By Gareth Soloway on October 13th, 2010 12:40pm Eastern Time
The markets jumped higher again today as the U.S. Dollar continued its rapid decent. The SPDR S&P 500 ETF (NYSE:SPY) is trading at $118.13, +1.12 (+0.96%). Like a plane in a nose dive, the Dollar is showing no signs of stabilizing. In all fairness, the Federal Reserve has the Dollar doing exactly what it wants. A weaker Dollar creates a fake wealth effect as equities and commodities move higher to compensate. In theory, if the Dollar drops 10%, stocks should go up 10% to maintain their balance and real value. The general trusting public will see this as an increase in wealth, spending more, buying more, but in real terms they have gained nothing. The PowerShares DB US Dollar Index Bullish (NYSE:UUP) is trading at $22.36, -0.06 (-0.27%). The Dollar is not far off the 2009 November lows and may have its sights set on that double bottom. Long term, expect it to be far lower.
As any educated investor must realize, the U.S. Dollars drop is not going unnoticed by other countries. Many leading powers are racing to devalue their currency faster than the U.S. The idea behind this is the cheaper the currency of any country, relative to its neighbors, the cheaper that countries goods will be for export. If exports rise, jobs increase. This is known as a currency war. We have seen Japan intervene and rhetoric with China explode. This path of racing to devalue one's currency is treacherous. One wrong move and currencies all over the world could collapse, much like Lehman did and other financial companies almost did in the snow ball effect. The major difference would be, the government was able to intervene with the financial firms. In a currency collapse, no government will be able to stop it. In the short term the U.S is playing a game of chicken as it relies on China and other countries to buy its debt thus infusing money into the system. However, as the Federal Reserve drops the Dollar day after day, countries like China are threatening to cease their hungry nature for U.S debt. This is exactly why the Federal Reserve is now forced to buy treasuries. They must make up for the lost demand from other countries as they piss them off by killing the Dollar. Bottom line is this, should other countries stop buying the U.S debt totally, the Federal Reserve would never be able to handle the impact. This is a game of chicken. Who will swerve first?
Also, this QE2 (quantitative easing two) is a total joke. This is the ponzi scheme of all ponzi schemes. The Federal Reserve is buying their own debt. Granted, technically they are not part of the government but let's be realistic here, they work together and it all comes out of the same pot in the end. The Federal Reserve is giving the American public fake statements much like Bernie Madoff did to his poor investors. They are paying one credit card off with another and paying that one off with an other as well. In addition, in their basement they are running printing presses 24 hours a day, diluting each hard working Americans savings and earnings. Mark this article folks, history will show this to be the biggest ponzi scheme ever. It will cause a melt down in the global system that makes the financial collapse look like a rain drop in the lake.
Even if the printing of trillions of Dollars by the Federal Reserve does somehow restart the jobs market which is unlikely, the greater fear must be the next bubble forming. Treasuries and currencies. If the economy does recover, inflation will spike massively, commodities will soar and the buying power of the U.S. consumer will shrink in a huge way. The Federal Reserve is hoping the public is trusting enough to believe they will then handle the inflation correctly. However, not once in history has the Federal Reserve been ahead of the curve in handling any major issue. Just think of all those baby boomers on fixed incomes when the Dollar is worth half of what it was. The Federal Reserve is playing a game here that is probably the most dangerous ever played. Unfortunately, we, the people will pay the price. To get market guidance, swing trades and education, join the Research Center.
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
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