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Re: Trade Deficits & Strength Of The Dollar

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By EddieLuck
October 19, 2006

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Looking back through my last post, it seems that it needs some clarification. There is no certainty that the water temperature is below 32 yet. Who knows? The deficits could go to 10% for five years for all I know. These things are impossible to predict. What I am sure of though is that we are inexorably approaching a point of instability as the deficits steadily grow larger.

The current account deficit graph over the last ten years is just horrifying, as are many other graphs showing the results of the ongoing dollar credit bubble. I have a collection of them which I look at whenever I am tempted to get substantially out of cash, short treasuries, and precious metals.

The credit bubble is the underlying monster which will eventually (but who knows when?) devour our markets as others have done in other countries lately. Think Japan, Thailand, Korea, Argentina etc. When the reversions to the mean get going in earnest, the effects on the various currencies are hard to predict. Look at how well Japan's currency held up during the last fifteen years while the Japanese made Easy Al look like Scrooge himself as they tried to get out from under their credit bubble collapse by printing Yen in unbelievable quantities, dropping their interest rates to zero, and bringing the Japanese National (govt.) debt to a much higher level than any other developed country. A level (about 150% of GDP) which may yet prove to be impossible to reduce and which may strangle their whole economy one day if rates rise enough. Even while this was going on, they had to buy dollars to hold the yen down enough to keep their export machine alive. Unbelievable. The forces at work in foreign exchange are huge and inscrutable with all the CB meddling going on and the massive speculative float. Who can predict these markets? The hedge funds are all over the map this year with currencies, winning and losing fortunes.

There is one sure long term bet that I am convinced you cannot lose on in these not-so-rare circumstances, and that is gold bullion. It doesn't take any brains or original thought to see that gold is sure to be relatively safe in the context of a gigantic credit bubble like the one we are experiencing, especially when the credit is being generated in our own currency. The Japanese holding gold in 1989 didn't make any killing, but their investment held its value through it all. The Koreans holding gold in 1997 did very well indeed.

If and when signs of serious strain show up in the credit machine, I'll be backing up the truck to get gold. In the meantime caution is the name of the winner's game I believe. By the way, I dumped some of my Asian funds the last two days because they had gone up so fast I got scared. The pundits all say dump your losers and hold your winners but that's just BS to me. That's not buying low and selling high, is it?

Good luck,

Ed.


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