By Clyde Harrison –
CHICAGO (ResourceInvestor.com) — Leo Malamed is known as the Father of the derivatives market. I started in the investment business in 1968, so I was around when the baby was born. In 1968, the Mercantile Exchange wasn’t well known as they only traded eggs and pork bellies. The Exchange being made up of capitalists, were willing to try to trade anything. They tried to trade potatoes and they tried to trade turkeys. Neither one flew.
Leo Malamed and his family escaped Nazi Germany when he was 7. His father was a mathematician. Every time they fled to a new country his father would explain the new exchange rate to Leo. Before coming to the United States they lived in Japan. Leo’s father explained that the official exchange rate was 100 yen to the dollar but on the black market; the real market, you could get 300 yen to the dollar.
Leo had developed an interest in trading and currencies.
In 1979 Leo was convinced the Bretton Woods Agreement was disintegrating. Milton Friedman had written many articles on why Bretton Woods would fail. Leo set up a meeting with Milton at the Waldorf. He told him of his idea to trade currency futures at the MERK. Milton responded by immediately standing and embracing Leo stating, “it was a wonderful idea.” Leo asked Milton to write a paper on the benefits of currency futures as a hedging vehicle. Milton said he would, but he reminded Leo he was a capitalist. Leo wrote Milton a check for $5,000 and the rest is history.
Currency trading, the dollar, gold, oil, trade deficit, budget deficit, interest rates…. none of them matter to the value of the currency. There is no correlation to the foregoing and the value of the dollar.
Oil is going higher until there’s a bounty on caribou, you can see an oil rig from every beach in California and there’s a drilling rig in Barbara Streisand’s yard.
In the 60’s, we had a trade deficit with Japan. The exchange rate was 300 to the dollar. Every year we’ve had a trade deficit with Japan and today the exchange rate is 105 to the dollar; a 60% plus decline. If you add up all countries trade deficits, you would find that the earth has a 100 billion dollar trade deficit with the moon. The numbers are garbage. If you use them for investment decisions you will have to eat cat food when you retire. What about budget deficits? US debt to GDP is 55%. France is 70%. Italy is 110%. Japan is 140%. There is no correlation. The regulatory nightmare in the US is heading for the critical stage. In Europe it’s past the critical stage. Who would want to start a business there? It’s so expensive to fire someone businesses don’t hire anyone. They go over seas.
When Russia collapsed, the third world discovered capitalism. Capitalism is easy to understand, it’s nature with a balance sheet. If you’re wrong, you go broke instead of being eaten.
India and China contain 2 ½ billion people; 9 times the population of the US. They use 2% of the world energy. We use 25%. They have 13.5 million autos vs. 130 million in the US. They have 280 people per car. We have 2 people per car.
As real incomes rise, demands for raw materials increase.
In 1900 in the US we used one barrel of oil per person per year. By 1970 we were using 27 barrels per person per year.
In 1950 when Japan started to industrialize, they were using one barrel of oil per person per year. By 1970, they were using 17.
In 1965, when South Korea started to industrialize, they were using one barrel of oil per person per year. Today they use 17.
Currently, every country south of the United States uses 4.5 barrels per person. China uses 1.3 and India uses .7.
In 1950, Japan’s per capita income was 18% of US per capita income. Today, Japan is 96%. In 1965, South Korea per capita income was 16% of the US. Today, they’re 53%. India today is 11% and China is 8%.
These figures include normal government inaccuracies but the direction is undisputable.
The demand for finite resources is increasing exponentially with rising standards of living.
Asian countries, excluding Japan are the growing entrepreneurial countries. They will have the stronger currencies.
Currency values are the markets perception of future government policies and central bank actions.
Government policies are determined by politics. The definition of politics is the advance auction of goods that have not yet been stolen.
Democracy, at it’s base is Mob rule. Many uninformed voters choose the guy that promises the most. They forget that whenever the government does something for someone it must do something to someone.
Bush Sr. simplified taxes. Now we only tax the living and the dead. Clinton promised to tax only the rich. Once in office, he defined rich as, “Those Americans with Indoor Plumbing.”
The demands of the majority are always greater than taxation alone can provide and that’s where the Fed comes in.
