- Published on Thursday, 10 May 2012 08:00
- Written by Sara Nunnally, Editor, Inside Investing Daily
- Hits: 1489
The American dollar is the best of the worst. It is a scary thought that proves big trouble lies ahead.
It's not often you see the wizard behind the curtain. But every once in a while you get a glimpse. It's sometimes strange, and the headlines are a little unbelievable...
Like this one from Bloomberg on May 9:
"Bernanke Gets 75% Approval From Investors in Global Poll"
I mean, really?
Let's take a closer look at who these investors are. They are -- in essence -- you and me. Bloomberg subscribers from all over the world.
They're not big banks who get to borrow money so cheaply from the Fed that the interest they get paid to park their reserves with the Reserve is higher than the costs to borrow. And they're not exporters who revel in a weak dollar.
They are everyday investors like you and me.
But that means I'm not quite doing my job... You see, it's my job to pull back that curtain -- to show you the inner-workings of the all-powerful machine. The "great and powerful" Fed...
And if 75% of us think Ben Bernanke's doing a good job, then I've got a lot of work to do.
The Fed's job is to keep our economy liquid. But not too liquid. They've pumped so many new dollars into the system that they won't even release the actual figures. And where have all those dollars gone? Two places: The government's coffers to keep the country running; and into the deep dark holes of major borrowing (or bailed out) corporations.
The Fed's quantitative easing programs bought debt at unprecedented rates, and those 75% of investors who think Bernanke is doing a good job are expecting another round.
Big banks and big corporations are also hoarding cash. I'll let Zach Scheidt, editor of Velocity Trader, explain:
Instead of borrowing money from consumers (savings accounts, CDs, etc.), the major banks have been borrowing money at discounted rates as a result of the Fed liquidity efforts.
And big corporations have some $3 trillion on their balance sheets. That's a massive amount of money just sitting there.
It's like a giant clogged toilet... and the Fed just keeps throwing roles of t.p. into the bowl, hoping to push it all through. The result is going to be busted pipes or an overflowing mess. In economic terms, no buyers for our debt or hyperinflation.
But as with all things, these opinions are relative.
The Bloomberg poll says four out of five investors think the Fed has done a better job of handling our economic troubles than the European Central Bank has done handling theirs.
And maybe they have. The EU is juggling a lot more moving parts than we are.
All that means is we're the best of the worst. And that's making things very confusing for investors.
The best of the worst means the U.S. dollar is climbing against other major currencies. I told my Macro Trader readers this Wednesday that the dollar has jumped above its recent downtrend. Here's the chart I showed them.
Since this big move higher with a lot of momentum, the U.S. dollar index has dropped back slightly. If we were to judge our economic health in a vacuum, there would be no support for the higher dollar. But with Europe heading up a creek and Japan's Nikkei index dropping, the U.S. is the safest port in the storm.
That Bloomberg survey said 46% of those polled ranked the U.S. among the best performers this year... more than double amount that think China will rank highly this year.
That makes the dollar in demand. The U.S. dollar index has climbed for eight days as of this writing... the longest streak since September 2008.
And that makes me nervous.
If these dynamics become a self-fulfilling prophecy, will our economic problems just slip away? Not really. Because so long as companies keep hoarding that cash, the clog will always be there. That money will eventually find its way into our economy, and when it does, those soggy dollars could send our system into a hyperinflationary tailspin.
And the mountain of debt will collapse.
Think it can't happen? It's already happening for Europe. Join me Monday for some truly scary stuff.
Until then, the U.S. dollar might just be the best playground for investors.
Editor's Note: Biggest Spending Spree in Modern History? It has nothing to do with 79 million baby boomers or bailout plans... It's a spending spree the likes of which the industrialized world has never seen before. I'm talking about nearly $1 trillion every year -- for the next 20 years -- that's on track to flood into this red-hot sector. But which companies are likely to benefit the most? And how can you get your own slice of this massive new spree? Follow this link for details.
Chart of the Day: Let's Call This What It Is
By Adam English, Associate Editor, Inside Investing Daily
It is time to start using the right words to describe the Greek situation.
Greece is in a full-blown depression. The Greek stock market has lost 88% of its value. To put that figure in perspective, the S&P 500 fell roughly 85% during the Great Depression.
A healthy dose of realism would do all of Europe some good. Politicians want to use cute euphemisms to make the situation look better.
The truth is... it's dead. And the corpse of the Greek economy is starting to stink. Makeup isn't going to help anymore.
While we're at it we might as well stop using the word "austerity." Austerity implies that the Greek government is taking grave or somber actions to cut deficits and lower spending enough to realign its debt burden. The eurozone is trying to contain the equivalent of a screaming child in the midst of a crazed temper tantrum.
We should add "bailout" to this list as well. Calling the emergency cash "bailouts" implies that Greece is receiving financial assistance to save it from collapse. The country is not being saved at all.
In reality, it is a mix of triage and life support. There are plenty of other ailing countries that wouldn't mind a helping hand from the few viable European countries left.
Perhaps if economists and politicians start being honest and stop their public relations campaigns, we could have an austere conversation about the inability of the eurozone to bail out a country in a full-blown depression.
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