The Ghost of Smoot-Hawley?

These past 9 years, with debt plaguing the performance of the dollar, have been quite interesting; watching the debt explode to the upside, and the dollar implode to the downside… But now, the Eurozone has taken on their own debt problems, and so it is that investors look for a safe haven… The US has debt coming out its ears, has had its credit rating downgraded, and has just scratched the surface of debt, with the unfunded liabilities staring us right in the face… The Eurozone peripheral countries, otherwise known as the PIIGS or GIIPS, whichever you prefer… for me, I just call them the debt ridden countries of the Eurozone! Well, the Eurozone no longer offers a respite from the dollar and all the US debt…

I’ve said for some time now that the reason the euro (EUR) was able to maintain its very strong margin against the dollar was that the dollar was uglier… It was an ugly contest and the dollar was the winner… But guess who’s catching up? The markets are looking over the euro with a magnifying glass these days, and they don’t like what they see… Pimples, skin rashes, hairy growths… You name it… Not only does the dollar have them, but so too, the euro…

And with that thought this morning, it’s no surprise that the euro has taken on more water overnight, after falling in value versus the dollar all day yesterday. You know… I’ve told you over and over and over again that the euro is the offset currency to the dollar, which means that it’s the Big Dog when it comes to anti-dollar currencies… And if the Big Dog gets off the porch to chase the dollar down the street, the little dogs (the other currencies) will too… Well… It goes both ways… If the Big Dog has been sent to the doghouse, the other little dogs get sent there too…

And just like when the Big Dog was chasing the dollar down the street, the little dogs would go faster, thus outperforming the euro… I told you before all this began that a perfect storm was brewing for a short-term period of dollar strength… Well the little dogs are selling off faster than the Big Dog, too… It goes both ways, folks… And that’s not to be flippant about it; just making certain that everyone understands what’s going on…

There’s a black cloud out on the ocean, and it’s heading toward the US… This black cloud is brought to you by our illustrious lawmakers, who are still hell-bent on telling everyone that China is responsible for all that ails our economy… Yesterday, I told you that there was a new bill circulating the halls on the hill that would pressure China to allow a faster appreciation of their renminbi (CNY)… I even heard the president applaud the coming of this bill…

Let me explain what I mean by a black cloud heading toward the US. By passing this bill, the US could very well start a trade war with China… And there’s this thing called “protectionism” that usually bangs a currency from a country that enacts protectionism. But that’s on the side here… The thing that scares the bejeebers out of me is the fact that the U.S. has depended on China for almost a decade now, as the deficit spending exploded to the upside. They depended on China to show up at the Treasury Auctions with fists full of dollars, to buy our debt issuances (Treasuries)… But now, these elected officials believe that possibly ticking off a country that we’ve depended on, won’t be a Big Deal… I don’t agree with that… Not one iota! This is going to get ugly… And since we’ve become a debtor nation, which depends on the kindness of strangers, I don’t think the “ugly” part is going to reside in China, but here…

Of course the Chinese are already saying the right things… Like that they “regret” the Senate voting yesterday… The Chinese Foreign Ministry has already challenged that the bill violates the World Trade Organization (WTO) rules… But that’s not where the problems reside in my opinion… Instead, a trade war is NOT what the world economy needs at this time… I’ve written about this before…

Back in November of 2009, I had this to say about protectionism and trade wars…

I’m not for any protectionism measures, as I see grave things or I should say, grave unintended consequences coming from protectionism measures… Can you say Smoot-Hawley? I thought you could! For non-history buffs, go ahead and Google Smoot-Hawley, and you’ll see that most economists blame these protectionism measures as one of the key reasons the Great Depression was so bad.

