Richard Russell talks about the sliding dollar - Dec 1 03


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Subject: Richard Russell talks about the sliding dollar - 12/01/2003

Subject: Richard Russell talks about the sliding dollar - 12/01/2003

From Richard Russell's 12/01/2003 letter.
So far, the stock market has paid almost no attention to the sliding dollar, and I take this to mean that the stock market sees no problem with a SLOWLY declining dollar. A "lightly and politely" declining dollar makes US exports more competitive, and hopefully (and I emphasize the word "hopefully") a slowly declining dollar will not frighten our foreign holders of over $1 trillion in Treasury and agency bonds.

If our foreign creditors become "tired" of seeing their US holdings slowly sinking, sinking, sinking, they're going to do just what you or I would do. They're going to either slow their buying of US Treasury securities -- or God forbid, they're going to actually start selling our US Treasury debt. If that happens interest rates will rise and the wheels of the US economy will start feeling the brakes tighten.

And the wise-guy snaps, "So what, so the US economy slows down, big deal." And yes, a slow-down would be OK in "normal times," but these aren't normal times. This is a US that is up to its eye-balls in DEBT. If the US economy slows down during the period ahead, we're going to have a recession that you won't believe, and if that happens the housing boom will top-out, and people will start walking away from their overpriced homes. As for car sales, forget it, the dealers will be giving cars away.

I've been saying for months that the Achilles Heel of the US economy and the stock market is the dollar. So let's take a look at the dollar. A kind subscriber sent me the very pretty chart below, showing the Dollar Index from 1970 to the present.

The Dollar Index hit a high of 165 in 1985, the year of the Plaza Accord (an agreement to allow the dollar to weaken). From its 1985 high the Dollar Index headed down by 1982 the Dollar Index broke below 80, having lost better than half its international value.

From there the Dollar Index rose to 120.80 in January, 2002. But conditions are worse now than they were at the 1985 highs. I say that because today we have twin deficits equal to ten percent of our Gross Domestic Product. Furthermore, short rates are a lot lower. And the Dollar Index is a lot lower now than it was in 1984. For these reasons, it would not shock me to see the dollar do a "repeat" of its 1985 to 1992 performance. If, for the sake of argument that does occur, then we could see the Dollar Index cut in half again, sinking to 60 or even below. Remember, these primary moves tend to go further than anyone thinks possible and last longer than anyone thinks possible.

The big question then becomes -- does the dollar decline slowly or does the dollar start to fall apart? I don't have the answer to that one, and neither does anyone else. But if the dollar does drop precipitously, that will stir up fears on the part of our foreign creditors, and if they cut back on their purchases of US securities, that's when the trouble hits -- big time.