The UnDollar Digest is no longer actively maintained.
However, UDD editor Will Reishman and his associate Chad
Swanson publish occasional “Client Memo’s.
A recent sample is posted below. To be placed on our
mailing list, please send request to
or call 541-773-7774 and ask for Val.
Strategic Financial Management - Client Memo #5
Whither blows the wind?
Despite the crush of significant events in the
last six months, the primary trends that we
charted through our communications during 2013
remain dominate. Notwithstanding the dollar’s
lackadaisical performance over the last year, it
will in time emerge as the “one-eyed man in the
land of the blind.” Profoundly undergirded by
the dollar’s status as the world’s reserve
asset, U.S. equities will continue to attract
global capital flows.
Despite the widespread horror at the U.S.’s
oncoming fiscal train wreck, the fact is that
the greenback simply has no competitor as a
refuge for the trillions spawned by hyper-active
central banks. This will remain the case,
regardless of bouts of temporary weakness, such
as the latest dip likely due to the shifting of
Russian dollar-denominated accounts. With
geopolitical turmoil on the rise, the United
States’ role as a safe haven is secure for now.
Once the European sovereign and banking crises
re-emerge, the dollar’s anomalous ascendance
could in fact destabilize the global economy.
(See Plaza Accord,
For now U.S.-based investors can take genuine
comfort that the long-term, or “secular” trend
for our market is favorable. The march higher
will naturally not occur without a good deal of
angst; nonetheless a series of higher highs lies
ahead, even if interrupted by one or two
nose-bleeding 20% corrections. We will continue
with our strategy of “taking what the market
gives” while forswearing the “Kool-Aid” of
equity euphoria, or the siren song of
We do consider it important to address the
concerns that some of you have raised. It is
admittedly true that many of the wiser Wall
Street hands see the current market as “detached
from the fundamentals.” Some experts point out
the elevated level of the market’s
capitalization relative to the country’s GDP, or
the warping of share values from today’s
unprecedented flood of stock buybacks.
Other sensible market skeptics focus on the very
high real PE’s (price earnings ratio), which
factor out corporate earnings that have been
inflated by disingenuous accounting. Still
others correctly note that valuations have
reached levels equaled only twice in history,
just prior to massive bear markets. These and
other more sophisticated metrics are cited as
signs that “the end is near” for the bull market
born out of the depths of the Great Financial
Crisis of 2007-09.
These and similar concerns represent valid
observations and should give us a serious note
of caution. However, in our judgment traditional
fundamental metrics are trumped by a combination
of a millennial monetary disorder and the
soon-to-come flight to safety into U.S. assets,
especially equities. Thus, is it just possible
that this time it actually is different, this
“one last time?”
First, let’s establish that any pretense that
the U.S. stock market reflects fundamental value
investing, associated with traditional capital
formation in a free-market economy, is long
gone. With the advent of the Greenspan-Bernanke
era Wall St has become a money-game increasingly
divorced from the real economy and the legacy of
Charles Dow and Benjamin Graham, or even Jesse
Livermore. For anyone to analyze whether stock
values make sense or not based on traditional
measures is absurd. Sorry! Wish it weren’t so.
Secondly, it is important to recognize how
profoundly the ascension of Alan Greenspan to
the Fed chair changed global finance. Every
teeny-weeny supposed financial crisis was a
cause to ‘ease,’ to ‘print money,’ to rescue an
increasingly leveraged and thus vulnerable
banking industry and the growing speculator
community. Under the Fed’s tutelage this has
become a global phenomenon, and has resulted in
untold trillions upon trillions of money and
money-like instruments flashing at the speed of
light through trading desks around the globe.
This money is “hot,” and increasingly nervous.
A third trend that has escaped most observers,
and has been heightened by recent geopolitical
developments – government bonds, even U.S.
Treasuries, ain’t what they used to be. The vast
global money pools no longer view the safety of
ANY sovereign credit as unimpeachable. This has
profound implications long-term.
Now this last trend is still in its earliest
stages, and most certainly trillions will remain
parked in government instruments for the
foreseeable future, but at the margin, the
demand for private assets as opposed to public
assets, i.e. sovereign credits, is growing. For
example, in the event of bankruptcy, would you
prefer to hold the paper of a Caterpillar, Inc.,
or the U.S. Government, much less one of its
subdivisions or that of some other sovereign?
With CAT our money at least is secured by plants
and equipment. With the USG we could….ah,
re-possess the Post Office, or,…perhaps
Yosemite. You see the point. And more and more
large money interests do as well. We will see a
growing trend toward a preference for private
credit instruments versus government paper.
More to our point, the reality is that this will
accrue greatly to the benefit of the U.S. stock
market. With the Fed and the global central bank
chorus strangling the possibilities for a fair
return from the credit markets, Big Money will
continue to gravitate toward equities. For these
large money pools it isn’t (unfortunately) about
the traditional analytical discipline of buying
businesses, or collecting reliable streams of
dividend income, or financing the capital
formation for a growing entrepreneurially
capitalist economy. No, the primary objective
for Big Money investing in the U.S. stock market
– it’s about accessing highly liquid assets
that offer the promise of return that will
compensate for inflation and opportunity cost,
and that just might dodge the growing
To repeat our earlier acknowledgement: the stock
market’s trek higher will not occur without the
majority of participants getting kicked in the
pants from time to time. Only a well-conceived
and faithfully executed risk management
discipline will enable us to achieve positive
long-term performance, while sidestepping these
market declines. Facilitated by the move to
TDAmeritrade last fall, we are confident that
the systems now in place for our model accounts
will deliver the results you deserve and to
which we are fully devoted.
