Bulls versus Bears

The destruction of the U.S. Dollar is directly related to the rise in the price of commodities, especially oil and gold. The sooner the U.S. Dollar will be replaced as a 'commodity currency' the sooner commodity prices will stabilize. There has been plenty of talk about the replacement of the U.S. Dollar, but that has been publicly downplayed in the media. The Dumb Money camp has bought into that idea and hopes that the U.S. Dollar will stage a strong recovery which is as pathetic as the annual returns the Dumb Money camp is able to cough up. The $11 Trillion deficit (give or take a few hundred billion dollars) and the additional $9 Trillion (give or give a few more trillion dollars) which will be added to the deficit ensure that the currency becomes worthless. That alone will cause the replacement of the U.S. Dollar as the prime currency for commodities.

The rise in the price of oil has nothing to do with supply-demand anymore, but is directly related to the drop in the U.S. Dollar. Consumers will soon feel the 2009 highs in the price of oil, first at gas stations and later in grocery stores. Oil prices will creep higher and blow past the $100 per barrel mark over the next 12 weeks. The rise will last until even the Dumb Money camp will realize that the hoped for economic recovery was a short lived myth and that the downward spiral will continue, partially due to the idiotic policy response across the entire spectrum. Once the economic recovery hope busts like the tech bubble did, the price of oil will retreat but remain at an elevated level thanks to the U.S. Dollar, which will continue to shed value over the next decade and beyond.

Increased demand from Asia will put a floor on the price of oil at around $50 per barrel. The U.S. consumer will have very little to cheer about due to the Septic Tank's policy of near 0% interest rates which will ignite a period of super-inflation amid a continue economic deterioration which will make a period of stagflation look like a relief. The period we experience right now is the calm before the storm, we are in the eye of the hurricane.

Oil prices will grind higher and most likely breach the $100 per barrel mark by January 2010. The rise will pressure the consumer even further and choke off any temporary increase in consumer sending, which accounts for roughly 70% of the economy. The increase in manufacturing can be attributed to inventory rebuilding and a pick-up in demand from Asia and even Europe. The rise in the price of oil will put pressure on companies across the board as raw materials will become more expensive and companies can either pass those costs on to the consumer which will pressure inflation upwards and that will be negative for equities, or they can accept smaller profits which will pressure equities to the downside. Either way the rise in oil prices due to the weak U.S. Dollar will have a immediate and direct negative economic impact.

Interest rates are already extremely behind the curve, once again and as always. The Federal Reserve, under the lack of leadership by the Septic Tank, contributed its part to the deterioration of the U.S. Dollar and also assisted in the creation of a future period of super-inflation and economic weakness. The Dumb Money camp hails him as a hero in the worst financial crisis since the Great Depression, but very few understand that he is part of the problem rather than a part of the solution. An increase in interest rates is another negative for the hammered financial system as well as for equities which are extremely overvalued.