Bailing on the buck?

We are barely into 2014 and already the headline noise coming out of Wall Street is that we should be looking at financial stocks for our portfolio. This concept has been around for some time, along with the new “Volcker Rules,” and the bullish noise that has been pushed into financial stocks for some time now.

The main force facing all financial companies is of course the outlook for interest rates and the ultimate shape of the yield curve. Longer-term, U.S. bond yields will be bumpy but in the end will rise significantly as the Federal Reserve goes through the transition of its new leadership.

I was fortunate to spend some time with Warren Buffet recently and learned that he was quite positive that U.S. interest rates are going higher. In his view, it will be the basis of renewed U.S. economic growth which is expected to continue gradually before 2014 ends.

But it is also likely that the new Federal Reserve leadership will be filled with a lot of public lip service before we will see any sig­nificance of higher interest rates and positive moves for financial stocks. Personally, I am more concerned about the U.S. heading into a hyperinflationary mode before the end of 2014.

John Williams of Shadow Government Statistics carries more weight for my viewpoint and he has been predicting U.S. hyperinflation “by the end of 2014” for the United States since January 25, 2012. He then predicted that “Heavy sellers of the U.S. dollar could hit with little warning.” In November 2012, Dr. Williams wrote that the U.S. economy was already in a stag­nant renewed contraction.

To quote his 2012 viewpoint which he still maintains is inevitable. “The U.S. financial and political system has been troubled for decades with the government and consumers living well beyond their means supported by excessive and unsustain­able growth in debt. Faced with structured impairments to individual income growth, the Federal Reserve (former Chairman Alan Greenspan) actually encouraged the excessive growth of consumer debt as a way to support overall economic activity which continuously was borrowing economic growth from the future, and the Federal government handled their affairs likewise. Inevitably the day of reckoning for the U.S. financial and banking system came literally to the brink of col­lapse in September 2008. To prevent the unthinkable, the Federal Reserve and the US government, created, spent, loaned, guaranteed and gave away whatever money was necessary.”

But they did bail out or acquired a number of fairly large corporations including a number of banks, AIG, GM and Chrysler. Anything needed to keep the system afloat was pur­sued, whatever the cost. These actions did forecast a system collapse, but did not really resolve the fundamental underlying difficulties. The in-place economic downturn “exacerbated systemic excesses.”

Dr. Williams goes on with “contrary to official GDP report­ing, there has been no subsequent economic recovery in the U.S. Broad business activity in the U.S. has been stagnated since 2006 and the “negative implication of a deteriorating economy for the U.S. dollar, political, and central bank issues are rapidly turning against the U.S. currency, upping the risk for a major sell off of the U.S. dollar in the foreign exchange market in the near term” (November 20, 2013 quote).

Dr. Williams expects that the dollar weakening will translate into higher oil prices and new consumer inflation. On November 20th, 2013, Dr. Williams reiterated that his hyperin­flation call of 2012 remained unchanged saying that “the entire unfunded liabilities for the Medicaid overhaul added nearly $8 trillion in net present value unfunded liabilities to the 2014 federal deficit exceeding the total $7.4 trillion gross federal debt of the time in 2014.

On a GAAP basis, the U.S. faces long-term insolvency, and the global financial markets and central bankers as well as the “miscreants currently controlling the US government.” He goes on to say that “The chances of the U.S. actually not pay­ing its obligation or interest are nil.”

Instead, typically a country which issues debt in the cur­rency it prints for the cash it needs, which it can no longer raise adequate funds through the usual confiscatory tax rates, and when it can no longer” sucker the financial system and its trading partners into funding its spending. That results in inflation, eventual full debasement of the currency, otherwise known as hyperinflation.”

The purchasing power of the current U.S. dollar can drag effectively to zero.

If or when the resulting dollar crisis intensifies causing a general flight from the dollar, odds are high for the loss of the U.S. dollar’s global reserve status and these circumstances can unfold at any time, with little or no warning.

Irrespective of short-lived gyrations, the U.S. dollar should face net heavy selling pressure in the months ahead from a variety of factors including, but certainly not limited to (1) a lack of Fed reversal on QE3; (2) a lack of economic recovery and, or (3) concerns of increased quantitative easing by the Fed; (4) inability/refusal of those controlling the government to address the long-range sovereign solvency issues of the United States; (5) declining confidence in and mounting scandals involving the U.S. government.

It is the global flight from the dollar–which increasingly could become a domestic flight as well—that would set its early stages of domestic hyperinflation.