Wither the U.S. Dollar, Gold and Dow in Transition Mode

By: Christopher_Laird

Now that the credit/bank crisis is two years old, and the Dow around 10,000, gold is at highs over $1000. One would think that with $3 trillion of direct US Fed bailout cash, plus $17 trillion of various guarantees and singlehanded support for the US mortgage/financial markets would do something.

After the ‘Cash for Clunkers’ stimulus, and all the other money thrown into the banking system since the collapse of Lehman a year ago, one would expect some kind of economic rebound.

The financial pundits are all making a big deal out of the Dow rally to 10,000. Will it stick? Or will it falter, if the economic data in the US and Western economies again sputter?

Tepid data

Case in point, the New York Empire State manufacturing index posted at 34.6 compared to 18.9 in September. Readings above 0 indicate manufacturing is growing.

US unemployment applications ‘fell’ to 514,000 compared to 524,000 expected. It’s the ‘lowest figure since January 2009’.

Scary data

Or try this: Sumitomo Bank just stated the USD will fall to 50 yen in 2010, due to an expected double dip recession, and lose its status as the world reserve currency. They stated that central banks cannot stay ahead of a falling USD, hence their prediction.

Or consider that just recently when the USD broke first below 77 on the US Dollar index currency basket, that the Far Asian central banks got together to support the USD and it temporarily rallied above 77 and stopped the slide. Well, that major intervention lasted about a week, with the USD now at 75.71 on the USDX. Gold fell off a bit from its recent $1070 highs, but is still around $1050.

Big change?

One gets the feeling that there is a fundamental change going on here. We are not in the financial panic of a year ago, that was followed by a massive drop in world economic production in the last two months of 2008, and the first two of 2009.

The economic rebound after February 2009, which led to the March stock rally to its present levels around 10,000 on the Dow Index gives hope out there.

But interestingly, many people have not yet returned in a big way to stocks, as mutual funds are sitting on $2 to $3 trillion of cash accumulated since the Fall 08 Lehman bank crisis. Supposedly now that the Dow is at 10,000, they will come back in…it’s speculated.

But the tepid ‘improvement’ in the US employment numbers (510,000 unemployment applications is improvement?) and the manufacturing data which really reflect a bounce from the utter collapse in latter 2008 into early 2009 are not convincing. This ‘recovery’ reflects the huge stimulus from the central banks, and zero interest rates.

And, zero interest rates tend to force idle money back into financial markets, as people lose patience. Investment funds cannot sit on cash for long.

I think the economic ‘recovery’ is bunk. All that happened is a bounce from the total collapse in world production after Lehman. But a bounce to what level? A US unemployment rate of about 10%, which is really more like 18% if it was calculated the same way when Clinton was first elected is not exactly a rosy scenario.

Is 10,000 Dow going to carry forward, and are people going to start moving money back into stocks now?

What do you want to believe?

You have to be careful of what you want to believe. It’s a matter of perception. There are a lot of retired people who want to believe in a stock recovery, and they cannot let their money sit idle – so they say.

But actually, even though we believe that the US ‘recovery’ is nothing more than a blip and will be forgotten, we are open to alternative interpretations. I always look for contrary views to my beliefs, to try and avoid getting stuck in a mental viewpoint that does not recognize change afoot.

Am I bullish now? No. But I do consider alternatives. One is that there may be a surprise Mid East peace treaty with Israel that calms the fears over Iran. It’s merely an educated guess on my part, but if it were to happen, markets would likely rally worldwide for a good while. But that treaty has to happen first. We also might get a go it alone Israeli attack.

So, I am open to out of the box developments. I have my reasons for this possible treaty scenario, no I don’t have any secret information. It’s all a bit of prognostication.

In any case, we came up with 7 fairly big prognostications for the next 2 to 3 years in our latest newsletter. Some we already know, but they are part of this changing and chaotic and dangerous financial market. We also have some simple to execute USD hedging alternatives we have discussed as well.

I thought I would post an email from one of our subscribers who states that her dilemma in trying to keep track of all the financial information coming at us in the Internet – about why she subscribes to PrudentSquirrel:

“I am not expecting a reply....it just exemplifies my difficulty in holding a consistent view.

 The internet is a wonderful tool....but I am constantly being whipsawed by all the sources of information!

Guess I have to stick with the analysts who have worked for me - like you for instance - and then get out more.

Your work is excellent, though terrifying to read from time to time.

Many thanks for bothering with this subscribers occasional enquiries. It is much appreciated.” Jennifer

Internet is information overload

Even though that is flattering to me, I honestly believe her dilemma is exactly why I do what I do. There is so much financial information on the internet every day that, unless you spend full time tracking it, you have no way to keep up. Even I have problems with the amount of information. Frankly, most people can definitely use a good analyst.

But as a case in point, I would like to point out two predictions we made that were critical, and that no one to my knowledge was even close to by months. One was that the USD would rally in Summer 08; we predicted that around April 08, and that the general commodity complex would sell off hard. We know commodities and gold all fell hard during Summer 08 into Fall.

The other was that gold bottomed in late Nov 2008. We know how that turned out too. The HUI was around 270 at the time.

Also, in this latest subscriber newsletter, we introduced a new dimension to our analysis, and it was very well received. It is pretty far out. If you have ever wanted to check us out, go take a look this week. You will be stimulated, I am sure. It’s all big picture stuff, something that we have been complimented on for years.

We invite you to stop by our site and have a look.

By Christopher Laird
PrudentSquirrel.com

Copyright © 2009 Christopher Laird

Chris Laird has been an Oracle systems engineer, database administrator, and math teacher. He has a BS in mathematics from UCLA and is a certified Oracle database administrator. He has been an avid follower of financial news since childhood. His father is Jere Laird, former business editor of KNX news AM 1070, Los Angeles (ret). He has grown up immersed in financial news. His Grandmother was Alice Widener, publisher of USA magazine in the 60's to 80's, a newsletter that covered many of the topics you find today at the preeminent gold sites. Chris is the publisher of the Prudent Squirrel newsletter, an economic and gold commentary.

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