If you do not stop to learn from the mistakes that took place in history, then you will repeat them… it’s that simple…

So… Yes, the dollar is swinging a mighty hammer, and the currencies are getting hammered by the mighty hammer right now… But this could all come crashing down, should the markets get a good whiff of these protectionism measures that the US is implementing…

So… If the currencies become embroiled in a trade war, what will be the shining light for investors? Whoa, there partner… If you thought I was going to go out on a limb, and possibly lose my job by saying what investment I think is going to be the shining light, and then it doesn’t, and the lawsuits come flying in the door… You’re mistaken… I would never get on that ship named “Chance”… However, I can tell you that in my opinion, which of course could be wrong… I would look to gold…

Speaking of gold… Well.. It was up $15 when I came in, but is now up only $8… But still, it’s up versus the dollar which is something all the other currencies can’t say, not even Japanese yen (JPY), or Chinese renminbi today! The shiny metal has slowly risen from its brief dip below $1,600… I prefer these smaller moves in assets, especially gold, given the propensity for the “afterhours trades” to increase when the upside moves are larger for gold. That’s a wink, when I talk about the “afterhours trades”…

I have quite a few readers that have taken the ball on my challenge to research these “afterhours trades” on their own, and then let me know if they agree that the price of gold and silver is being manipulated… Well, most of them send me stuff they read, that explains the price drop of gold and silver, and most of them all talk about the price manipulators, or “banksters” (the bullion banks) as one article calls them… I think that the more the public is aware of what I feel is going on here, and I’m not the only one, maybe they will petition the regulators and get to the bottom of this!

In Australia overnight, the Aussie dollar (AUD) plummeted to the 94-cent handle, a level we hadn’t seen in a year… And now after a couple of months of saying that they weren’t entertaining a rate cut, the Reserve Bank of Australia (RBA) is beating around the bush with a bias to cut rates… Well, probably not the RBA, but the markets are putting words in the RBA’s mouth… RBA Governor Stevens last said that, “an improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

Basically, that’s central bank parlance for… “If you want a rate cut, you’ll have to wait until inflation falls”… The markets are beginning to believe that inflation for Australia is going to even out around 2.5%, which is still higher than the 2% target ceiling, but lower than the previous figure of 3%… So, the markets believe this will be enough to get Stevens to cut rates… And for that… Not reality, the Aussie dollar is getting sold… Go figure… Weren’t the markets all wrong a couple of months ago, when they called for a rate cut, and never got one, then?

The price of oil has really hit the slippery slope, eh? Yes, I like that when I go to the gas station… And it’s much better for the US economy… But, it doesn’t play well, and share its toys with the petrol currencies of: Canada, Norway, UK, Mexico, Brazil and Russia… So… On top of the dollar strength, these currencies lose even more because the price of oil is taking a ride on the slippery slope.

So… Do you believe the price of oil is going to continue to go south/down? Or the Southbound Train Going Down? I guess, if the global recession comes about because of the newest version of Smoot-Hawley, then the price of oil will continue on the Southbound Train Going Down…

Then there was this… From The Baltimore Sun

The US futures regulator delayed a final vote on controversial measures to crack down on excessive speculation in commodity markets because it lacks the three votes needed for approval, sources familiar with the situation told Reuters on Wednesday.

The US Commodity Futures Trading Commission announced on Tuesday it was delaying by another two weeks to October 18 its meeting to consider the long-awaited rule on position limits. It was the second time a vote had been postponed.

What? Just what the heck is going on at the CFTC? They can’t see what’s been going on, and the need to pass a measure to crack down on excessive speculation? Are there “outside” forces putting pressure on the CFTC to not vote on this measure? One would have to think there is, otherwise the CFTC would do what’s right for the people of the United States!

To recap… The perfect storm for dollar strength that I talked about weeks ago is beginning to really set in, with the dollar hammering the currencies (not gold, though!)… The big news is that congress is going ahead with the bill to place pressure on the Chinese to allow a faster appreciation of the renminbi… Chuck thinks this is going to ignite a trade war, and possibly bring back the ghost of Smoot-Hawley… The petrol currencies are especially taking it on the chin, due to the drop in oil prices…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning