Barack Obama taking the Oval Office today , the hope for “change” he promised is running high .. but don’t expect the hope to translate into a solution to the economic problems. I correctly projected that Obama would prevail as the 44th President of the United States early in 2008, and I do believe that the best candidate won. Obama’s incredible speaking skills and natural charm are reminiscent of those wielded by Bill Clinton, but Obama promises inspiration and leadership that have been missing in the White House for many years. Undoubtedly, the U.S. desperately needs leadership and hope, given the incredibly negative consumer sentiment and daily avalanche of bad news in the media. The problem is that hope is not a strategy for success, and sadly, there’s no REAL plan developed to try and pull the US up from its current nosedive. What we do know is that Obama is planning massive deficits for several years — he’s warned deficits in the Trillion dollar range, for “as many years as the eye can see”. These deficits have to be paid for somehow, and when the U.S. needs money, there are really only a couple of ways to get it. Raising taxes is one, and you can bet that this isn’t going to be an option because of the political damage it would take on the fresh faced President. Cutting spending is another, yet we’re seeing that they’re going to try and spend their way out of this econmic problem. So where does the U.S. go to borrow money? This question was asked to average citizens in the tremendous movie, “I.O.U.S.A.” and none of them knew the answer. “We’re the USA,” one person said. “I don’t think we borrow money, we are the ones lending it”. Sad how out of touch the average person is with what’s going on! The fact is the US is the BIGGEST borrower (debtor) in the world! The real answer is that to fund deficits, the government has to BORROW it (by issuing Treasuries and selling them), or if that fails because no one will take their IOUs, then they have to fire up the printing presses and print it. But this contributes to inflation, rendering every US dollar worth a little bit less as each new bill comes off the press. I don’t care how you look at it, I cannot see a scenario in which the U.S. avoids MASSIVE inflation in the next few years. The incredible amount of stimulus already injected, along with all the spending Obama’s planning, is going to have a VERY serious effect at some point in the future. The problem is that stimulus doesn’t show up in the economy until several quarters later. So by the time it shows up, it’s often way too late, and then it actually contributes to creating bigger problems instead of solving them. In the short-term, we might see what some interpret as deflation, but that will be very temporary if at all. The reality is, deflation means a contraction of the money supply, NOT falling prices. So lower prices on some things does not mean deflation. It just means some things are cheaper right now. The money is on inflation coming, and coming soon. And with it, inevitably, higher interest rates. Is this in 2009? 2010? Hard to say for sure, but it’s headed this way, and I believe it’s inevitable. Today is certainly a memorable day to be sure. I think today is truly one of the greatest days in the history of the United States of America, because we’ve seen something occur that should have happened a long time ago. It’s fitting that Obama was sworn into office one day after the day that Americans celebrate one of the greatest American heroes, Martin Luther King. Unfortunately, the hope and optimism we’ll see in the short-term from Obama’s new administration will fall away quickly, as the reality of the problems facing him begin to mount. Expect the media to begin shining a light on the problems, and don’t expect them to be kind to him for very long. Make no mistake — Obama is certainly a step in the right direction, but the U.S. needs a lot more than just hope for change. And unfortunately, what the U.S. really needs right now is likely not what it’s going to get, because as it always does, politics will win out over sound economic policy. Obama will regulate industry, he’ll build a much bigger government than already exists in the U.S., and in a matter of time, the U.S. will realize that a new President isn’t enough to solve the problems it faces. So fire up the printing press, bail everyone out and whatever you do, sell your U.S.dollars! If Obama’s lucky, the fall out from the steps he’s about to take won’t catch up with the US until after he leaves office.]]>
8 Responses
Hi Greg,
I wanted to get your thoughts on the Bank of Canada rate cut today and how it relates to the CAD/USD exchange rate. My expectation in 2009 is that the Canadian dollar will appreciate relative to the USD, although a low interest rate environment in Canada coupled with reduced export demand from our biggest trading partner could dampen relative appreciation of the Canadian dollar. Which factors do you see as having the biggest impact on exchange rates in 2009?
Tyler
I think the current rate cut, combined with the fact that the Bank of Canada has all but assured us that they’re cutting again in March, means we may see some short-term weakness in the CDN $.
Timing currency moves is tough, and it’s only someone’s best guess because there are a lot of factors that go into what the currency is at any given moment.
However, I remain confident that the CDN$ will begin to gain strength over the next several months.
Remember that when you’re talking about currency, you’re never just talking about ONE currency .. because you have to measure every currency in another currency (and I would include gold as a measure of currency for this purpose).
