Energy, Cycle Theory and a Weak Dollar

How about some reader mail?

Regarding our latest observation that we may be at the start of a great, resource-intensive cycle of industrialization, one reader mentions the natural limit in the growth of any system: energy. “When we consider the growth of different economies and the cycle of resources I think it is of great importance to consider where we are in peak oil! Oil will be the final and deciding factor of this cycle of expansion.” Probably so.   Check out Exxon Mobil’s thoughts on Peak Oil.

Another reader puts the “cycle theory” of global growth in perspective. “There is an “economic day” that follows the celestial day around the globe. The “economic day” takes much longer, of course… centuries… but it has moved from the Cradle of Civilisation in the Middle East, through the Mediterranean, into Europe, across the Atlantic to North and South America, then across the Pacific to Japan, Korea, and now… China, India and the antipodes, Australia and New Zealand. The 21st Century will belong to China and Australia/New Zealand, with India close behind. The Chinese are simply doing what they’ve always done best throughout their history: being consummate mercantilists. The 50-year experiment with “Communism” will be nothing more than a footnote on China’s history centuries hence. The “economic day” has reached them, and now it is their day in the sun.”

Here is a very practical question from a reader: “How does one buy Australian stocks for $7-8 a pop as we do here in the U.S.?” Sadly, the best of our knowledge (which we admit is limited) you can’t. Retail investors get rough treatment here in Australia, both in the pricing of execution only stock trades, and in the quality of useful and inexpensive trading data. We are aiming to change the latter, and suspect the market for Australia’s $1 in managed funds will attract more competition for the retail investment dollar, improving service. You can always hope…

Another question about the U.S. dollar. “To my way of thinking, Bill’s argument about it being $30 for a steak in Dallas and $60 in London would mean the opposite to what he is implying. It means the dollar is way over valued, not “cheap”. The currency would need to depreciate by 50% to make it $60 for a steak in Dallas, the same as London. Therefore the dollar is chronically over valued and the dollar should go down. Or am I missing something?”

Answer: Nope. You’ve got it right Dave. By “cheap” we think Bill meant that when you take it abroad, the dollar just doesn’t go as far as it does at home. He means “cheap” in the tawdry, miserly, way. Not cheap in the attractive, beaten-down value way.

His story does point out one strange aspect of the dollar’s weakness: no one in America notices it. Americans don’t notice the dollar’s decline because its purchasing power, at least inside the U.S. has not noticeably fallen. Quite the opposite, in fact.

Cheap imports have kept retail inflation at bay. Also, huge foreign buying of U.S. bonds has kept U.S. interest rates low, which makes it a lot easier to keep racking up big credit card debts. And Americans are in love with the other aspect of inflation: rising asset prices. Who doesn’t want a stock or house to double in price? If that’s inflation, bring it on!

Dan Denning
Markets and Money

Dan Denning

Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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2 Comments on "Energy, Cycle Theory and a Weak Dollar"

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Rod Campbell-Ross
This is a good article, and it should be read with the excellent linked article on net energy. Dr SamSam Bahktiari, ex senior exec in Irans National oil company describes oil as the master dominoe. Indeed it is. Everything else depends on it, including food. The massive increases in yields since WWII have a lot to with oil: pesticides, fertilizers and machinery. Once oil production set in, there is going to be less food and famine is going to become a much bigger problem than it is today. If I have a criticism of this article it is that it… Read more »
henry clark
Marc Faber narrates yesterday, how american financials have not participated in the april may 2007, dow rally. This is not the case here in Melbourne, with the banks. Out at hoppers crossing, where there is mile upon mile of new land and house packages($250,000-$300,000)things still seem upbeat. Not so with the 20 year old,plus, housing market,in Werribee, Wyndam vale, and Laverton.Here mortgagee sales are being passed in at the $160,000 mark. Back in 2003, there seemed to be plenty of carpenters ,telstra techs etc who were buying 10 properties ,to hold for 10 years,to bank a cool million. Nice work… Read more »
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