Bill Fleckenstein: Is the US stumbling into a currency war?

Contrarian Chronicles10/1/2010 5:02 PM ET

Is the US stumbling into a currency war?

The Fed is weighing how to push more money into the economy, and, given the central bank's record, that's bad news for the dollar. Gold, anyone?

By Bill Fleckenstein
MSN Money

As the country's economic and financial woes refuse to recede, the worst-kept secret is that the Federal Reserve is going to engage in another round of quantitative easing, which I have come to refer to as QE2.

What actually is not known is what form said QE2 will take. "Fed mulls new bond approach," a story in the Sept. 28 Wall Street Journal by Fed reporter (and mouthpiece) Jon Hilsenrath, suggested that our central-bank powers that be have not decided exactly how to implement its QE2. According to the article, any Fed action to push money into the economy would likely be on the small side, yet over a longer period, as opposed to a large, short-lived "shock and awe" approach.

This story is something of a wild card, because one could interpret it as forecasting that the Fed will have tighter purse strings than one might have imagined. On the other hand, it portends that whatever "solutions" the Fed comes up with will be more permanent and therefore actually more stimulative in the long term.

Death by a thousand paper cuts

No matter how you look at it, the Fed's track record has proved that the outcome will not be good news for the dollar. At first glance, this might appear to be an issue of concern only to Americans, but the news last week proved otherwise and perhaps a bit more.

Even more important than Hilsenrath's article was an above-the-fold column Sept. 27 in the Financial Times headlined "Brazil in 'currency war' alert," in which Brazil's finance minister declared: "We're in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness."

The article notes that various countries (i.e., Japan, South Korea, Taiwan) had intervened to help weaken their currencies and acknowledges the generalized weakness in the dollar.

The same issue of the FT also covered a large related story, "Hostilities escalate to hidden currency war," so this is a phenomenon I suspect we will hear more about.

What quaintly was referred to in the old days as beggar-thy-neighbor policies of debasing one's currency to benefit exports is certainly under way, and it will be illuminating to see what occurs on this subject at the Group of 20 global finance meeting in November. My expectation would be that this will be problematic and that it will be difficult for the attendees to put a smiley face on it. (Got gold?)

London calling

While all the talk of QE2 and currency issues might have been expected to prove beneficial to precious metals, their reaction to these articles was initially to yawn (actually, sink). However, something occurred in the gold futures market last Tuesday that is definitely worth noting.

A very well-connected friend of mine (and longtime commodity trader) called me that morning to point out that an unusually large trade had taken place very early in London to the tune of more than 8,600 futures contracts. As he noted, this was approximately a $1.1 billion sale, but, significantly, it didn't really cause the price of gold to fall much (as it would have in the past). In fact, by the day's end, gold had recovered all of that morning's losses and gained 1%.

My friend brought this to my attention because the current sentiment seems to be that the gold market is crowded and that the first time a big seller appeared, the price of gold could be expected to drop $25 or $30 immediately and then go into an even bigger slide. Thus the fact that this huge trade could be absorbed so easily was an indication that the gold market was potentially deeper than a lot of people had thought (my friend included).

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These conclusions are all sort of theoretical, but so is the thought that the gold market is crowded. Nonetheless, if a trade that size was on the up-and-up and not some completely coincidental bit of noise (which would be hard to imagine), it is bullish in the sense that it does show increased market "depth" in gold, contrary to what used to be the norm.

This development would be a big plus in attracting very large investors who may have been worried that the gold market was too thin (i.e., that it lacked the liquidity necessary) for them to get involved.

On the air

Finally, last week I participated in a wide-ranging discussion of macro-economic topics in my continuing series of interviews with Eric King. Interested readers can listen to it here.

At the time of publication, Bill Fleckenstein owned gold.

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14Comments
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First a currency war, then a tariff war, then a trade war, and then.............

Think about it.  Taiwan is hosed.


10/06/2010 8:23 PM
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As proof of the large scale and widespread corruption in the financial system, a reminder of recent history:

 

Raters Ignored Proof of Unsafe Loans, Panel Is Told

http://www.nytimes.com/2010/09/27/business/27ratings.html?th=&emc=th&pagewanted=all

 

These people and the rest of America will be even when they finish paying off their FULL debt to the nation (not just TARP).

10/04/2010 3:18 PM
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a Billion dollar sell bid would only prove that on that day the market had that much depth, not how much depth was left after the trade. One could conversely say that the Gold market is 1 billion dollars thinner than tuesday.
10/04/2010 12:48 PM
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In reference to the Soc Sec comments (which only indirectly relate to this article on the dollar)

1. Social Security has always been a pay as you go system

2. The "lock box" concept came from the Reagan era when SS taxes were jacked up 25%

3. Social Security is completely irrelevant to current Federal deficits.  But will come into play for future deficits.  If a politician talks of addressing the current deficit via Social Security then vote for someone else.

4.  If the Baby Boomers are the 800 pound gorilla in Social Security discussions then there is a 2000 pound gorilla hiding around the corner.  Businesses pay far more SS taxes than they do taxes on profits - "follow the money"

10/04/2010 12:26 PM
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So, what happens or could it happen if Gold's worth drops overnight? You would end up with the US $ worth nothing and Gold worth nothing, and then if Inflation kicks open the Back Door or Deflation decides to come unannounced to the Front Door, then what do you have? A Major AfterShock?Maybe there will be continued value in Gold as long as the US $ is devalued, but I am glad for all of you Gold Bugs, but I don't see investors buying into Gold with prices per ounce so high, but hey, maybe I could be wrong.
10/04/2010 12:16 PM
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Bill is bashing the Fed and urging people to buy gold....that is about as fresh as a Foghat concert.
10/04/2010 12:06 PM
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The Massive spending programs and Deficits are driving up gold, oil and silver to record levels. These commodities will continue to rise as long as the Deficit is Trillions of dollars and the stated policy of the Fed is to stimulate exports through a weaker dollar.

