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July 20, 2011, 10:09 a.m. EDT
By Todd Harrison
"I know what you're thinking; "Did he fire six shots or only five?" Well, to tell you the truth, in all this excitement I kind of lost track myself." -Harry Callahan
NEW YORK (MarketWatch) "” The more things change, the more they stay the same.
I shared some foresight in September 2007 and while some might view the vibe is out-dated, I would humbly counter that it's not only relevant; it's increasingly cumulative in cause and effect. See: Russian Roulette.
And I quote:
"After years of focusing investor attention on the risks of inflation, the market demanded "” and the Fed delivered "” a policy shift designed to alleviate credit market pressures.
In doing so, they effectively told foreign holders of dollar-denominated assets that every nation must fend for itself. That, when push comes to shove, the devil we know "” inflation "” is more palatable than the devil we don't.
As the dollar slips to multi-year lows, it is incumbent on us to understand the implications of this policy sea change.
First, it would be helpful to familiarize ourselves with the underlying basics of the dollar dynamic. Kevin Depew wrote a fantastic primer that should be required reading for anyone trying to get a better grip on the subject. See: Five things you need to know about the dollar.
For the last few years, while hiding behind the beard of hawkish vernacular, the FOMC has printed and pumped massive amounts of money into the financial system. That liquidity, while providing a rising tide for virtually every asset class, has come with a cost.
It's been my long-standing belief that we will continue to toggle between "asset class inflation" and "dollar devaluation." While both could manifest, I don't foresee a scenario that includes both a stronger dollar and higher asset classes.
The Federal Reserve, if given the choice, would opt for hyperinflation over watershed deflation. With inflation the rich get richer, the poor get poorer, and the middle class steadily erodes. With deflation, everyone loses. See Pick a Side: Inflation or Deflation .
Wasn't it Billy Ray Valentine who said that the best way to hurt rich people is by turning them into poor people?
We've been monitoring this evolution since 2002, opining that the 30% run in the S&P has been masked by the 33% decline in the greenback. That hasn't mattered to "us" but it's the central tenet of foreign angst and a seed that will sow protectionism and isolationism.
Think about it "” if you're a foreign central bank that bought the S&P in 2002, you've lost money on the margin. That's the chief beef with the dollar being the world reserve currency; while we're enjoying the benefits of our economic "expansion," they're sucking wind in local currencies.
That may seem like an obtuse perspective but it's pertinent in the context of the globally intertwined economy. Americans have been slow to embrace the notion that our basis of valuation is eroding. We earn, spend, and save dollars so, apples to apples there was little impetus to pay attention.
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