Blogs > Cliopatria > DOLLARS SEEM RISKIER THAN STOCKS?/update

May 13, 2009 10:52 am


World Regains Taste for Risk declares the front page of the WSJ. I beg to differ. What the"world," i.e., investors are doing is hedging their former bets on the dollar. Why? Because it is obvious to all that the Obama's 3.4 trillion dollar budget 50% of which will be borrowed, spells inevitable US inflation, even hyper-inflation. Americans will have to pay more in dollars for commodities and imports. In other words, dollars no longer seem a safe haven. Indeed, they seem a losing bet. Hence, as Bloomberg reports the"world" is less interested in buying dollars and is willing to pay less for it.

What is a risk averse person do? At the very least, hedge his bet on the dollars. How? By converting at least some of his/her dollars to commodities and foreign stocks. Indeed, that is what the"world" is doing. Indeed, much of the rise in commodity prices can be explained not by increase demand, or projected demand but by the decrease, or projected decrease in the value of the dollar. U.S. currencies, reports the WSJ, are down 7.5% against a basket of currencies since March 5. Oil prices are up 10%.

Let us not forget. There are too ways to increase one's profit: to sell more or to charge more. American consumers may not be in the mood to buy more but they may have to pay more for the goods they buy. Many of those goods come from China and, hence, will continue to enable that upcoming super-power to continue keep its economy humming by continuing its ongoing investment in stimulative infrastructure.

Such Chinese demand will enable oil producers to more than compensate for the decline in the value of dollar by raising the price of oil. The decision of the Obama administration to rely on Sun and Wind to decrease American dependence on foreign oil is playing admirably into the hand of oil produces and is sure to prevent a significant resurgence in US manufacturing.

An ever poorer American consumer saddled with ever increasing oil prices cannot be expected to increase spending and rejuvenate the world economy. The"world" understands as much. They merely hope to balance the loses they accrue by the fall in the value of their dollars.

Will they succeed? They may, at least temporarily, if they convince small investors to join the rally and then make a timely retreat. For let us not forget that it was only last year that it was proven that the developing world is not ready to take up the slack left by the decline of American spending. It cannot be assumed that the past year changed fundamentally that reality. That day is bound to come but it is, certainly, not here yet.

In an excellent WSJ article, Andy Kessler points out that some of the rally may be automatic:

Savings accounts pay a whopping 0.2% interest rate -- 20 basis points. Even seven-day commercial paper money-market funds are paying under 50 basis points. So money has shifted to stocks, some of it automatically, as bond returns are puny compared to potential stock returns. Meanwhile, both mutual funds and hedge funds that missed the market pop are playing catch-up -- rushing to buy stocks.

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