In other words, the Canadian $ gaining strength will have more to do with the US $ losing strength than with the CDN $ itself.
However, since commodities like oil are measured in US dollars, as their currency erodes due to inflation, you’ll watch oil prices go up (because it takes more US $ to buy a barrel).. and that will make people feel like oil is going up.
Canada’s an oil country, and that will be seen as strengthening the Canadian economy.
The truth is that oil’s move is as much about currency fluctuation than the intrinsic value of oil itself.
So to your point, I agree that we may see continued softness in the CDN$ on the short term, but I do believe that the inflation coming is going to help drive the price of commodities up. Canada will also see stronger economic turnaround faster than the US and I expect Canada will increase interest rates before the US does, because it will be out of economic harm’s way before. And higher interest rates will attract more investment capital to Canada and to the Canadian dollar.
Yep, as history has proven, politics will most likely trump sound economic policies. It would appear the U.S. will continue to try to ‘borrow it’s way out of debt.’
Hi Deb:
Leave it to the U.S. government to try and craft a logic argument to themselves that to deal with debt problem, you need to borrow more and borrow faster.
Their only hope at this stage is absolutely decimate the U.S. dollar through inflation, and therefore destroy the debt. Problem is, you can’t destroy debt without massive inflation, which means destroying the U.S. dollar.
Hi Greg,
Thank you for sharing your points of view. I have a question…….Your Blog said to “sell US dollars”. This seems straight forward. I have invested in US dollar stocks (Coca Cola, Walmart, Pfizer to name a few). I appreciate you are not a financial adviser but ask for your opinion. Are you suggesting you would sell your interest in such stocks that are valued in US dollars?
I would REALLY value your point of view on this.
Thank you
Chris Nicholls
You are correct. I am not a financial planner.
The issue is, if you are holding U.S. denominated stocks, and the U.S. dollar falters, you will be hurt by that conversion.
In my mind, I think holding almost any U.S. stock right now, especially outside the US, is a risk that isn’t worth taking.
If you believe that the U.S. dollar faces challenges, and that oil is a long-term bull market waiting for its next leg up, to me the most logical equities to be buying are Canadian energy sector plays.
They’re paying attractive dividends, AND their prices are so beaten up they’re a relative bargain.
If you hold a US-based stock that goes up 20%, but the US dollar corrects down 20%, you’ve made nothing.
If you hold a Canadian (or other foreign currency) denominated equity that goes up 20%, and the currency moves up 20% against the US dollar, you’ve made 40% instead of 0%, compared to where you would have been in the US equity.
To be holding US stocks right now, you have to believe that (a) the worst is over in the financial markets, and (b) that the U.S. dollar is going to continue to be stable at worst, or gain strength against other currencies.
I believe neither of those things are true, but that’s just my opinion.
For the record, I am NOT into the stock market beyond about 1.5% of my net worth right now. Not only do I not have the time to really understand it properly, I also think it’s a risky place to be right now with the lack of visibility I keep talking about.
I literally own 2 stocks. One is an oil related company, and the other is Berkshire Hathaway. That’s simply in homage to Warren Buffett, so I get the annual reports and can attend the Berkshire shareholder meeting if I ever have the time when the shareholder meeting is held in the spring!
I could not agree with you more, “Hope is not a strategy for Success”! After listening to Obama talk about spending trillions of dollars to “spend” our way out of this financial crisis, I start thinking that maybe there is “NO HOPE For THE FUTURE”, however the US economy always seems to bounce back, but this is potentially the worst financial crisis it has ever had to deal with. Spending our way out of a financial crisis did not work for Hoover or FDR and it won’t work now. I personally am in favor of giving tax breaks and incentives to small businesses so that they can stay in business, create new businesses and thus create more jobs.
It’s pretty funny if you step back and think about.
“We’re in a hole and having to borrow record amounts of debt. So to get us back in the black, we need to just start spending and spending, and that will make things better.”
That’s like a family getting together, realizing their credit cards are maxed out and saying “ok, we’re in trouble so all of you, go out and start spending money. That should do the trick”.
Spending money you DON’T have is the whole PROBLEM! The U.S. is literally spending money it doesn’t have. To get it, they have to borrow it, or print it. And neither is going to help them become more financially stable.
Same quality of logic that leads a business to say, “sure, we lose a $1 on every product we sell, but we’ll make it up in the volume” . . .
Ay, carumba. Incredible to watch.