Resolving the conflicting investment trends (page 1 of 3)

It is true that recently the US dollar has recently broken down, but when we look at the performance of the US dollar since the beginning of the year we note that so far the dollar decline in 2004 has been very moderate.

Against the Canadian dollar the US dollar has, so far in 2004, lost 6% but just about 2% against the Euro and it has actually gained against the Australian dollar and the Mexican peso. Therefore, it would be premature to speak about a "dollar crisis" for now.

US dollar not in crisis

I agree that in the long run the US dollar is a doomed currency, but against what? I cannot see any great value in the Euro, but I still like Asian currencies such as the Singapore dollar, and of course gold and silver, since they are currencies, for which the supply cannot be increased by some intellectually totally corrupt central bankers whose monetary policies will ensure the complete loss of paper money's purchasing power sometime in the future.

Concerning the US dollar, much further weakness would somewhat surprise me because US money supply has not been growing much since the month of May of this year.

In my opinion, for the US dollar to really collapse one would need a strong rise in money supply, which is not taking place at the present time. But there are other reasons why I do not expect a significant breakdown in the value of the US dollar right now.

It would appear that the US economy, which was largely driven by expanding credit leading to a strong increase in home prices, which allowed households to extract money from their homes and spend it on consumer goods, and tax cuts, whose impact are now history, is slowing down.

The overheated housing market is showing signs of weakening and the shares of sub-prime and mortgage lenders have recently been hit as their earnings, which depend largely on re-financing of homes activity have been disappointing.

Watch financial stocks

The break in financial stocks is, in my opinion relevant for the entire stock market. Since 2000, financial stocks have significantly out-performed the stock market and their superb performance was a symptom of the credit bubble, which drove the US real estate market and US consumption.

Declining financial stocks are on the other hand indicative that not all is well in the credit market and that excess credit growth is either slowing down or that in some sectors of the economy credit is declining altogether, which would be negative for the entire US economy. Moreover, when financial stocks break down, and at the same time home building shares and lumber, sell-off, we should assume that the housing market is in trouble.

I may add that the strength in bond prices until just a few days ago would support the notion that the economy is likely to weaken in the period directly ahead. In fact, it is bizarre that US bond prices have been as strong as they were over the last six months given the US dollar weakness. Usually, if a currency weakens one would expect fixed interest securities to also decline, but in this instance we had the opposite.

I am mentioning this "unusual" condition because "normally" one would also find bond prices going down when oil prices and commodities rise, as commodity price increases are perceived as inflationary. But now we had in the last ten days oil moving down and bonds selling off at the same time. So, do recent movements in the various asset markets make any sense?

China slowing down

Now, across the Pacific Ocean, in the Middle Kingdom, we also get the impression that the economy is decelerating faster than is generally perceived.