Don Coxe
Okay. A couple of other topics. First of all, what's happening on the US
and Canadian dollars - what we've had was we had a big sell-off in the
American dollar during the month of November and that's reversed partly with
a rally in December. The rally in December goes along with a trip to
Beijing in which the two biggest heavyweights in the US public sector of
finance are going to Beijing together: Ben Bernanke and Hank Paulson.
Watching them standing together on a receiving line yesterday I thought,
"What a display of American power when what they are essentially doing over
there is asking China to somehow or other support the dollar while letting
the renminbi go up," which is the kind of balancing act you expect of those
Chinese circus performers to come out and dazzle audiences, but as a basis
for trying to answer the long-term problems of America is perhaps an
inadequate strategy.
What is interesting of course is that the Canadian dollar has not shared in
this rally against the American dollar. We've discussed some aspects of it
in the current Basic Points but I'd like to note that the coincidence if you
look back at the chart at yearend '04 of the US dollar index and the
Canadian dollar, you'll see the same phenomenom at work. The US dollar
falling late in the year but the Canadian dollar not rallying. So it was
other currencies it absorbed.
So, why is that? Well, I think that there's a variety of factors in that
but remember that the Canadian dollar is still a small currency. And when
you come up towards yearend in the major currency markets when people are
squaring their books they are really - this is not a kind of currency that
they go long on. They make their basic plays on the Yen and on the Euro
now.
So I think that what you are going to see going into the new year is a
resumption of the bearish condition of the US dollar index and if we break
80, then there is going to be a rush to the exits and the Canadian dollar I
think this time will be outperforming on the upside because the forecast
that was in there was that the commodity prices were now about to give up
their gains of the year, that was all speculative froth and
everything...hasn't happened and I think the markets are going to take note
of that.
And finally the bond market once again as soon as we get some good inflation
numbers what we get is a terrific rally in the long end of the market so
that this hedge that I recommended that you put on where I said that the
long zeros were a nearly perfect hedge inverse correlation to mining stocks
and oil stocks to the extent that you consider that copper and gold and oil
are "inflation assets", I would debate that to some extent, but I believe
they are perceived that way in the market, what you can certainly say about
a long zero it's definitely a deflation asset. I mean the long zero loses -
if the economy is strong, the long zero loses bigger if inflation is strong.
So when we get a day like today when there's still these lingering doubts
about the strength of the economy - because if you look at those retail
sales numbers that had people dancing in the streets and sending the DOW to
an all-time high, one of the big things that led the list the biggest
consumer growth area was sales of consumer electronics. Now the only ones
of those that are still made in the US are those that are being repaired by
people from ones that were made abroad. So that what you've got was that
this was the suggestion of the tremendous strength of the US economy, when
what it does is that it testifies to the strength of the US trade deficit
and therefore will therefore show up absolutely certainly when the trade
deficit numbers come out which is the kind of thing which will concern the
dollar.
So, putting this together I still believe that you keep your hedge on,
because you don't even have to pay the insurance premium. And I have the
feeling that something is going to go wrong for the Dollar in the next few
months. There's just too many things wrong here and if Beijing and Tokyo
decide that they are prepared to let their currencies appreciate somewhat,
in other words if this trip to Beijing is successful, then the dollar is
going to fall and we'll be back up to the $700 mark on gold. And if it
happens quite suddenly what we could have is one of those financial events
where we have a major stock market sell-off, consumer confidence gets
knocked and then what we have is one quarter or so of zero or negative
growth. And then there is the perception that the central bankers of the
world are going to have to reverse their strategies.
That is going to be the beginning of the next commodity bull market which we
talk about.
