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Posted 12/6/2004
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Dollar's plunge is a blight, not a benefit
I dont buy the idea that the falling dollar will fix our trade deficit. It will cause a lot more trouble, and even Chinese peasants understand the problem.
By Bill Fleckenstein
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% 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.
Related news and commentary on MSN Money
A lower dollar wont fix the trade deficit
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 (WMT, news, msgs) (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" 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 '80s, 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."
Meet Mr. Bond Market
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.
A window into metal-stock weakness
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 under-perform 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, news, msgs) 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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