Now let’s do a quick review of three exogenous
issues that will have profound effect on our
markets, very possibly upon our financial
fortunes, and that will certainly shape the
future of the next generation.
Item 1: Europe
One of the more puzzling developments of the
last six months (to us at least) has been the
quiet that has descended over “old Europe.” From
all we can learn, Europe’s banking crisis has in
no wise been resolved; no, it looms as large as
ever. Her sovereigns have not righted their
blighted finances. Hardly, debt ratios have only
continued to rise and catastrophe only postponed
by global finance’s ability to keep interest
rates at incomprehensibly low levels. Nor has
the “southern tier” had some great burst of
entrepreneurism with surging employment
opportunities for disenfranchised youth. No, in
contrast, the miasma of deeply entrenched
unemployment further raises the specter of a
lost generation, and stokes the resentment that
can and will (see Turkey, Venezuela, Thailand,
Spain, Bosnia, Brazil, and Ukraine) contribute
to decidedly uncivil behavior.
The revival of the European sovereign credit and
banking crises, and the failure of the euro
experiment altogether lies just around the bend,
certainly so in the context of the long march of
history. The next major signpost visible from
here will be the results of elections to the
European Parliament scheduled to be held in
member states between May 22th and 25th.
So-called Euro-skeptic parties have scored
startling gains in popularity in recent months,
and the results of these elections could be
quite troubling for the little caesars of
Item 2: China
God help us! And God help the Chinese.
In China’s effort to maintain its export-driven
juggernaut its leaders decided they had no
option but to “peg” the yuan to the US$. As a
result of the enormous inflow of dollars from
the United States, China’s monetary authorities
were required to issue gazillions of yuan. No
surprise, according to classic Austrian economic
analysis, this of course resulted in
artificially low interest rates in China, which
in turn promoted a millennial explosion of
If the U.S. is faced with an intractable debt
and unfunded liability balloon in coming years,
China faces multiples of that. With its enormous
working population and limited social safety
net, China must keep the masses employed. To do
so, with weakening business fundamentals, Xi
Jinping’s government may be forced to add
further to the Himalayan debt bomb, or risk
unprecedented civil unrest.
For a sense of how pivotal China’s financial
health is for the world economy, consider the
effect of the country’s first ever corporate
bankruptcy on the “canary-in-the-coal-mine”
copper market. On March 7 Shanghai Chaori Solar
Energy defaulted on a less than US$15 million
interest payment. No big deal, right? Not so.
The fact that China “allowed” this to occur is
unprecedented, and presages – in the minds of
many China watchers – that more, perhaps many
more such defaults and bankruptcies will follow.
Perhaps China wants to inject disciple into its
overheated debt market, or perhaps the
authorities see no choice but to stop propping
up profligate corporate borrowers. Whichever it
is, the world took notice. Witness the beating
“Dr. Copper” took:
Item 3: The Winds of War
Folks don’t fight wars when they’re content.
Even on an interpersonal level, conflict,
marital strife, domestic violence and abuse
occur more frequently when financial conditions
are difficult. Thus, as the economic noose
tightens around untold millions, the climate for
conflict worsens. It is our view that
collectively, much of the world is close to, if
not past the tipping point at which a complex of
stress inducers pushes countries inexorably
toward – first, growing civil unrest.
In some jurisdictions this may unleash
centrifugal forces that will threaten social
cohesion and national unity. In other countries,
the volatile mix of collapsed living standards,
intractable and extreme youth unemployment, a
loss of national pride, purpose, and place will
combine to produce fertile soil for the crowd to
be aroused and to tolerate, or even support,
foreign conflict and adventurism., i.e. WAR!
Many compare the tinderbox of contemporary
global tensions with the environment in Europe
pre-1914 that exploded into the horrific
conflagration known at the time as the Great
War. [See several related items in the
And then we have the situation with Ukraine,
Russia, the U.S. and the EU, and Crimea. What is
really going on here? Well, on the surface,
according to the headlines, it’s, ah…obvious.
‘Bad Vlad’ is attempting to revive the Evil Red
Empire and once again threaten our very way of
life. Heaven forfend!
However, with a slight peek beneath the
headlines, it is evident that the United States
government furthered the overthrow of the
duly-elected Ukrainian government (thuggish
though it may have been) in an effort to bring
Ukraine into closer association with the EU and
the West and distance it from Russian influence.
But why is the United States attempting to shape
the political future of a deeply divided country
on the very border of another major power? Do
the U.S. political elite presume that we are the
only country that warrants some reasonable
Monroe Doctrine-type regard for a recognized
sphere of influence?
There’s much more here than what has been thus
far reported. If we were able to peel back the
obfuscation and diplomatic deception, it would
likely be very troubling. Our hopes for peace in
the years ahead could be badly shaken.
Has the U.S. decided to re-engage the Cold War?
What would justify that? Surely Russia, whatever
else might be said, no longer represents an
existential threat to the U.S. or its European
allies. Perhaps it has been decided that this is
the moment to pivot from the quagmire of the
Middle East to pursue Zbigniew Brzezinski’s
“Great Game” and assure U.S. global hegemony for
another century. [See:
Time may soon tell.
We pledge to stay ‘on the case’ in these
enormously significant arenas.