There’s a new war going on these days. It’s a war on “all things defensive.”
In bad times, money runs toward defensive assets. Central banks and governments know this.
However, as a central bank if you’ve shot all of your interest rate reduction bullets at the market and you’re out of ammo, you have to get a new weapon.
So what if you could engineer a way to make most all-defensive assets look like bad choices? Then money would have to run back into the riskier, offensive assets.
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What are the riskier, offensive assets? Most commonly stocks but also real estate. What are the defensive assets? Gold, silver, the Swiss franc, Japanese yen, U.S. Treasurys and the U.S. dollar.
Friday, gold dropped more than $100 an ounce and silver dropped more than 19 percent at one point that same day. What’s going on? The margin clerks keeps raising the margin requirements on both the initial and maintenance margin levels required to invest in gold and silver.
As investors can’t continue to meet the newly raised requirements it causes selloffs to happen. That’s a great way to put a damper on some of the best defensive assets out there. Not only is the U.S. playing this game, but so is China. They’re raising requirements right along with us. So gold and silver are getting hit on a couple of fronts.
We know that the Swiss have tried to put a ceiling on how high the Swiss franc can go by intervening aggressively in their currency. This makes the Swiss franc not a great choice now either.
Then there’s the Japanese yen. Japan has intervened in their currency too. In fact, on one occasion, many members of the G-7 joined in and helped them to sell the yen. So that makes buying the defensive yen a dangerous venture right about now too.
Of course, we know that really U.S. Treasurys are a bad investment because they are backed by the “hot air” of a government that is debt-laden. Within a few short years, they won’t even be able to afford to pay their creditors the interest and that’s going to cause a huge lack of faith in our Treasurys.
But for now, they’re an acceptable option because all stock investors know to do when stocks are heading south is to run to Treasurys. So as long as stocks fall, Treasurys will be an acceptable option.
Then there’s the greenback. We know that the buck is in a long-term downtrend. That’s not going to change.
Ever since the creation of the Federal Reserve, our dollar has been doomed. But the pace really picked up when we went off of the gold standard in the 1970s and it hasn’t looked back ever since.
Now, with that said, the dollar does have “bear market rallies” from time to time and we’re in one of those right now. Why? It’s one of the only defensive choices left. In other words, it’s one of the “least meddled with” defensive choices out there right now.
I believe this is all being very strategically orchestrated right now.
If you can make all other defensive choices look bad but the dollar and Treasurys look good, then it will cause foreigners to still want to buy our debt — for now. At the same time, when the dollar is influenced higher, it causes commodities (which are priced in dollars) to head lower, thus attempting to lower inflation — for now.
If they could somehow keep interest rates low and inflation from going out of control, they stand a decent chance of reviving the stock market. That’s their thoughts, in my opinion.
Will it work? In the short-term, it may and it can be profited from by currency traders. But ultimately, you can’t engineer these Band-Aid situations and expect those to be permanent solutions.
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Ultimately, these problems have been brought on by poor fundamentals (for example, uncontrolled government spending).
Until these issues are looked squarely in the eye and addressed, things won’t change.
In order to do this, it would take a lot of political will that I’m still not convinced is there just yet. Also, it would take T-I-M-E. In fact, it would take many, many years. There are no quick-fixes like politicians like. They’re out of those.
This will all cause stocks to continue to fall for a while longer. As that happens, the dollar will continue to be a good “temporary” choice.
Once the stock rout is over, there will be some great fundamental choices out there that are trading at fire-sale prices, such as the commodity currencies: Australia’s dollar, New Zealand’s dollar and Canada’s dollar.
But until then, the dollar gets its temporary “bear market bounce.”
About the Author: Sean Hyman
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