February 16, 2004

Wastepaper, Quote of the Day

Tom Donlan gets it right in is commentary in Barron's this week. You might think that with the big fat greenback making the cover of the Economist and everyone and his dog going bearish on the dollar, the truly contrarian play is to be a dollar bull. Sentiment is so universally negative that this must be an extreme, right? Well, sentiment is negative, but the money managers and traders I had dinner with in London last week said now one is actually making the bearish trades. Everyone is convinced the dollar is going down. But very few traders are actually "selling it." This tells me there's a rational understanding that the twin deficits make the dollar a weak proposition. But emotionally, no one is ready to contemplate life with dollar/euro at $1.50 and dollar British pound at 2/1. It reminds me of an old golden retriever I had. His hips were going. He couldn't run. He'd routinely fall down stairs. It was obvious his best days were behind him and that he'd have to be put down eventually. But all I could see when I looked at him was the dog that used to spend all day chasing tennis balls and digging for rocks. What the currency markets need is some emotional closure. "You don't have to wish for gold coins clinking in your pocket to realize that gold is still a relevant measure of wealth, no matter how many economists denounce it as a barbarous relic. Without some attachment to harder values, the half-life of paper money is Hobbesian -- "nasty, brutish and short." "Fortunately, the U.S. is not merely on the Greenspan standard. Confidence in the chairman of the Federal Reserve is trending lower with the dollar, and deservedly so. Interest rates would be substantially higher than they are if Greenspan had not been part of the two-year soft-dollar policy. "In reality, however, the U.S. is on the gold standard, the crude-oil standard, the copper standard, the commodity-index standard, the stock-market standard, the bond standard and the interlocking standard of all currency markets. Every day, millions of traders, speculators and investors pass judgment on the dollar and its stewards as much as on the supply and demand for whatever they happen to be buying or selling that's priced in dollars, euros, yen, yuan, rupees or wastepaper. When the dollar goes down, that's a sign we're going wrong. "As any Argentine must know by now, the markets, like the mills of the gods of old, grind slow, but they grind exceedingly fine. At the moment, the markets threaten to grind the dollar to powder.


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