This week’s Up and Down Wall Street looks at a recent analysis out of QB Partners. They are a hedge fund run by Lee Quaintance and Paul Brodsky.
QB put together an analysis of the US dollar, and why its ongoing wekaness is both significant and ongoing. In their analysis they see the buck ultimately endingits run as the world’s reserve currency.
The heart of the analysis is the quandry left for the current Fed chairman Ben Bernake by new PIMCO flack and former Fed Chair Alan Greenspan.
Poor Ben is confronted with a long term Hobson’s choice: tighten the monetary and credit screws to
bolster the dollar, go the other way — loosen credit and lower rates even further to prop up asset
prices. Why is this no choice at all? Because History has taught us the Central Bank will continue to "inflate the money
supply and promote more credit, thereby sustaining asset prices at the
expense of the purchasing power of the dollar."
Here’s an excerpt:
"That may seem the downward path to financial and
eventually economic rack and ruin. But such a trivial consideration has
never deterred Washington. You don’t have to swallow whole QB Partners’
gloomy diagnosis and prognosis for the beleaguered buck to find it
valuable as well as provocative. Even though we agree there’s plenty of
sliding room left for the greenback, we’re not convinced the outlook is
as apocalyptic as the duo contends . . .
The pair point out that the vigorous monetary
inflation manifest in the 30% decline in the value of the dollar in the
foreign-exchange markets since 2002 is seeping inexorably into the
economy: "Prices paid in the U.S. for goods, services, financial
assets, real-estate assets and natural resources have risen in recent
years significantly more than population growth and organic demand."
They then cite the findings of Shadow Government
Statistics, an independent research outfit, that "U.S. prices have been
increasing at annual rates ranging from 8% to 11% since 1996. This
contrasts with the Bureau of Labor Statistics’ core CPI, which has
risen in the 1.5% to 4.5% area."
And they comment drily that most Americans likely
"intuit their rate of inflation more in line with the higher
‘unofficial’ rate than" the conveniently low numbers calculated by the
Timely, too, is their take on our increasingly
leveraged markets, the inevitable result of all that cash and credit
the government is so sedulously pumping into the economy. "Levered
funding," they warn, "gives the public markets an embedded tendency to
fall faster and harder than they otherwise would."
Leverage, they point out, enters markets leisurely
but can exit quickly and violently. Might keep that in mind when some
shill next tells you there’s just too much liquidity around for stocks
to ever go down."
For those of you who prefer Happy Talk to chatter of this sort, there’s always USA Today . . .
The View From Mars
Barron’s May 21, 2007
UP AND DOWN WALL STREET