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Japan threatens huge dollar selloff
5:15p ET Sunday, December 5, 2004
Dear Friend of GATA and Gold:
Bill Fleckenstein's latest commentary, appended here,
may be most interesting for observing that the
prevailing opinion now expects the dollar to rise and
gold to fall.
Fleckenstein says:
"Curiously, it seems to me that the No. 1 battle cry is
not 'I'm bearish on the dollar' (though lots of people
are bearish) but 'There are too many dollar bears,
and therefore the dollar is going to bounce.' I think
THAT is the consensus, not that the dollar will be
weak. Certainly in America that is the consensus."
Fleckenstein's observation is the flip side of the
prevailing opinion among gold followers -- long-
term bullish but expecting and even HOPING for a
plunge in gold soon so that they may obtain a better
re-entry point.
In any case, when you hear that the market is too
bearish on the dollar, remember that the biggest
holders of the dollar are central banks, that they
have not yet even BEGUN to sell, that the dollar is
swooning only because they have reduced their buying,
and that there is great speculation that they are
about to intervene in the currency markets by BUYING
dollars to halt or slow its fall.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
Bill Fleckenstein's Contrarian Chronicles:
Dollar's Plunge is a Blight, Not a Benefit
By Bill Fleckenstein
MSNMoney
Monday, December 6, 2004
http://moneycentral.msn.com/content/P93626.asp
This week's column is devoted to the dollar, and it
begins with a sobering vignette from Shanghai: "The
long lunch-hour lines at this city's downtown Bank
of China are filled with people who not long ago
stuffed their accounts with U.S. currency. Now they
are dumping dollars. ... The customers lining up to
change dollars are young and old, Chinese as well
as foreign."
That comes from a recent Wall Street Journal story
called "Chinese Are Losing Dollar Faith," and I'm sure
it's a story that's being played out all over the world.
This is what Alan Greenspan's stewardship of the
dollar has wrought. It has become confetti to the point
where it depreciates against virtually every currency
on the planet -- something that would have been
unthinkable under former Fed Chairman Paul Volcker
(who has said that there is a 75 percent chance of a
dollar crisis in the next five years).
As I have been saying for more than a year now (see
"The dollar is on borrowed time," written in May 2003;
and "The sliding dollar is already costing you," written
this past February), a train wreck is coming in the
currency. It will have serious ramifications. I wish I
could time it exactly, but I can't. However, I continue
to look for clues that suggest a further acceleration
of the trend.
Curiously, it seems to me that the No. 1 battle cry is
not "I'm bearish on the dollar" (though lots of people
are bearish) but "There are too many dollar bears,
and therefore the dollar is going to bounce." I think
THAT is the consensus, not that the dollar will be
weak. Certainly in America that is the consensus.
On a similar note, I am often asked: "Isn't the dollar's
decline going to be bullish because so many people
tout it as such?" As I stated in my column, "The 7
stages of a dollar crisis," the bullish argument is
always made in the early stages of a currency
decline, because the ugly ramifications often have
a long gestation period. It's like the way that every
slowdown in a business cycle is at first always
deemed to be a soft landing.
The purported benefit this time around? The
declining dollar will magically solve our trade deficit.
Last week, my friend Joanie McCullough debunked
that thought process so nicely that I thought I'd turn
the microphone over to her:
"It is generally accepted these days that the continued
debasement of the U.S. dollar is a positive. It is also
generally accepted to expect that as the buck declines,
the U.S. trade deficit will correct itself, like a
self-cleaning oven, we have been led to suppose. But
upon pondering this 2004 rule of thumb, a question
came to mind. Perhaps you can answer it. Here goes:
"At what dollar/yuan (or dollar/won or dollar/anything)
level will overseas manufacturers lose the
cost-competitive edge to where, say, a Wal-Mart Stores
(or any other U.S. entity that's contributing to our gaping
trade imbalance) will eschew Asia and opt for
domestically produced goods? Simply put, how low do
we have to push the buck before a 42-inch TV is cheaper
from Sheboygan than from Shenzhen?
