markets we've seen over the past 35 years -

'70's - sugar went up 45 times
'70's - oil went up 30 times
'70's - gold went up 24 times
'70's - silver went up 24 times
'80's - NIKKEI went up 8 times
'80's -'90's - NASDAQ went up 50 times
'80's -'90's - Dow went up 14 times

As you can see from the above, these previous bull-markets in the past took the various items to unprecedented highs as prices surged several-fold. Coming back to the present situation, in the current ongoing bull-market in commodities, gold and silver have doubled in value, oil has increased six times, sugar has risen three-fold and stuff like corn, wheat and cotton haven't even moved. Moreover, the public remains oblivious and hasn't even started investing in this area. These factors combined with the industrialisation of China leave very little doubt in my mind that the current boom in commodities is still in its infancy. How high will she go? All I can safely say is that when the public gets worried about its savings and turns to tangibles, the '70's bull-market in commodities will look like a blip on the radar-screen.***