Let’s Talk Greenback

There was a joke flying around the water cooler yesterday. It went something like this…

“What if the government were to print a TRILLION dollars a year in stimulus? That’d be crazy, right!”

One trillion. Bigger than 2008’s “shock and awe” bailout, and powerful enough to lift any ailing boat in the economy, eh?

Ready for the punch line?

After a quick scratch of the head and carrying of the one, you’ll realize the government IS ALREADY printing a trillion dollars a year in stimulus! [The joke spawned when someone misfired a quote from Dr. Marc Faber, editor of the Gloom Boom & Doom report, who postulated the case where the Fed prints a trillion dollars A MONTH in stimulus. Nah, the stimulus isn’t a trillion a month. Not yet however.]

Sometimes misunderstandings are funny – in this case the throwing around of “a trillion dollars” is downright scary.

Jokes aside, the Fed’s loose money policy is having a direct effect on the markets we trade every day. After all, you can’t just keep printing dollars without recourse, right?

A quick look at the vitals – four important charts I highlighted earlier this month – and you’ll see the greenback is in trouble and the financial markets are continuing an epic move higher. (We’ll save crude and gold for another discussion, of course there’s much to talk about there, too!)

Let’s talk greenback…

The U.S. dollar has been trending higher since mid-2011.

Whaaat? Uptrending dollar? With all the quantitative easing (QE) and loose monetary policy the Fed has been throwing at it, your editor is amazed by the strength of the U.S. buck.

The current status of the U.S. dollar is almost like imagining an island economy that runs on seashells. But every month “hurricane Bernanke” washes ashore and dumps billions of the dead crustaceans about the island. How can a seashell hold its value, at that rate!?

But, the dollar has been doing just that! That’s the power of a crappy global economy. When compared the other alternatives the U.S. dollar was the clear winner. What, would you rather own Yuan, Yen or Euros? No way!

Not only was the U.S. dollar the clear winner in the global race to safety, the U.S. economy is actually quite bustling! Surprise surprise, when a country gets unexpected, valuable raw materials (shale oil and gas) from beneath its soil and manufacturing can use that raw material to an advantage, it certainly favors the economy. And in that respect it also supports the dollar.

So in the past two years, even in the face of QE, we’ve got a “better than the rest” currency and an economy that’s really starting to make strides – it’s all been very positive for the dollar.

Unfortunately, for the U.S. dollar, the flow of beneficial factors is ebbing. Other economies around the globe are starting to pick up. Strip it all down and the U.S. dollar isn’t as strong in comparison.

That said, the dollar is starting to feel the overwhelming pressure of the Fed’s loose monetary policy.

Fact is, I can’t see how we get out of this scenario without unforgiving levels of inflation. The Fed isn’t worried about inflation, by the way. Instead the Chairman and his predecessor are more interested in making sure the strings they pull actually make the puppet dance.

The dollar will dance alright. Dance to the downside. Meanwhile, at the clip of $1 trillion a year, Fed stimulus is having a direct effect on financial markets.

A look at the S&P 500 and you’ll see that the Fed’s action, combined with a positive economic outlook, has spurred the market barometer to new highs.

The market has been screaming higher for years now. And although you can chalk some of the froth up to an economic comeback a lot of it gets back to “hurricane Bernanke.”

The market is either going up because of the expectations of stimulus or because the stimulus itself is already inflating prices. Either way as long as the stimulus continues the market will churn higher. And as far as the eye can see, the stimulus in one form or another will keep coming.

What’s the takeaway?

There’s not much more to be said today other than the fact that the U.S. dollar is finally feeling some pressure. The government keeps on spending and to keep its debt in check it’s going to have to keep on printing. That also means good things for the commodities and hard assets we talk about on a daily basis. It’s always hurricane season on this island!