When the Fed was created in 1914, government was 8% of the GNP. Today, it’s 37%.
God, who created everything, only wants 10%.
Since the creation of the Fed, the dollar has lost 97% of it’s value. The value of the dollar has dropped 37% since Allen Greenscam took over.
Guns and Butter have returned. The result will be stagflation and a lower dollar.
Allen Greenscam and the Fed are planning to drop money from helicopters if necessary to keep the economy from collapsing under the weight of the debt.
The last central banker to get it right was Joseph, in the Bible. Seven good years followed by 7 bad years. I thought central planning was totally discredited when Russia collapsed but Greenscam and the Fed keep trying. The Fed is like the post office giving out money instead of stamps. Faith in the Fed is based on elaborate mathematical models relying on the breathtakingly faulty assumption that human beings behave rationally.
Greenspan’s invisible hand of intervention is trying to keep interest rates as low as the world will allow. But the world is becoming a bit nervous. The US has borrowed over $1 trillion from overseas. Some day it will be repatriated. The exchange of paper for wealth will go into reverse. We will get our paper back and have to return real wealth. Recently, the dollar has been rapidly declining against the euro and gold but at a much slower rate against the Asian Tigers.
Japan and China have purchased massive amounts of US treasuries to stem their decline. They loan us money to buy their products because they need the US as a customer. When will this end? When the Asian Tigers develop a consumer credit system and their three billion plus citizens become the customer. At that point we will no longer be able to live beyond our means – the dollar decline will accelerate and interest rates will rise.
The dollar has instructions in Faith right on it, “ In God We Trust.” Placing your faith in the Fed could be a dangerous plan. Prior to the creation of the Fed, the worst bank panic caused 2.8% of the banks to fail in 1873. Following the creation of the Fed, almost 50% of the banks failed during the 30’s. The Fed made a local problem national – now the problem is global, a brilliantly executed, bad plan. Someday, the dollar could fall to its intrinsic value. Denial is not just a river in Egypt. Currencies do not float, they sink at different rates. Currencies are abstractions not redeemable in any specific amount of anything, they are an I owe you nothing certificate.
If you’re using government statistics to follow the economy, they’re useless. The GNP and the CPI are hideously weighted and stupidly adjusted. The government assumes that if the price of energy goes up we will burn computers to heat our homes because their price went down.
Last year if you didn’t buy a home, didn’t use energy, didn’t eat, didn’t see a doctor, didn’t buy insurance of any kind, didn’t have a child in college and didn’t pay local or state taxes your family price index agrees with the governments.
I wish I could seasonally adjust my checkbook.
Since the Feds creation there has been deflation – deflation of the currency. It shrinks on average 2.5% to 3% per year. In the US, we have voters who are deep in debt. Deflation would crush the voter. Currency deflation will help the debtor. Expect stagflation – the value of the currency goes down while the economy goes nowhere; an, “L” shaped recession.
Prices will be lower for every thing that can be manufactured in China or serviced in India.
Prices will be much higher for what can only be made in the US; medical care, insurance, plumbers, trash collection, raw materials, real estate, and government.
In the next 10 years, the government will lie about the deflation of the currency so, (when the baby boomers retire) their social security check will be worth half of what they anticipated in real terms.
When the Fed fine-tunes, the orchestra gets fired. All soft landings by the Fed have resulted in thousands of casualties. Ever since the earth was cooling the Fed was headed by a banker. Greenscam is the first economist. Karl Marx was an economist!
If you believe Alan Greenscam and the Fed guides the economy you must also believe the twelve birds sitting atop the rhinoceros guide him through the jungle.
Recently Allen stated interest rates are a conundrum. Which in English means the head of the Federal Reserve doesn’t understand why long rates are declining while he raises short rates.
From now on I will refer to him as Allen in Wonderland. His answer to any and every problem is to print more money.
I expect the dollar to stay in a trading range like the last 6 months. And sometime in 2006, when we’re in the next recession, the Fed will lower rates, print, and the dollar will head to new lows.
The Federal Government and the Federal Reserve are completely incapable of keeping tomorrow from coming.
Mr. Harrison is the Founding Member of Beeland Management Co., L.L.C., which manages the Rogers Raw Materials Index Funds.
Source: Resource Investor