Not Expecting Miracles From the G7

Good Day,

Ed here, writing in from rainy and cold, Vancouver, BC.  Somehow that just doesn’t have the same sex-appeal as Acapulco.  At all!

But the constant drizzle that normally goes on for 8 straight months here is more conducive to staying inside and pouring through reams of data, news and analysis.  Which may explain why I am sitting here blogging well into the evening while Jeff is AWOL somewhere in the tropics.

But I digress.  Let’s take a deeper look into the markets today – they finally took a breather.  Not much, but there was more red on my screen than I’ve seen in a long time.  I was beginning to wonder if my monitor was broken, it had been almost solidly green for weeks now.

The focus shifted to the currency markets as the drum roll begins for the G7 meetings of the IMF and World Bank this weekend –starting tomorrow – with some looking for an agreement on intervention to support the dollar, among other things.  Export sensitive countries have been fretting about the impact of the weak dollar and the low relative Yuan value on their economies, and disruptive FX movements in general.  There is even some talk about a second Plaza Accord, as well as discussion about a new reserve currency.

This of course doesn’t make a lot of sense because the original accord was an agreement between the developed countries (1985-87) to devalue the dollar against the Yen and Deutsche Mark.  Up until 1985 the dollar was coming back strong from an oversold position in the early eighties subsequent to the end of the last bull market in gold (1962-80).  Today of course the problem is a ‘weak’ dollar, so I don’t know what the rumor mill is thinking.  At any rate, the 1985-87 devaluation resulted in a massive slide in Treasury prices and ultimately the stock market crash of 1987.  It also forced the BOJ to inflate in order to offset the rising yen, which brought on the Japanese stock and real estate bubble of the late eighties.  The plaza accord was replaced by the Louvre Accord in 1987 in order to halt the US dollar’s slide.

But the dollar remained weak until 1995 regardless.

Such interventions/arrangements may work in the short term but they don’t in the long term, or they cause other problems.  The timing for a vociferous intervention to boost the dollar is probably good because it is a little oversold.  It could give us that gold correction we’re looking for, which would be healthy if it comes sooner than later.  However, the US will probably have to give up a fair amount of leverage on the international stage in order to convince foreign governments to continue purchasing dollars, or they’ll have to provide a plausible plan for increasing the value of the dollar subsequent to the short term intervention(s).  Thus, I don’t see a major threat to our thesis.

I can’t imagine the markets are going to like any solution the G7 proposes.

Today’s sell off in gold, however, reflects some healthy caution ahead of those meetings, and tomorrow’s unemployment numbers.

And with that, I’ll saunter off, fading into the greyness and drizzle of the west coast.

Regards,

Ed Bugos

Senior Analyst

Ed Bugos

Mr. Bugos is the Dollar Vigilante's Senior Analyst and founding partner. He is an Austrian economist and has been a dedicated investment professional since 1989, having started his career as a stock and futures broker on Howe Street at one of Vancouver's leading brokerage firms. Ed retired in 2000 warning clients about the tech bubble, and launched an online digest forecasting gold's revival and bull market when it was just $285. He saw the value in bitcoin as a potentially sounder alternative to the present fiat currency system as early as 2011 before many of his Austrian peers. Ed has built a career record of being early on major economic trends, bullish and bearish.

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