Sunday, November 22, 2009

A US-dollar (USD) rebound around the corner?

The business media and pundits have all but declared the USD dead in the water. The question is, dead against what? When looking at currency valuations, a currency has to compared to another currency, usually in pairs.

Lets take a look at the USD and the Eurloand euro (EUR). In July 2008, it took 1.588 USD on average to buy one EUR. Today, it takes slightly less at 1.49 USD. The EUR itself may see significant short term headwinds in currency valuations as Greece, a signficant member within the Euro common currency zone is in serious economic difficulty. Greece's budget deficit is off the map, the economy is imploding and there is now talk of even Greece defaulting on its national debt. If Greece defaults, it will forced to leave the EUR and quite possibly return the drachma back to circulation within Greece as their new national currency. This currency event would be an economic earthquake in EUR trading valuations for several months. Accordingly, capital outflows out ot the Eurozone may see the USD benefit to a stronger exchange valuation. At present, the USD as measured by purchasing power parity is undervalued to the EUR by 20 percent, a valuation of 1.3 USD to 1 EUR is quite feasible by mid 2010.

The Japanese Yen has steadily increased in value to the USD since July 2008 from a valuation of 106 JPY to the USD to its current 89 JPY level. Much of the media talks about the US total debt ceiling approaching 90 to 100 percent of GDP depending on what figures you look at. But that is the general figure for the US debt at this time. Japan on the other hand has a national debt over twice as large as America's as measured as percentage of GDP. True, the majority of Japan's debt is held by domestic investors unlike the U.S., but Japan finds itself in a precarious position with other issues of significant concern. Their population is declining in numbers unlike the United States where the population base is growing. Japan's economy is not as diversified as America's. Further, Japan lacks the abundance of natural resources that America holds. With deflation still taking hold in Japan, it is a fair bet that the U.S. will likely see higher nominal interest rates down road before Japan. Don't be surprised to see an exchange valuation reversal in the near term with the USD breaking the 100 JPY level within 6 months. As measured by purchasing power parity, the USD is currently 25 percent undervalued to the Japanese yen.

Finally, lets look at gold. Gold is a great measure against all fiat currencies. Gold is due for a pullback currently holding at the 1150 USD per ounce level - a tremendous rally over the last year in USD gold valuation. However, it should be noted that gold like fiat currencies can trade illogical at times as well. Usually, gold and the USD trade inversely. When the USD falls, gold rises and vice versa. In the short term, it would not surprise us if we see both the USD and gold rising in value at the same time with gold approaching 1300 USD per ounce in 2010.

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Saturday, May 30, 2009

Is the US dollar Toast?

Not at all. The critics argue that the projected fiscal deficits will inflict severe long term damage to the US dollar and overall credit worthiness of the U.S. sovereign credit rating. With next year's projected fiscal deficit at a stunning 12 percent of GDP, the market is already forming an opinion. Some critics have also stated that outright hyperinflation is inevitable to America.

One only has to look at the US bond market, it is collapsing. Yields on long term US Treasury notes are quickly moving higher. Recent quote for US 10 year note at 3.75 percent is dramatically higher than the low in December 2008 at 2.1 percent. The market will put pressure on the US authorities to issue less notes, basic supply & demand. More expensive the rate, the less paper.

Further, what may happen to the US fiscal economy going forward? Simple, the Congress has the power to authorize spending. Today when compared to other industrialized nations, America remains a relatively low tax nation. The U.S. government has room to raise taxes. There are now for the first time in a long time rumblings in various mainstream US media publications about the possible implementation of a VAT consumption tax.

Canada, most of Europe already has a consumption tax. We argued on our USD currency review that America will ultimately have to bite it and implement a VAT which will likely bring in excess of $500 billion USD in revenue annually. A consumption tax will hit the underground economy, tax evaders, etc. Everytime one buys a toothbrush for example, bang, you get hit a few cents in a VAT consumption tax.

The politicians are playing a game of chicken, they know very well the market will not allow unrestrained huge deficits to continue, the cost of money will skyrocket, so will inflation. The market in time will force economic discipline and pain. The least painful way is to implment a VAT. Unfortunately, the politicians in power of the day know it is political suicide. They will keep delaying until the market forces it down their throat, play the game to the economic edge of the ledge of financial havoc. A VAT is the right thing to do, the question is who has the political charisma and leadership to sell it? Unfortuately, taxing the rich will not solve the fiscal shortfall, only a massive broad based VAT which will be needed to pay for the President's spending objectives.

So in our view, America will likely see a VAT and perhaps an amero currency in the next decade. Meanwhile, the USD will old its own. Expect to see higher interest rates, a lower standard of living, and a US dollar currency that will continue in a consistent bull/bear 7 year cycle. The USD is now entering its 2nd year in a bull cycle, expect a rebound shortly after the latest market sell-off over the last couple of weeks.

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Tuesday, May 19, 2009

Globalization - Regional Currency blocs are on the way?

The advent of the Internet and the movement towards integraton of economies via globalization in our view is going to have significant economic ramifications within the world of money. Sound and stable currencies is critical for the economic advancement of a nation state. Today, we are seeing firsthand countries abandoning their national currencies in favor of a common currency.

One only has to look at Europe, the introduction of the Euroland euro has replaced several national iconic currencies including the French franc and German duetschemark. Now country after country within Europe wants to be a member of this currency club including smaller states such as Slovakia, Lithuania, Latvia, Estonia, etc.. Europe to be the next United States of America (Europe)?

Future currency blocs may include the amero for North America (United States, Mexico, Canada). Within Asia, we could see the Indian rupee, Chinese renminbi, a common Asian currency union for countries such as Korea, Philippines, Malaysia, Indonesia, Singapore, Thailand, etc. Within the Middle East, the potential for an Islamic Gold dinar to circulate as a common curency is very real.

South America with a common peso currency. A continental African currency to service the majority of African states. The Leader of Libya has a dream of a United States of Africa with a common currency. At present, there is already the common CFA franc currency that circulates in several French speaking West African countries. In the Caribbean, there is the common East Caribbean dollar that currently circulates as legal tender.

The world may see a Central American common currency? The Russian rouble is likely to stay around with a paw on a few of its own countries such as Belarus, Moldova, parts of Ukraine? The Japanese yen will prevail in its own currency bloc.

The bottom line today is that much of the world's 180 currencies in circulation are junk. Countries are going to gravitate towards currency unions to ensure economic stabilization.

Currency crashes can be devestating particularly to the middle classes. Remember Argentina in 2000-01, Thailand and the Asian financial crisis in 1997, Germany in the 1920's to name just a few.

Currency unions will be much more likely in those countries that have significant trade relationships with one another to help lower transaction costs of currency conversion.

Look for an amero to arrive near you sometime in the future! For more currency discussion, please visit:

Thursday, May 14, 2009

Hypothetical Amero Valuation to the EURO

Our best guess natural trading range for the hypothetical proposed amero currency to the Euroland euro would trade in a likely tight band of say 1.03 to 1.13 amero to 1 EUR. The two currency zones will have similar GDP output and population totals after EU enlargement finalyzes coupled with the North American currency zone which will include Mexico, United States and Canada.

The amero:euro currency pair would actually trade close to par. This is a complete reversal to the current trading patter of the USD:EUR pair which has witnessed tremendous currency exhange valuation swings. In 2001, the USD peaked in value at 0.83 USD to 1 EUR. By 2007-08, the USD bottomed close to 1.6 USD to 1 EUR.

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