The Destruction of the US Dollar

A debate is waging between the deflationists and inflationists.  It will come as no surprise to those who’ve read my previous posts on the subject that I fall into the latter camp.  I have indicated numerous times that I’ve put my money where my mouth is.  In January, I was so convinced that there would be inflation, that I eventually decided to implement a strategy of holding little cash but rather oil and gas and gold mining stocks.  I’ve also shorted the US dollar.  This strategy is paying off handsomely so far.   Besides the inflationists have many decades of contemporary monetary history to back their point of view, and the knowledge that government deficits generally feed inflation.  The current Obama deficit is profligate and never seen in the US before Obama. In Bloomberg, David Reilly asks whose face should go on the $1,000,000 bill, but never suggests Obama, apparently because he is afraid to be put on the President’s enemy list.

It is true that the credit bubble was popped last Autumn, and this caused deflation.  But this has been reversed.  Consumers don’t see it yet because consumer goods haven’t increased in price yet.  But rising prices is not the definition of inflation.  One mustn’t confuse the symptom with the cause.  Inflation is caused by an expansion of the money supply without a corresponding growth in real wealth (i.e., goods and services).  When the supply of money is inflated, prices will rise to accommodate it.  This is what is already happening to gold, oil, and the stock market.  In Canada, there is an increase in real estate prices.  Next, consumer prices will catch up and everyone will feel the pain when their pay cheque won’t go as far.  Witness that oil is already back above $80 per barrel, gold is above 1050, and the Canadian dollar is almost en par with the dollar.  These are all symptomatic of the re-inflation of the US money supply.  Meanwhile, the Koreans are buying Harvest Energy Trust, a sign that the Asian, creditor nations are abandoning the dollar for hard assets in commodity interests around the world, including Africa.

Irwin Seltzer writes in a his column, “The Dethroning of King Dollar?“:

Which puts the ball right back in the Fed’s court. Unless Bernanke drains liquidity from the financial system, and shrinks the Fed’s balance sheet by winding down $2 trillion in support programs — and does so precisely when the recovery takes hold so as not to cause a relapse by moving too early — the dollar’s decline will accelerate, shattering confidence in its long-term value. One well-respected expert tells me that in two-to-five years the dollar will no longer be considered safe enough to be the currency in which the world does business. Its replacement: separate deals in local currencies — the Chinese paying for Brazil’s oil in renminbi, which the Brazilians use to purchase stuff made in China — and the International Monetary Fund’s drawing rights, bits of paper backed by a basket of currencies, including but not limited to the dollar. That would mark the end of an era that has seen world trade flourish and millions emerge from poverty. Sad.

Advertisements

The Obama Dollar

I wrote back in January that Obama budget deficit would lead to inflation.  Now finally financial writers are calling it the Obama dollar.

In personal finances, debt is not a good thing unless properly managed.  Advisers distinguish between good and bad debt.  Bad debt is spent on consumer goods and services (Christmas gifts, food, vacations, etc.).  Good debt is used to buy appreciating assets like a house or investments which will produce positive cash flow (e.g., Crescent Point Energy Corporation, which pays 23 cents per share Canadian per month).

I lamented that Obama called his profligate budget an “investment”.  But there is no question that government debt is bad debt.  It is used neither to purchase appreciating assets nor cash-producing investments; rather government debt is spent on programs and make-work projects that will never have a profitable rate of return.  1.4 trillion dollars was borrowed in the 2009 budget year and it has led to inflation of the US currency as I predicted in January.  Let’s consider the difference in Canadian dollar:  On Jan 23, the Canadian dollar traded at 1.234 to the US Dollar; now today it is at 1.03 per US.  This is a drop of nearly 17%.  But it is not as though Canadian currency is not also being inflated by low interest rates.  In Canada, most investments, including stocks and real estate, have nearly completely recovered from the downturn.  Housing is now completely recovered in much of Canada, and this has financial writers worried about a bubble in housing prices.

I am still shorting the US dollar (it means that I gave borrowed US to purchase Canadian-based Barrick Gold (ABX: NY), Enerplus (ERF: NY), and Daylight Resources Trust (DAY.UN: Toronto).

Writers and analysts often refer to the Federal Reserve Bank “printing” money.  Actually they don’t have to literally print money, because the central bank has the ability to create money without printing it.  This is done especially well when the Federal Reserve buys US treasury notes.  The dollar is called a “fiat” currency, because money can be made from nothing and out of paper and ink.  Eventually, however, printed money flow will have to increase in order to keep up with prices.  But until then, inflation remains an invisible monster which devours people’s savings and cuts into how much they can earn.

