I bet most of you are glad to put 2008 behind you, as far as the financial markets are concerned. But, for those of you who have followed us here at Moneynews.com, you've had a brighter path than most.
While many were just panicking and fretting, we were using our heads and thinking soundly in the midst of a market in turmoil. If you followed guys like David Frazier, editor of The ETF Strategist, Michael Carr, editor of Superstar Stock Screens, and myself throughout 2008, then you know that you bucked the norm and had a leg up on the crowd.
I certainly hope to repeat that success in 2009. If you followed my predictions for what will go up in 2009 (If the Dollar Loses in 2009, Who Wins?), then you know that I'm bullish on the Australian dollar. Now let's talk more about why.
Last year brought about a deleveraging process and a deflating process. It was unfortunately needed to take the froth and the excesses out of the market. It did that, almost too well.
However, central banks around the world worked overtime in the latter part of 2008 to bring a halt to deflation and the global slowdown. My bet is that they will be successful. Here's why.
Many people want to compare what's going on now to the Great Depression. However, there are some differences. For example, how the government is responding to the crisis. In the Great Depression, when stocks started to fall, the government raised interest rates, raised taxes, and imposed trade barriers.
This time around, we have the same landslide in stocks. However, the government lowered interest rates aggressively. They've put one stimulus package into the economy with another on the way shortly.
Also, while the Obama administration will eventually raise taxes, he says he's not going to until we are out of the woods economically. Another smart move. And thirdly, we are not erecting barriers to global trade. In fact, there have been more trade meetings this year with global leaders than is typical.
That's why this is not going to turn into another Great Depression. The government wants to make sure it doesn't repeat the gross mistake that helped to bring on and extend the depression.
Not only has the Federal Reserve and Treasury been working overtime to get rates lowered, but they've been pumping money into the economy. The Treasury also has been working closely with the Fed to use its powers in the TARP program to ease the pain as well.
They are doing the right things in order to turn things around. However, as I've said many times before, economies turn around like ships, not like speed boats.
The Fed has also used its influence as being the world's leading central bank to rally the other central banks around them and team up together against global deflation. This "collective easing" by all the major central banks around the world and the money that they've pumped into their economies will eventually re-inflate the economies and turn the deflationary period back into an inflationary one.
Lately, some savvy institutions have been doing what most retail investors are scared to do. They've been easing out of bonds and the U.S. dollar and yen and back into stocks, commodities, and higher-yielding foreign currencies that are presently higher than the U.S. range of 0 percent to 0.25 percent.
Why would they be doing that? The CRB index (an index that tracks a basket of commodities) literally is 50 percent off of its highs right now. Gold still remains close to $200 an ounce off of its highs. Oil sits $100 less a barrel than its highs right now (bouncing around in the $30s to $40s). Copper is still 60 percent off of its highs. So it's not like these are frothy anymore.
Institutions have to be forward-thinking. They have to connect the dots. They are saying that if the Fed and global central banks are successful at turning deflation around by pumping money into the economy and cutting rates, then inflation will return. If inflation returns then stocks and commodities like gold, oil, and copper will also rise as a result.
The Fed took the lead role and has pumped the most money into its economy and also won the race to zero percent interest rates. Therefore, the dollar will be watered down and the value of the buck will decrease over 2009.
As it does, it will boost commodities as most commodities are predominately denominated in U.S. dollars.
As these commodities rise and global stocks stabilize, it will cause investors to come back into the markets with a renewed confidence. As they do, they will flee the U.S. dollar once again as they seek higher yielding currencies. The ones that could prosper the most are the commodity producing and exporting countries like Australia.
Australia is a huge exporter of gold and copper, for instance. Copper has likely hit a bottoming area now and gold never fell as hard as many other commodities, yet it's poised for a rebound as inflation comes back to the economies.
Also, as corporate growth and residential growth rebounds, copper will be back in demand once again.
Therefore, the Aussie dollar will benefit from the rise of commodities as inflation returns and it will also benefit from the dilution of the U.S. dollar as more and more money is printed by the U.S. Treasury. This gives a green light to buying both gold and the AUD/USD currency pair.
As a side note, I also believe that the Aussie dollar will rise very well against the Swiss franc too (AUD/CHF). So get ready to buy up Aussie dollars on dips.
In 2009, dollars will be sold across the board, but it's best to sell it against a currency that should be strong this year. So, buying AUD/USD fits the bill.
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