First, we turn to romance. We’re talking about money… nowhere is the sky more full of stars and the streets full of more starry-eyed romantics than the wide-open spaces of the financial world. Investors are willing to overlook wrinkles and sags… morning tempers and evening fatigue. And they are willing to believe anything.
What is romance, after all… but the willingness and eagerness to see something more than is really there… or overlook something that really is? We look into our lover’s eyes… and see what we want to see, something grander, sweeter, nicer than others might notice. And why not? No matter where we look, we see what we train our eyes to look for. If we want to see evil and cupidity… we will open our eyes and they will be right in front of us. If we want to see beauty and benevolence, we will see that too. And the most remarkable thing… sometimes, looking is creating. Because we are looking for it… and seeing it – suddenly, it is really there.
But enough riddles… we don’t know what we are talking about. And we don’t have time to figure it out.
So, let’s move on…
Yesterday, the Dow rose another 178 points. This has been a good week, so far, for the feds. The Dow Buffett has stepped in to rescue the bond insurers. And Bush and Paulson inaugurated their plan to save Americans from the humiliation of getting kicked out of their houses for non-payment of the mortgage.
The smart money, we are told, is taking big positions in bank debt; their sense is that the banks have been oversold. “It’s not smart to short the United States,” said Buffett. A lot of people – probably most people – believe him. They think that now is a good time to go long on America… and bank debt as a good thing to go long with.
They may be right. We have no opinion on bank debt. But we do have an opinion on the currency in which the bank debt is calibrated – the U.S. dollar. In short, we don’t like it . Yes, it may be going up against the euro. But we still don’t like it. And we don’t care for the euro much either.
The problem with both paper currencies is obvious. When Buffett buys a business, he says he wants a ‘business with a moat around it.’ What he means is that he wants some protection from competition – either a trade secret, a patent, or a brand. Without a moat, the barbarians can attack. They may be able to run you out of business… or simply force you to trim your profit margins. Either way, it’s not a good position for a business to be in.
The problem with the dollar is that it has no protection at all. Worse, the people in charge of it have no interest in protecting the dollar. Each new dollar that comes into existence competes with every old dollar. Inevitably, they all fall in value.
This insight is of no particular concern to people who don’t have dollars. But it comes as a recurring nightmare to those who have a lot of them. And who has dollars?
The monetary system of planet earth, circa 2007, is simple. Arab nations export oil. Europe exports luxuries. Asia exports autos and gadgets. America exports dollars. Yes, dear reader, the buck gets around. It has more stamps in its passport than we do.
The Treasury Department tells us that most of the world’s dollars are now outside the 50 states. Sixty percent of them pass from hand to hand without hearing an English word or getting a chance to go to a baseball game. The same is true for U.S. government debt. There’s three times as much of it in the hands of foreigners – $2.11 trillion – as there is in American mitts.
The trouble, as we’ve pointed out on many occasions, is that there is no moat around this money. It takes a whole chain of supply… machinery… capital… and skilled labor… to produce an automobile. An automaker has a moat – because the costs of entering the business are so high. But it takes almost nothing to make a dollar. And as the greenback sinks in value – thanks to the competition from billions of new dollars all bidding for the same oil, gold, wheat and autos – many of these foreign dollar holders are going to look for other places in which to park their wealth.
Markets and Money