Behind the Scenes (by BKudla)

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As we watch the Federal Reserve launch QEII, and other programs to "support" growth in our economy, many of us are saying this will ruin us, we will have a run on the dollar, etc. and these guys can't be that stupid, can they.  Then there are those of us that try to pierce the veil to determine what is really the strategic end game here.  Here is my take, and before I share it, I don't necessarily endorse it or morally judge it.  That is when I lose money.  I am simply trying to see if I can get an edge.

The Federal Reserve has taken the role of executing our trade policy, this is nice and convenient for the Administration, as they can appear reasonable in public, and say things like, we support a strong dollar, and a rising Yuan would be helpful, while behind the scenes we have declared war on the Mercanilist nations. 

From a currency perspective, the players of world are divided into three camps;

  • The resource currency countries such as Australia, the Gulf States, Canada, South  Africa, Russia, etc.
  • The Mercanilist nations, which are of two flavors;
    • The overt, which simply tie the nations currency to ours, such as China.
    • The indirects, which use a variety of regulatory, tax, currency and trade policy to artificially support exports and suppress imports.  Those would be Germany, Brazil, any other Southeast Asian nation, and Japan.
  • The rest of the nations are not engaged or relevant in this fight, but will still suffer collateral damage.

The U.S. has put themselves in a box by allowing their budgets and current account deficits to become unsustainable (the why or whose fault it is, is irrelevant). We have been trying to rebalance global trade to save ourselves, and at the same time been printing dollars (along with every other consuming nation) to reinflate the world economy.

The Mercanilists and the Resource countries like things just the way they are now. But, they are vulnerable; by tying to our dollar, and having a high need for raw material imports, we are now in a position to cause them great pain, unless they revalue their currencies.

So my thesis is, we are playing a great game of chicken to see how long these countries can stand the internal inflation and the havoc of higher food and fuel prices on their populations, and the reduced profits for their business owners.  The squealing has already begun.

Brazil is having great difficulty handling the money flows, Korea, Japan and Germany are concerned enough to take this fight public, and China is struggling with higher food and fuel prices, and disappearing margins.  Here in America, the Federal Reserve has maybe a six month window before higher fuel and food costs embed themselves into the supply chain and come out with intolerable retail price increases. 

Between now and then, expect this new money to flow into hard assets that are internationally trade able.  These prices, I suspect will rise far faster than most expect, with high volatility throughout this complex and within it.  That is where I am positioned. When our energy and food prices get too high, we will force the Fed's hand to stop (Average gasoline in the $3.75-$4.00 range). That is when I step off. I suspect after this, a new managed world trade policy will be hammered out if we did not tip the world over the falls into real deflation and depression.

One man's view