Friday, May 16, 2008

Three Big Bubbles Will Burst: Part I

The first is The U.S. dollar. This could be called an inverted bubble. The actual bubble is all of the non-U.S. currencies. Here is a brief overview

The dollar is weak for a lot of reasons:

1. Low interest rates in the U.S.

2. Increased development and investment in Europe and China.

3. Desirability of the euro, lack of demand for the dollar.

4. The dollar is a commodity and as with all things the price goes up and down.

5. There are cycles and the pendulum swings, usually too far each way.

6. Supply, there are a lot of dollars around the world that have been dispersed for over 30 years.

7. Speculation.

At one point, not too long ago, the yen was one of the strongest currencies in the world. Because of that, the Japanese bought everything in sight, major art work, businesses, and the Pebble Beach Golf Club. Within a few years it died. They were forced to sell most of their purchases at significant loses, cascading it into the toilet. It is now coming back and is even gaining on the euro.

When the euro was introduced it was pegged at a $1.15, steadily fell until 2002 (when I was in Europe for the first time) to .83. At that time we were coming out of the bubble which hit world-wide, toppling the euro as well as our economy for a while. Germany, for example, was in the tank because they took over East Germany and basically became a welfare state. It still is.

As Europe became more organized, the euro became more attractive. Interest rates were higher there, so dollars became converted to euros to deposit in European banks causing a demand on them.

From 1995 (with the Soviet Union breakup) to about 2003, Europe was just getting its act together. People who lived there, as well as the newly liberated East Bloc countries wanted to convert their money into dollars because it was classically a safe, sound currency. When it started slipping, they started buying Euros (running with the herd), putting a demand on them raising the price in U.S. dollars. When you have millions of people doing this at one time it has a powerful effect.

We began lowering interest rates to spur growth and in the process creating the new Finance and Housing bubble. Dollars went to euros for higher interest rates and safety.

Now for the biggy, speculators started working the euro pushing it to the sky, topping recently at $1.60 +/-.

If you think this is permanent, think again. As the old song says, “What goes up… must come down, spinning wheel… spinning round”.

A strong currency is not a desired commodity for any length of time. It makes your products and labor unaffordable, and upsets your balance of trade. The dollar was too strong for too long.

Japan had to outsource work to Southeast Asia. We outsourced work to India and Mexico, etc.

Europe is in the beginning of a major crisis. Unemployment is climbing and will do so steadily. Tourism is collapsing. The speculators are still there, but their house of paper will tumble down. Something, I have no idea what, will spook them and they will be gone.

Europe is outsourcing labor because theirs is too expensive. A Russian steel manufacturer, the second largest in the world, just bought Bethlehem steel in Baltimore because it is cheaper to do it here.

Just as with the housing market, 25% to 30% of all purchasers of the dollar (and of new homes) are from speculators. That is basically the rise from a $1.15 to a $1.60. When they leave (for profit taking or most likely a panic), the euro will go back to $1.15 and then overshoot that point as others run for cover. You can easily see for a short time the euro at .75 - .85 cents and then a recovery to $1.00 - $1.15 where it was set originally. Last week’s drop from $1.60 to $1.50 and slight recovery was simply profit taking. The big drop will be a panic. After it is over we can try to figure, how, what, and why? You can make guesses now, but something will cause it.

Best advice: don’t buy euros. Remember the “Last Fool Theory”, when they have sold the last fool, the most expensive euro, it will all be over.

Be Prepared,

The Hammer

Copyright Crickard Publishing 2008. All rights Reserved


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