January 18 th , 2014. Critical Thinking At Its Best! Woman: Do you drink beer? Man: Yes Woman: How many beers a day? Man: Usually about 3 Woman: How much do you pay per beer? Man: $5.00 which includes a tip Woman: And how long have you been drinking? Man: About 20 years, I suppose
Woman: Do you drink beer?
Woman: How many beers a day?
Man: Usually about 3
Woman: How much do you pay per beer?
Man: $5.00 which includes a tip
Woman: And how long have you been drinking?
Man: About 20 years, I suppose
Woman: So a beer costs $5 and you have 3 beers a day which puts your spending each month at $450. In one year, it would be approximately $5400 …correct?
Woman: If in 1 year you spend $5400, not accounting for inflation, the past 20 years puts your spending at $108,000, correct?
Woman:Do you know that if you didn't drink so much beer, that money could have been put in a step-up interestsavings account and after accounting for compound interest for the past 20 years, you could have now bought a Ferrari?
Man: Do you drink beer?
Man: Where's your Ferrari?
Currency Watch: Triffin’s Dilemma inflation, the past 20 years puts your spending at $108,000, correct?
Chuck Butler, President, Everbank World Markets
In the 1960s, the Belgian-American economist Robert Triffin pointed out something that I would like to bring into the sunlight today, and which soon will be a popular topic around the water cooler, if I'm correct.
Triffin observed that when a national currency also serves as a world reserve currency, a dilemma arises: the issuing country must choose between "store of value" and "reserve status." A country whose currency has reserve status must be willing to supply the world with sufficient currency to meet world demand for foreign exchange reserves, and thus dilute the "store of value." Meeting this demand will also be reflected in fundamental imbalances in payments, specifically the current account.
I will focus on the dilution of the dollar's value since Nixon severed its gold backing in August 1971.
As I explained in my February 2012 inflation, the past 20 years puts your spending at $108,000, correct?World Money Analyst article, the dollar has completed four alternating weak/strong trends since 1971, shown in the chart above. The current weak trend in the dollar began 11 years ago; could this one be the trend to end all trends?
A History of Reserve Currencies inflation, the past 20 years puts your spending at $108,000, correct? Prior to the current US dollar stint, the currencies of five countries each held world reserve status for an average of 95 years. This data goes back 563 years, folks, so we're not just looking at a single example. Here's the list and approximate time frames:
As you can see, the US dollar has held reserve currency status for 88 years… just seven years shy of the average of 95 years. Of course, the 95-year figure is just a historical average; the actual time till expiration of reserve status could be longer… or shorter!
I found the graphic below on the Casey Research site and thought that it played well with my point here.
Notice that the sand that represents the time the dollar has left is moving through the hourglass right before our eyes. To borrow and adapt a line from a soap opera, "Like sands through the hourglass, so are the days of the dollar's life."
I travel and talk to people throughout the US, Canada, Mexico, and Panama. Wherever I stop, I try to explain what deficit spending and debt has done to the US dollar's value, and how regardless of what country they live in, they should not have 100% of their investment portfolio allocated to their home currency.
For over 3 years, I have warned that the US dollar's term as the world's reserve currency will expire by the end of this decade. That message, it turns out, aligns well with the historical average that dates the end of the dollar's reign as 2020.
And now, the US must deal with another debt ceiling debacle. I truly believe that the US will eventually relinquish its reserve currency status in order to avoid an outright default.
So, if the dollar loses its reserve status, what will that mean to dollar holders? Gloom, despair, and agony come to mind. It took the UK over 50 years to recover from their loss of the reserve status.
Remember, the country with the reserve currency gets to receive loans at discounted borrowing costs.
Also, commodities are priced in the reserve currency, meaning central banks around the world must hold the currency in their reserves to facilitate trade. When these benefits are lost, a country's economy becomes stagnant at best, and the value of the currency is depreciated, mainly because the world's central banks no longer need to hold it.
What's Next? mean to dollar holders? Gloom, despair, and agony come to mind. It took the UK over 50 years to recover from their loss of the reserve status. I am frequently asked which currency will replace the dollar as the reserve currency. I respond that the real concern is not speculating about the next currency king, but about the consequences of the dollar's lost status!
When pressed, I speculate that it will be the Chinese renminbi. China was the first country to state as its goal the replacement of the dollar standard. Since making that claim, China has taken multiple steps toward making its currency, the renminbi or yuan (same currency), eligible to become the next global reserve currency. China still has a long way to go but has moved quickly.
