Wowee! So says AFL football commentator Brian Taylor when something spectacular happens on the ground.
You could say something like that about yesterday’s big surge on the ASX. A lot of people are.
But I’m referring to something else.
It’s the call from economist Stephen Roach for the US dollar to collapse 35% from its current level against its major rivals…and in fairly short order.
I haven’t heard of Señor Roach before.
But it’s worth considering this claim in the context of Donald Trump’s reported trillion-dollar infrastructure ‘plan’.
The Financial Times reports that this is ‘fluid and could take time’.
That is to say, it appears to have no basis other than another Trump brain spurt!
But where are these trillion dollars going to come from and how could they be paid back?
The answer is this money won’t be paid back, alongside the rest of the US national debt. That ship sailed long ago.
The only question is: How credible is the proposition that more US Treasury bonds can be absorbed when so many are already pumping out now?
The Fed is the ultimate backstop here. It can just buy them if need be.
However, there are two wild cards in this kind of situation.
One is the assumption the US dollar will stay steady when so many are flooding the world. The second is that inflation remains contained.
Hence why we return to Señor Roach.
A big crunch in the US dollar would take US inflation to levels no one is even thinking about now.
But they said this after 2008, did they not? Indeed they did. Why were those calls wrong?
2008 was a banking crisis. The massive Fed response — Quantitative Easing — merely offset the contract in the private banking system.
Long ago I read that there was less money circulating in the US economy in 2016 than there was before 2008.
It was a deflationary trend that made it a very good period to own Treasury bonds.
But that brings us to today…
The Fed’s Stimulus and Collapse of the US Dollar
We know the Fed is again expanding its QE program. But this time — I really hate to put it like this — is different.
I must introduce you to another character — Russell Napier. He’s a strategist that’s been around a long time. I have his book on my shelf.
An article in The Wall Street Journal introduces us to his latest thinking…
‘Mr. Napier—who has spent two decades worrying about deflation and who wrote a book about major market slumps—now predicts inflation above 4% next year in developed markets due to government loan guarantees.
‘Governments, he thinks, have finally found a way to ensure that commercial banks lend: promise to cover bad debts. Heads, the banks collect the (slim) interest; tails, the government ends up with the losses. Of course banks will lend.’
I cannot emphasise the importance of this insight.
It also goes back to our recent discussion of Australian bank stocks. The taxpayer is now absorbing the credit risk of their lending decisions.
And this will continue because the governments know that the private banks must lend or the economy tanks.
The alternative is Japan’s two decades of stagnation.
The net result now is that the US money supply is exploding. The Center of Financial Stability says it’s never seen such a surge in 50 years.
A picture is worth a thousand words…
Source: Center for Financial Stability
This, we can assume, is part of Señor Roach’s dynamic for the US dollar to tank. This could also send the US dollar gold price soaring up.
However, it’s not simple for us Aussie investors. The Aussie dollar could surge as well against the greenback…and limit the AUD gold price.
Consider the implication from such a scenario for the Aussie mining sector…there would be less of a free ride of a falling Aussie dollar translating into higher earnings.
We’ll see on that. Perhaps of more pertinent and pressing concern is what happens when the US$25 trillion locked up in US Treasury bonds discovers the purchasing power could be about to be shredded?
If you thought 2020 was volatile so far, we may yet be in for plenty more!
It doesn’t tell us what to buy today…but do think about Señor Roach’s warning on the US Dollar collapse.
The ingredients are there for it to happen.
PS: Our publication Profit Watch is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.