Don't Get Too Attached to a Weak Ruble. The Dollar May Be Coming Down

Dollar is over-valued and has to come down. Look for the market to wake up to that when the Fed doesn't raise interest rates as expected and inevitably sends the US currency tanking

  • Aside from helping the ruble in direct competition with the dollar, this will send commodities up - further boosting Russia's currency
Thu, Aug 27, 2015
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Everyone expects an interest raise in 3-6 months time. It's not happening

Seeing how at this very moment ruble is getting hammered by the dollar predicting a ruble appreciation seems like a very bold statement indeed. However, if one contrarian investor is right that is exactly what we should excpect. 

Peter Schiff is a financial analyst who made his fame and fortune by going against the grain. He is most known for having predicted and warned about the housing bubble and the financial crisis of 2008. Broadly speaking he is bearish on US economy and the US dollar and bullish on commodities, gold, foreign stocks and foreign currencies.

He would sum up his position somewhat like this:

The much vaunted US recovery since the 2008 crash has not been real. Economy and disposable income of most people have not improved significantly, or at all, since then.

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As such the gains made by US stock markets are not based on the state of America's economy. They are the outcome of loose money policies of the US Federal Reserve. 

When crisis hit instead of allowing a corrective recession that would have liquidated malinvestment (as well as wiped out profits for numerous investors) the Fed re-doubled its easy money policies. It ushered in an unprecedented seven year period of zero percent interest rates, and undertook three massive money-creation campaigns - each bigger than the previous - the so called "quantitative easing" ("QE") programs.

The result has been that in the place of a housing bubble, a much larger stock-market bubble has been blown up. The high US stock market is simply a consequence of trillions of new dollars chasing after a limited number of stocks - along with money from real people who re-invested into the markets because they seemed like the only thing that was going up.

This has escaped most people who buy the explanation that due to years of "stimulus" by the Fed the US stock market is now fundamentally sound. Therefore, when at the end of 2014 the Federal Reserve announced the end of their QE3 program, numerous investors believed a raise in interest rate was also around the corner.

Indeed this would have made every sense - if the markets were now sound, there was no longer a need for a heavily interventionist policy of the Fed. Indeed the Fed itself signaled and has been signaling since that it will set a higher, more conventional interest rate.

It was this expectation of a return to (relatively) hard money policies in the US that contributed to the fall of oil and emerging market currencies compared to the dollar and which is perhaps the main reason for the latest tumble in the oil price.

(At the time QE programs were taking place dollar wasn't depreciating on foreign currency exchanges because central banks all over wanted to prevent this from happening and instituted loose money policies of their own - the Chinese are already paying the price for this having blown up a stock market bubble of their own in the process.)

However, Schiff, at least, believes A.) that actually raising the interest rate and ending a supply of free credit would set US markets for a free fall and B.) that the Fed knows this. Therefore his expectation is that the Fed will continue to prop up the phony high stock market with zero percent interest and eventually go on to restart the policy of quantitative easing starting "QE4".

If this happens, or if the rest of the investors come to believe it will, it is inevitable the dollar will surrender all of its gains compared to commodities and foreign currencies. Both of these would push the US currency down and the ruble up. (In fact there is a possibility - albeit no guarantee - it may even serve to dramatically expose the oversupply of US dollars and burst the entire US currency bubble - albeit it just as likely this will take many more "QEs".)

And that's a great thing for Russians. While there are those who argue that a weak ruble is "good for Russia" I don't agree.

It's true that an undervalued currency can help sell you more goods, however, we have to remember the goal of trade isn't to sell the greatest number of goods, but to earn the greatest amount of foreign currency. If you can earn the same amount of foreign currency by selling fewer goods then that's a great thing.

It means you still get to import the same amount of foreign goods, but you can redirect some of your production capacity away from exports and to domestic consumption. 

A hard, highly valued currency therefore helps you achieve the purpose of economics - which is enjoying a high standard of living and satisfying the greatest number of your material needs. (Not assembling tons of stuff and shipping them overseas.)

Chances are that in six to twelve months Russians can go back to having that - unless their government follows the US in enacting hare-brained inflationary policies of its own.

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