Wednesday, November 07, 2007

Catching On Slow, Larry?

We're still waiting for that gold weakness that Larry Kudlow predicted after the Fed's 50 basis point cut in September. When I first asked the rhetorical question of when that gold weakness will come, gold was at $787. Now it stands at $841. That is 16% higher than before the rate cut, and 25% higher than before the Fed's discount rate cut in August.

Meanwhile, oil has risen over $98, the euro is up to $1.47 and the pound to $2.10, while the dollar is down to 6.27 versus the Swedish krona. If the petroleum inventory report today from the EIA shows continued declines in inventories, oil could easily reach $100 today.

Commodity prices is increasing so fast, and the dollars exchange rate against other currencies dropping so fast, we are close to what one might characterize as a run on the dollar. Bernanke's actions leaves no doubt that he will inflate as much as it takes to bail out failed Wall Street investors, and that will in effect be paid for by holders of dollars, so anyone holding dollars is a sucker who volunteers to pay for Bernanke's bailout. As more and more people realize this the dollar's collapse will continue.

Some correction might come given how dramatic the fall in the dollar has been, but Bernanke's determination to debase the dollar and the growing realization means that the trend will remain for a falling dollar, and that any such correction will likely be short-lived.

Someone who is not catching on is Larry Kudlow himself. He asks "what's it all mean?" in a recent blog post, refering to the rally in gold and oil.

He mentions the obvious explanation, inflation, but dismisses it by pointing to rising stock prices and low bond yields. Yet that just shows how clueless he is. There is no reason for stock prices to fall on the basis of inflation, indeed they should in fact rise from it as the nominal value of earnings and fixed assets rise. They should only react negatively to the extent that this provokes the Fed to tighten monetary policy. And with Bernanke as Fed chairman, that won't happen. And bond yields will also only rise with inflation to the extent this increases expectations that the Fed will raise short-term interest rates in the future, as bond yields should roughly mirror expected future short-term interest rates.

If you adhere to false theories of how the economy works, as Larry does, you will have trouble understanding economic trends.

6 Comments:

Blogger goran said...

The dollar is as oversold as it was in December 2004, before it went up 15% during 2005.

The dollar has fallen down to the bottom of a downward sloping trend channel.

If it rises to the top of the down-channel it will go up to SEK 6,92 wich is up 10,5% from SEK 6,27

This will lower the gold price, CRB-index, the oil price, during 2008

1:00 PM  
Blogger W.C. Varones said...

Back in my prison days, we had a term for what Bernanke is doing: the Slow Puncture.

3:17 PM  
Blogger stefankarlsson said...

Göran, technical factors only cause temporary corrections. The real reason why the dollar rose in 2005 was that the Fed then raised interest rates while other central banks had rates unchanged or even reduced them as in the case of Sweden.

Now, with the U.S. economy falling into a recession, rates are more likely to be cut than raised despite the likely sharp acceleration of consumer price inflation. So, while there may be a temporary correction soon, the downward trend of the dollar will remain in 2008.

6:03 PM  
Anonymous newson said...

it seems extremely unlikely that even helicopter ben will be able to hold up equity/property values. revisiting the 1970's, there were substantial falls, even in nominal terms (catastrophic in real terms). maybe flaired trousers, long side-burns and lava-lamps will come back into fashion, too.

5:30 AM  
Blogger goran said...

But will there be a recession?

I read this morning that it is only a 17% chance of that?
According to the so called Writhe model?

Gold is in a speculative blowoff. Consequently something will certainly happen when that blowoff correct itself.

9:33 AM  
Blogger stefankarlsson said...

Göran, I don't know what model you're refering to, but generally these kind of mathematical models are pretty useless. With houseing sector and most of manufacturing already in recession, the oil price shock means that the U.S. likely enters a recession this quarter, i.e. growth will probably be negative Q4 2007.

1:19 PM  

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