The Deflation Driven U.S. Dollar Bull Market of 2009
Currencies / US Dollar Dec 27, 2008 - 03:42 PM GMT
Jack Crooks writes: I'm often hearing how much everyone seems to be anxious to put a lid on 2008 and get started over — refreshed. I can understand that. This has been a very challenging year for many investors.
But, some hidden treasures have also appeared in the markets amongst the mess we've become accustomed to …
Hidden Treasure #1— A Victory for the Market Process …
Attributed to how I grew up, I'm a firm believer in the “No pain, no gain!” mentality. On the other hand, the Federal Reserve, the Treasury, and our politicians don't seem to share those feelings. (I wrote about this in my September 6, 2008, Money and Markets column .)
Rather they favor reckless bailouts, out-of-control stimulus packages, and unabated aid.
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| Government officials continue to enable bad business with easy money. |
Nevertheless, the U.S. economy and financial system has begun a noticeable period of cleansing: Stocks, real estate, and many commodities are getting pounded into the ground.
Therefore, you can chock up at least a small victory to the market process.
Hidden Treasure #2— The Dollar's Bull Market …
The monetary powers-that-be may just find a way to temporarily overcome the natural healing process and instead artificially provoke a recovery. Yet despite the money being thrown at the world's financial problems, a recovery is still not in sight.
However, there's a tight correlation between currencies and stocks: As risk ebbs and flows, the buying of U.S. dollars ebbs and flows … in an opposite direction. I explained this in detail in my November 22, 2008 Money and Markets column.
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| A flight to safety combined with deflation, should lead to a long-term bull market for the dollar. |
Of course, facing several financial bailouts plus the potential for more, many analysts are adamant we're destined for a renewed nasty era of inflation. I don't see this happening very soon.
Instead, I expect a longer-lasting period of falling demand and falling prices.
And the flight to safety combined with a deflationary environment should lead to a long-term bull market for the U.S. dollar.
Hidden Treasure #3— A Lower Euro …
The damage to the U.S. consumer is the biggest factor that's going to spread economic pain across the globe. Export-centric markets, and large trade surplus nations, will undergo sharp growth adjustments over the coming quarters (See my November 29, 2008, Money and Markets column for a full explanation of Europe's problems).
As a result, here's what we can expect for the majority of 2009:
- Stocks will hit lower lows …
- Emerging nations will weaken dramatically, and …
- Risk-aversion will win the battle over risk-taking.
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| Investors stand to make a killing off the rising dollar and the falling euro in 2009. |
Beyond that, the U.S. economy may show signs of a recovery. Whereas competing, developed nations will continue to wallow after longer monetary and fiscal response time.
This growth differential could very easily shift in favor of the U.S. dollar and spell bad news for the euro. Both should present tremendous opportunities for investors in 2009 and beyond.
I hope you had a merry Christmas. And I hope you have a wonderful New Year's celebration. Thanks for reading Money and Markets .
Best wishes,
Jack
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