I also believe that whenever China allows the renminbi/yuan exchange rate to float against world currencies, which is essential to gaining reserve status, it will issue the currency with partial gold backing. That would render its currency the most attractive in the world and spark global demand and wide distribution!
The euro was once considered the dollar's main challenger. That was before the markets woke up and realized that Greece, Spain, Italy, and Portugal can't pay their debts, and that their debt shouldn't be issued at the same yield as German debt. The euro may one day rebound to once again be a challenger, but not before China moves to the head of the class.
Another alternative could be that the reserve currency becomes a basket of currencies with each the "king of the hill" in their respective regions. But that wouldn't save the dollar from a loss of value that would follow its lost status.
I write a daily newsletter called A Pfennig for Your Thoughts in which I always remind readers to have at least 15% to 20% of their portfolio allocated outside of the dollar in select foreign currencies and precious metals. One day, when the dollar gives up its reserve status in order to stave off a debt default, non-dollar holders will be thankful they heeded that advice.
BOTTOM LINE That was before the markets woke up and realized that Greece, Spain, Italy, and Portugal can't pay their debts, and that their debt shouldn't be issued at the same yield as German debt. The euro may one day rebound to once again be a challenger, but not before China moves to the head of the class.
So far, the 1929 pattern analog continues to work for the current market. If that keeps on working, then a top is ideally due Jan. 14, a date which our Timing Model signals support. Another top due
Jan. 29-30 would probably constitute the “top to go down out of”, and in the meantime a rather choppy and indecisive month is in store. This is appropriate, with a new Fed chair. Bernanke killed the real estate
bubble in 2005. Greenspan killed the stock market rally when he took office in 1987.
T-Bonds should be the surprise winner, with an important bottom due the first week of February. But until then, more lower lows lie ahead for bonds. Gold is in the second half upward phase of the 13-1/2 month cycle, and needs to get up above $1420/oz to keep from having to
fall to a lower low (below $1190) at the next major cycle low due in July.
Divergences Persist That was before the markets woke up and realized that Greece, Spain, Italy, and Portugal can't pay their debts, and that their debt shouldn't be issued at the same yield as German debt. The euro may one day rebound to once again be a challenger, but not before China moves to the head of the class.
As we contemplate the potential arrival of a 1929 style market top this month (see page 5), it is important to look for confirming signs of that sort of trouble. We still do not believe that the potential damage to stock prices or the economy this time could be anywhere close to what unfolded in 1929-32, and that’s not the point. The real point is to get an insight about the direction in which prices are headed. If we get that right, then magnitude can take care of itself.
We continue to view it as a troubling prospect that the Dow Jones Utility Average is not making higher highs along with its big brother the DJIA. Both have been in a general uptrend since the 2009 bear market low, but along the way they have not always been in agreement about making higher or lower price highs.
The reason why that is important is that it is our observation (and others’) that when the two disagree, it is usually the DJU that ends up being right about where both are headed. Just before the Flash Crash in May 2010, the DJU was making a lower high, and sure enough some trouble ensued. But immediately after the Flash Crash, the DJU started acting stronger and led the way upward. Other similar disagreements since then have also worked out the way that the DJU said, at least up until recently. The DJU reached its peak back on Apr. 30, 2013, and is not confirming the DJIA’s higher highs since then. The DJU is very close now to breaking its rising bottoms line, a bearish sign for that sector and thus for the overall market as well.
European markets. The DAX is zooming upward along with the DJIA, but
neither the FTSE nor the CAC is confirming (yet). Similar instances of nonconfirmation occurred at major tops in 2007 and 2011. The message is that even though the Fed has not yet turned off the money hose, there are still liquidity problems brewing out there.
watch the Mainstay High Yield Corp Bond Fund (MHCAX) as a proxy for the whole high yield bond market, based on its long history and generally good chart behavior. MHCAX peaked back in early May 2013 and has not confirmed the SP500’s higher highs for the rest of the year. Nor has it gone along with the latest surge upward at the end of 2013.
The message is that while the big cap stock market indices might still be acting fine, the less deserving and more liquidity-sensitive indices and segments of the market are not in agreement. They are saying that there are liquidity problems out there, and perhaps the Fed’s continuation of QE is masking those problems to keep them from becoming more evident.
Bottom Line: We don’t yet have confirmation that the market is going to continue to follow the 1929 scenario. But there are lots of signs of trouble that say all is not actually well in the liquidosphere.