The UnDollar Digest is no longer actively maintained.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
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  March 2014
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 this-time-it’s-different delusions.
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 geopolitical risk.
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 Brussels.
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 malinvestment.
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 supplement.]
[Also see:
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.