The Carter years (1979-1981) were formative for me, as I graduated from high school in 1981.  I remember them like yesterday, and I remember its high inflation and how Reagan implemented so-called Reagonomics, reining in profligate Federal Spending.  Reagan halted an out of control Congress and put America back on track.  Being a beneficiary after my mother’s death in 1977, I remember my own Social Security check being cut.  Unfortunately, Obama was apparently too busy taking drugs during those years (marijuana and cocaine when he could afford it) and so has returned us to the pre-Reagan economic policies and ideas; but he has, in collusion with the Democrat Congress, implemented economic policies which are even worse than what we had during the Carter malaise.

I met a man from Singapore whose father lived in want much of his childhood and therefore as an old man hoarded enough rice for many years.  In like manner, I am afraid of inflation, because that’s what I saw as a child, and I have been preparing for this moment since I first heard about the Obama budget.  I fear inflation as much as any other investment risk, perhaps more.  The so-called safe haven of the dollar is a complete myth, all the more so when it is the Obama dollar.

Obama's no author: Bill Ayers wrote Dreams

Anne Leary of Backyard Conservative ran into Bill Ayers at Washington D.C.’s Reagan National Airport.

Leary, a Chicago resident, who has tracked Barack’s Bomber Buddy for years, started a conversation with the domestic terrorist whom Obama claimed was just a guy in the neighborhood. The conversation turned quickly to Dreams of my Father, which is allegedly Barack Obama’s first autobiographical memoir:

Then, unprompted he said–I wrote Dreams From My Father. I said, oh, so you admit it. He said–Michelle asked me to. I looked at him. He seemed eager. He’s about my height, short. He went on to say–and if you can prove it, we can split the royalties. So I said, stop pulling my leg. Horrible thought. But he came again–I really wrote it, the wording was similar. I said I believe you probably heavily edited it. He said–I wrote it. I said–why would I believe you, you’re a liar.

He had no answer to that. Just looked at me. Then he turned and walked off, and said again his bit about my proving it and splitting the proceeds.

James Simpson, who alerted the readers of the American Thinker of Leary’s blog, comments:

Was he, as she had asked, pulling our collective legs? Other sources report rumors that Ayers is very upset both about not getting any credit for helping Obama on ‘Dreams,’ and may also be put off by being summarily thrown under the bus along with Rev. Wright and everyone else who becomes an inconvenience to this President.
My understanding of communists is that most would know better and keep their mouths shut. But Ayers is a bit different. He is, as he says, a “
small ‘c’ communist,” but he is also, in a certain, slimy way, an entrepreneur, as we explained in Monday’s post. (Apologies in advance to entrepreneurs everywhere.) He grew up a very rich kid, used to getting everything he wanted. Even as an adult his career has relied on a hand up from his wealthy father. His past statements and radical activities also mark him as a megalomaniac. In youth he drew attention to himself by blowing things up. As an adult “educator” he merely attempts to subvert children. But that doesn’t seem to be going so well.

The trouble with evil people is that they often want the credit for what they have done.  It is therefore not surprising that Ayers has begun to admit that he wrote Obama’s book.  It has already been proven by Jack Cashill and confirmed by Obama biographer, Christopher Anderson.

Obama is a security risk.  His closest associates are a threat to America.  Bill Ayers is a terrorist.  Obama should resign or be impeached.

Was he, as she had asked, pulling our collective legs? Other sources report rumors that Ayers is very upset both about not getting any credit for helping Obama on ‘Dreams,’ and may also be put off by being summarily thrown under the bus along with Rev. Wright and everyone else who becomes an inconvenience to this President.
My understanding of communists is that most would know better and keep their mouths shut. But Ayers is a bit different. He is, as he says, a “
small ‘c’ communist,” but he is also, in a certain, slimy way, an entrepreneur, as we explained in Monday’s post. (Apologies in advance to entrepreneurs everywhere.) He grew up a very rich kid, used to getting everything he wanted. Even as an adult his career has relied on a hand up from his wealthy father. His past statements and radical activities also mark him as a megalomaniac. In youth he drew attention to himself by blowing things up. As an adult “educator” he merely attempts to subvert children. But that doesn’t seem to be going so well.