It's common sense to me and to alot of pension plans that are now adding GLD and SLV to their portfolios to protect the pension recipients from further stock market losses.

10/04/2010 10:31 AM
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MR. Fleckenstein, you sir, are the only one that has any brains and uses logic and common sense amongst all the so called journalists on this site, as well as the guts to report it. Keep up your outstanding work and reporting. Well done sir!
10/04/2010 8:23 AM
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Zeebart,

 

When you run a giant pyramid scheme, like social security, none of the money is ever saved or invested.  You are always paying the people at the top with the contributions of the people on the bottom.  Eventually all pyramid schemes fail, that is why you go to jail if you try to set one up.

 

Sorry, but that is WHAT SOCIAL SECURITY is.  So maybe is should be called social insecurity...  Sure you can keep the pryamid scheme going longer by raising the bar ever higher...but eventually it will collapse, because all the monies we have put into it have already been PAID out to someone else.   The BLAME for the fiasco is entirely FDR, and his swindle (new deal)...  Remember that when you vote...

10/04/2010 4:28 AM
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bottom line how much money has our government taken from the american people and given to other countries but for some reason did not ask or inform us of what they were doing until it was to late  now  we bailed out  banks  the stock  market  ect ect  then turn around and say SS IS GOING TO RUN OUT OF  MONEY  what happen to the money  it was there years ago  its  like putting  money aside in your  kids collage fund  its there for years you have a problem  borrow from it  but  never pay it  back  then tell your kid  its his fault  that you had to borrow  the  money  and  never explain how it was there fault  sounds like the government to me  how  can they take  your retirement  money without asking you if they can  you the american people put it there ea week  thinking it was  safe   we need to get control back  the government is so far off from  real life ask one of them how  much is a gal of  gas or a gal of milk ect ect  i would bet that most of them  don't pay the bills we do they are all on expense accounts  its time we get america back  before its gone  or maybe its already to late  the man who is in charge is not the problem its the ones who put him there  that we need to  watch  they the people who  put  mr  obama  in office  the tea party is on the right track but if you see congress is going after the young  americans  not the older ones  the  ones that can see we caused a lot of the problems  we thought it was ok to believe the government   well kids we messed up learn from our mistakes vote out the old government  and get new  blood in there less lawyers  and more real people  they have brain washed  us  give them a little  more time  and they will be telling  you  what to eat  where to sleep what to buy and what you watch on tv  and what books you can read   think i am nuts maybe  but look  at how much freedom you have lost in the last ten  years  smoking yes will kill you so will a lot of things in the real world but let it be your choice not there's they drive the price up  so high  thinking this will stop people  no no now instead of buying a car  food  a new tv   they buy cigs  what it cost for a heavy  smoker today  they could  of been  making payments on a new car   or bought a tv  putting money back into the economy
10/03/2010 6:36 PM
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Look at the full scope of this world. We as people can't bring the 3rd world up to our standard so the kings of this world will have 2 classes of people only.    workers an Kings

10/03/2010 5:21 PM
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Mr. Fleckenstein,

 

The 'currency war' the Fed has been waging on the US dollar is going on its 10th year. Go to CNBS ( woops cnbc ) and type us @ dx (all one word ) in the ticker symbol box ... to get an idea of how the Fed has crushed the dollar in a decade.

 

Is this a 'suitable reason' to be long gold in the Fall of 2010?

 

Certainly Mexico's central bank doesn't think so ... which is why Reuter's noted this bet ... google 'Mexico cenbank dollar put.'

 

For those that scratch their head concerning selling/buying puts/calls in the forex market ... let me just say ... the reuter's article implies the US dollar is about to strengthen ... at least ... Mexico's bankers think so.

 

Which is bearish for gold.

 

Bernanke has finally taken the US economy to the 'leap of faith' moment ... where inflation finally becomes evident in global crude oil ... as demand for the commodity outstrips supply ... and Mexico knows it because Mexico knows all about oil as Mexico is a major exporter of oil to the USA ... which is why they made the dollar bull bet ... betting that Bernanke will finally cave in ... and let the USA stock market sink ... which will stengthen the US dollar .. as money runs out of the stock market and into the currency.

 

Say why again?

 

Bernanke is doing everything he can to keep the 'status quo' intact ... but the longer he delays the 'restructing of the global economy' away from crude oil usage as a transportation fuel ... the more drastic the change will be .... when it occurs. In the USA ... ditto for the Euro currency ... and Japan ... all currency units are completely dependent upon foreign oil imports ... and Bernanke knows it ... and doesn't want the oil exporters to get the upper hand on the USA ... for Bernanke knowing as such.

 

But like I said ... Mexico knows otherwise. Ponder that thought with one last head scratcher ... Just because they're Mexico doesn't mean they're not out to sell you muddy water in Tijuana and tell you it's light sweet crud.

 

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Larry Summers, chief of the Obama economic team, said his goal is to export our way out of this recession by devaluing the dollar...so it's not a big secret. What is amazing is how long it has taken for investors to realize commodities like gold, oil, silver, etc. will rise accordingly as Bill Fleckenstein has written time and time again.
10/02/2010 5:49 PM
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The U.S. has been in a "war" ever since free trade became the law of the land. It just failed to understand that it was losing it.

 

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