Sell US equities, buy the US dollar! (page 3 of 3)

I have been careful above to describe the purely monetary-based stock and real estate inflation as a rise in prices in nominal terms. This is so, because in all these cases (Germany in the 1920s, Latin America in the 1980s, and now Zimbabwe) the asset price increases were more than offset by the weakness in the currency of the country that was pursuing such desperate monetary policies, with the result that, over time, these assets actually deflated - not because of a collapse in the domestic price level, but because of a collapse in the currency against other sounder paper currencies whose supply wasn't increased at the same rate.

Now, I am not suggesting that we have already reached in the United States the economic conditions that plagued Germany during its hyperinflation period in the 1920s or those that prevailed in Latin America in the 1980s, which were characterized, as just explained, by soaring domestic asset prices but collapsing currencies and, over time, by deteriorating economic conditions that were repeatedly interrupted by very brief bouts of strength - namely, when the currency depreciation was so sharp that these countries - competitive positions improved temporarily. But there certainly are, in the US, some symptoms that are pointing in that direction.

What concerns me most going forward is that in the present optimistic atmosphere and amidst very high valuations for US equities any slight disappointment could lead to a sharp market sell-off. The potential reward in holding equities at present does simply not compensate sufficiently for a large number of risk factors.

Interest rates could rise more than is generally perceived, cut short the housing and refinancing boom, and could combined with the end of the stimulative impact of the tax cuts lead to flat or even lower consumer spending.

The recent poor performance of retail stocks such as WalMart and Best Buy seems to support this concern. Another danger for financial markets would be soaring oil and other commodity prices - not a totally unrealistic assumption considering Asia's rising appetite for oil and other resources, and tensions in the Middle East. In fact, increased geopolitical tensions are already apparent in trade disputes and in belligerent comments by China over a proposed referendum about independence in Taiwan.

But my principal concern relates to the Fed' monetary policies should renewed turbulence disturb financial markets at some point in future. For sure the money printing press would be turned on at full speed - as always in times of crises in the past - and therefore, further dollar weakness is only a matter of time.

And while I am not sure that the ECB would wish to have an even stronger Euro, it should be clear that such monetary policies should lead to a loss of purchasing power of the dollar against hard assets such as real estate in countries with current account surpluses (the Asian region), commodities including gold and now especially also silver, as well as oil.