Sunday, October 25, 2009

Peter Schiff's Dollar View Could Damage His Clients Portfolios, Again

Capitalism Magazine is carrying a Peter Schiff commentary, Dollar Forced to Abdicate.

Schiff writes:
The great dollar rally of 2008-2009 has come full circle. When the financial crisis exploded in its full ugliness in mid-2008, the dollar, which had steadily declined over the previous four to five years, put in a rally for the record books. By March 2009, as investors across the world sought safety from the financial storm, the index had surged more than 25%. Since then, the dollar has steadily declined to the point where nearly all those gains have vanished. In short, the panic rally has given way to the long term trend.
Is Peter just talking is book, here? We all know that he is heavily invested in foreign non-dollar denominated stocks for his investors.

His proclamation that the dollar is near death rests on this accurate observation:
Vastly expanded debt levels and monetary expansion have created a greater supply of dollars, while poor investment performance and diminished industrial capacity have lessened the demand for dollars.
This is true, and those huge supply of dollars are just sitting there overseas, but Schiff fails to take into consideration that, since March, Ben Bernanke has not printed any money.

As I have consistently said, an overseas panic out of the dollar could sink it on foreign exchange markets. However, barring such a panic, the dollar is headed higher, much higher, since Bernanke has stopped issuing new greenbacks. In this part of the supply/demand equation, for the first time in ages, there is a halt to supply and that means one thing, the price of the dollar is headed higher.

Schiff in all his comments on the dollar either fails to notice this fact or chooses to ignore it. It is likely to again cause losses for his investors holding foreign non-dollar denominated stocks. Indeed, I fully expect gold to fall this time also. Thus, his clients losses could be greater than the losses they experienced in 2008.


  1. Yeah, Peter is not a market timer and understates the risks short term. Kind of like Jim Rogers quote that this is "China's century". It may be, but there will be a lot of ups and downs before it takes the globe's reins. Peter quite rightly observes that the US equity markets have been propped up and reinflated, but refuses to accept that foreign markets are in no better position.

  2. Robert, I don't understand how the dollar could rally substantially against a fixed resource like gold, simply because Bernanke stops printing it. Wouldn't he also have to allow for a substantial deflationary movement in the dollar? And hasn't Bernanke shown that, when push comes to shove, he won't hesitate to turn on the faucet?

  3. @Stewart

    I am not looking at what Bernanke might do in the future. I ma looking at his lackof money printing between March and now.

    I'm not sure gold is a "fixed asset" last I looked they were mining a bit.

    There is a yin and yang between the dollar and gold. During periods of high inflation more and more people prefer to hold a larger percentage of their liquidity in gold.And vice versa.

    We are headed for a vice versa period, when more are oing to choose the dollar over gold (For a short to medium term period).

  4. Overall I agree with you Wenzel, but I do think you're leaving out one other potential source for further declines in the USD. Although Bernanke has ceased printing new dollars, a substantial portion of his previous money printing has not yet entered into the real economy. Even if he fails to print more, if what is currently making up the mammoth excess reserves of the banks starts to seep into the real economy, then that certainly will produce further declines in the USD.

  5. RW - "since Bernanke has stopped issuing new greenbacks"

    Is this really accurate? I know that the broader money supply has been holding close to constant, but the monetary base is still climbing, up 6% or so since Jan 09. Isn't the monetary base where you would measure Ben's printing? And the lack of growth in m2nsa is just due to a decline in bank lending (possibly due to Ben now paying interest).

    Also, did you ever find out anything more about how the large amount of bank reserves is distributed? I'm dying to know which banks are really sitting on these reserves, and which ones aren't.

  6. Bob, what about the "Beijing Put" putting a floor under gold? It seems as though this could dampen any downdrafts in the gold price...

    China, Bernanke and the Price of Gold
    Ambrose Evans-Pritchard

  7. The Chineese are savvy enough traders that if they detect weakness in gold, they will accumulate but on the bid.

    They may slow a downdraft, but not eliminate it.

  8. Dollar rebound coming up.
    It's due technically..and with everyone on one side of the trade, you know it's going back up in the short term