Thursday, July 30, 2009

Why I think the dollar will rise for a long, long, time....



Here's my new video with a very contrarian forecast on the dollar!



4 comments:

Matt Franko said...

Mike,
Great insights. Another factor may be a reduction in use of petroleum products much of which we import. You once thought about this on your show where you projected that US consumers would start to view gasoline from petroleum as sort of dirty and unhealthy, polluting, etc...and would seek alternative fuels. 9 million bbls/day of imports at $50 per bbl would mean perhaps another $15B per month of USD "staying home" if we go biofuels.

Resp, Matt

Mike Norman said...

Yes, that is likely to happen, too. Good point as always.

tarun said...

But, where will they spend there USD reserves? They are buying stuff to fuel their growth internally ... are they really going to buy goods and services from the USA or from other countries ... Brazil is the largest exported to China now ... not sure if they want to deal with the Russians and China and India have never gotten along ... so, between the Chinese buying stuff from Australia and Canada (commodities) what else will theyt buy from the USA? Companies that own resources and manufacturing facilities with special IP is my bet ... So, can elaborate on the Goods and Services that China may want to purchase? A no brainer is infrastructure plays ... but I doubt that they will buy stuff from Haliburtin ... in any case, a string dollar is in the interest of the Chinese .. thanks.

tarun said...

Sorry about the typo's ... one more point: So, we have a clue as to what the Chinese are doing with their Dollar Reserves (from John Mauldin) -->

The important news out of China this week was the assertion that China was getting ready to use its massive $2.2 trillion reserves. From the Financial Times:

"Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country's premier, said in comments published on Tuesday. 'We should hasten the implementation of our "going out" strategy and combine the utilization of foreign exchange reserves with the "going out" of our enterprises,' he told Chinese diplomats late on Monday. Mr. Wen said Beijing also wanted Chinese companies to increase its share of global exports. The 'going out' strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China."

This is a very big deal, and from the Chinese point of view, quite smart. Right now they are stuck with $2 trillion in US Treasuries, agency paper, etc. They can't sell their dollars without really hurting the dollar, thereby forcing the renminbi to rise and hurting their own exports. But they, and much of the world, feel that the US is pursuing policies that are going to be harmful to the value of the dollar and therefore to China's largest reserve exposure.

What to do? Take those dollars and buy physical assets. Companies, natural resources, maybe a few small countries.

In the card game called Old Maid we played as kids, the loser was the one who ended up with the "Old Maid" at the end of the game. For the past decade, the Chinese sent us "stuff" and we sent them dollars in the form of electrons. They in turn invested those dollars in our debt so we could buy more stuff. It was a form of vendor financing.

And now the Chinese have apparently decided to pass the Old Maid of the dollar on to other parties, who will sell them their assets for dollars. Seriously, did anyone not think they would do this? Massively selling the dollar, which so many conspiracy-theory types keep saying they will, was never really a rational option. But using those dollars to acquire productive assets? Very smart, very rational. If you figure out what they want to buy and get there first, there are profits to be had. Attention should be paid.

$2.2 trillion in reserves and growing can cover a lot of economic sins and bad bank loans. It can buy time for the companies with too much production capacity in China to find new customers. Will it be a smooth ride? Of course not. There will be a lot of bankrupt companies and a lot of angst among the entrepreneurial class. That is part of the process. But in five or ten years, China will be larger and stronger than it is today. Count on it.

That being said, is it likely China will pull the world out of its current slump? Not for a while. China is just 7% of global GDP. Even if they grow at 8%, that only adds 0.5% to global growth, and it is likely that we will see global GDP shrink by 2.7% in 2009.

From me: Thus, China will use it's USD Reserves to fuel it's GROWTH! Brilliant!! The revenge of communism! And that too .... Two Trillion is 2 X 1000 Billion!!