Spreading the risk: Investment tips from an amateur

Early in 2005, I asked my investment adviser for suggestions regarding stocks I could buy in US dollars, and he didn’t come up with one.  When my wife asked to buy Catepillar, he said it wasn’t a good idea.  For these reasons, and because he also received 2% commission for every transaction, I decided to try a self-directed trading account (DIY, do-it-yourself). On November 1, 2005, I bought my first DIY stock, CAT, at $50 per share and sold it at $70 the following February.  That marked my beginning as an investor.  So I have an answer now to that thorny question, “What do you do?”  That question has been embarrassing since 1996 when I finished my doctoral studies.  As a biblical scholar, I’ve never had a full-time job in the field.  Rather, I’ve taught as an adjunct in Canada and as a visiting professor in Africa, I’ve continued my research in the Acts of Paul, I’ve been the director of a charitable project called the Barnabas Venture since May 2004, and I have been very active in my local church.  I do work for my wife’s company too, but only part time.  But imagine trying to explain all that to people.  Now I just say, “I’m an investor.”

Being involved in philanthropy, I’ve desired to increase our ability to be charitable.  This has been one of the driving factors in leading me into DIY; but also, in the last half of his life, my grandfather and role model, Wallace Wilkinson Dunn, Sr., was an investor.  An inheritance from grandfather paid for the first year of my studies at Cambridge.  My father, who received the bulk of grandfather’s estate, paid for the next two years.  Thus, I enter investing with full confidence that it can be done profitably.  Finally, when it comes to our retirement accounts and Tax Free Savings Accounts (TFSA, which is the Canadian equivalent of a Roth IRA), we dare not put them in fixed income with constant ebb of inflation taking away most of our gains.  So I manage all but one of our retirement accounts, TFSAs, and small but growing non-registered account.

This morning I sat down and made short list of my investment strategies which included the following points:

(1) Pay attention to the macro trends in the economy.  Information is key, but one must realize that much of the information out there is provided by incompetent writers or supporters of disastrous policies such as Keynesian economics (keyword, “stimulus”) and Obama’s presidency, which have led to huge budget deficits and inflation.  The conservative world view serves me well as an investor.

(2) Always maintain sufficient cash or credit instruments to take advantage of market downturns.  But I try always to maintain an extremely low debt to equity ratio (far below 1:1–the goal of a business is to be in business the next day–while failed banks like Bear-Stearns had ratios of 30:1).  The investments must also be able to pay for themselves through their dividends.

(3) Keep the watch list down.  It is very difficult for me to watch more than about 20 stocks.

(4) Specialize:  Most investors have their specialty, a nook where they have a better feel for the market.  Some are commodity traders; others trade gold or foreign currencies.  I trade in bank, oil and gold mining stocks.  I am not a competent in options or short selling.  I stay away from investments that I don’t understand.  That’s why I don’t do options trading, because I don’t understand them.  Not being an expert, I also have to depend on analysts at TD Waterhouse and Scotia iTrade to inform me if a stock is a “buy” or a “hold” or “sector outperform” or “underperform”.

(5) Spread the risk:  When we still had an investment adviser, he told us the story of how certain Nortel employees who lost their jobs also had retirement portfolios which were predominantly made up of shares and options in Nortel.  As a consequence, they were severely hurt by the demise of Nortel.  Once while in my bank, a representative mentioned that one would do well to buy, as she had done, bank stocks (which were at an all time low).  She had invested in TD Bank; I told her that she shouldn’t do that since she was employed by the bank.  Well she would have made money, without a doubt, because TD Bank is back up to $68 per share.  But it is necessary to maintain the principle of spreading risk which means that one should never have everything in a single sector or a single company (Don’t put all your eggs in one basket). My wife’s company is in aviation maintenance, so I have chosen never to purchase a stock related to that sector.  So Air Canada, Boeing, Bombardier are all on my never-buy list.

Obviously there is some tension between specializing/keeping the watch list down and spreading the risk.  Buying 100 stocks in several sectors effectively spreads the risk even more.  But I can’t know enough about every sector to manage that; so I am trying to learn more about the gold mining and oil and gas sectors to be able to trade and invest effectively.

In late 2008 and most of 2009, when people asked me what I do, I said I was an unsuccessful investor.  But today, thanks to the recent upswing in the market, I’m still investing, while many professional financial advisers are delivering pizzas, waiting on tables, driving taxi, or just sitting at home unemployed.  For that, I, a DIY amateur, am thankful

//

//