"Right off the bat, I'd have to surmise that we won't EVER
experience that phenomenon, because long before it
came anywhere even close to that, the inflation would
have eaten us all alive. ... You still wanna argue about
the benefits of a weaker dollar because this will lower
our imports and raise our exports with a view to
meaningfully closing the trade gap? This of course
would encompass the glitch of how to market a
U.S.-made $2,200 Maytag Neptune washer/dryer
combo to that guy in Nanjing who is pullin' down a
cool 76 cents per hour. ...
"Chew on this: The Department of Commerce has a
spreadsheet showing U.S./Japan Goods Trade
Deficit going back to 1986. ... The rate back about
30 years ago was 360 yen to the buck. In the 1980s,
as I recall, it ran with a 2-handle. At the moment,
dollar/yen is 102. (In 1994, the buck made the record
low of 79, as I recall. '93 Goods Trade deficit with
Japan: $59.4 bil; '94: $65.7 bil; '95: $59.1 bil.) Hello?
Right.
"And of course we still run a sizeable deficit with
Japan, noting that as the Japanese yen appreciated
over time, they experienced wage growth. That's when
local Japanese companies started outsourcing their
manufacturing to places like South Korea. As I also
recall, rejected parts from Kyoto Ceramics (Japan),
for example, ended up in Gold Star appliances (South
Korea). That was how this all got started, a long time
ago.
"But before we wrap up this diatribe, how about this
eye-opener: There is apparently a leading manufacturer
of large kitchen appliances I read about somewhere
(which was not named, though I continue to dig) that
has stopped using conveyor belts in its Chinese
factories. Is that right? Yep. So what have they
determined is a cheaper option? They hired Chinese
laborers to manually lug the stuff around."
* * *
To Joanie's comments, I would just add: We don't
export enough to solve our trade deficit. What we
need to do is stop consuming beyond our means and
start saving, which is what will be FORCED upon us
eventually. We're slowly moving toward the point in
the process where the rate-making decisions will be
taken away from Easy Al and the boys and given to
Mr. Bond Market himself.
Haven't heard of Mr. Bond Market? An interesting
fellow. Fluent in Mandarin, Korean, Japanese, etc.
He will soon be calling the tune in the mortgage
market, and -- oh, by the way -- he will therefore have
more than a little to say about the price of houses
going forward.
* * *
Finally, I'd like to share some additional thoughts
on the foreign currencies and some gold-related
ideas.
First, I keep getting asked if I notice that the metals
stocks continue to underperform the metals. Yes, I
have noticed, but I don't know exactly what it means.
Many folks are concerned that it's a harbinger of an
imminent puke in the metals market. While that
could be the case, I don't quite see it that way.
I think it's more likely a combination of gold bulls
being generally scared and not wanting to
aggressively buy these stocks, and a belief that
the streetTRACKS Gold Trust (GLD) is going to
siphon off demand. As I've said before in my daily
column, I'm sure some demand has been siphoned
off.
I also believe there's likely a fair amount of
short-selling in these stocks. Lots of people love to
hate gold stocks, and now that they're acting poorly,
they're probably being shorted. Guys may even be
putting on the short-gold-stocks-long-ETF trade.
There's no shortage of cross-currents as to why the
metal stocks may be dogging it here, but I do not
believe it's a precursor to a huge break in the
metals market.
If gold were to trade off, I would actually welcome it.
I would like to buy more to reposition the money I
recently took out of my foreign currency positions.
Thus far, I am not sure whether I will redeploy the
money back into foreign currencies or gold. But it's
a very large position for me, and I'm just trying to
figure out what to do next.
In the long run, in my opinion, gold is going to
outperform all these currencies dramatically. But the
long run is a series of short runs. My reason for
owning them in the first place was because I felt that
initially, they would outperform gold, which for the
most part has been the case.
To sum up, there are many different ways to protect
yourself from the coming collapse of the dollar.
There's no one, right way because everyone is
different. Also, everyone has different time horizons
and entry points.
So I can't tell anyone what they should do. I can only
say what I am doing, and hope it's useful as food for
thought.
----
At the time of publication, William Fleckenstein did
not own or control shares of any equities mentioned
in this column.
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