Is The Bell Tolling For The U.S. Dollar?

How did the dollar die? First it died slowly — then all at once...No asset is safe now. The only choice to hedge risks is to hold hard currency — gold (Zhang Jianhua from China's Central Bank) - source of quotes LINK

The economic numbers reported this morning showed continued deterioration in housing and the overall economy.  In addition, consumer and investor confidence is starting to plunge again. 

The Case-Shiller 20 city index of housing showed that the small bounce in housing prices that was expected in March from February was actually a lot smaller than expected.  Year over year for March, prices declined 2.6%.  The year over year number is likely more statistically relevant that month to month, because it doesn't reflect seasonal "noise" the way a month to month measure will.  Also, the Case-Shiller index de-emphasizes distressed/foreclosure sales, so the pricing is skewed to the high side.  In other words, despite the Fed/Govt's attempt to reinflate housing with artificially low interest rates and new programs which enable buyers with decent credit to make no-down-payment purchases, housing is still in serious decline.  It is unlikely that most media outlets will delve into details or report the year over year number, so please do not fall into the trap of buying into the widely pimped idea that housing has bottomed and is bouncing.

In addition to housing, the widely followed Conference Board's measurement of consumer confidence plunged in May.  The prior reading was 68.7, consensus expectation was 69.7 and the actual reading was 64.9.  That's ugly.  Also, the State Street institutional investor confidence index was lower than expected and the Dallas Federal Reserve manufacturing index absolutely plunged from the consensus expectation. You can review this data here:  LINK

The quote above about the death of the dollar is a play on a famous Ernest Hemingway quote from "The Sun Also Rises:"  "'How did you go bankrupt?' 'Two ways, gradually then suddenly.'"  I wanted to include this because I had a conversation with a friend and investor in my fund this past weekend about the timing of the eventual collapse of the dollar.  My view is that the dollar will be held up, while the elitists rape and pillage every last crumb of wealth, for longer than most believe is possible but the collapse of the dollar will be sudden and unexpected by most.

The relevant analogy of what to look for as indications of an impending collapse is one of my favorite analogies of all time from one of my finance professors at the University of Chicago, Richard Leftwich, who likened investors looking for answers to a drunk in who had been sleeping on a bench but was looking for his lost wallet under the street light:  "'Why are you looking over there for it?' - 'Because that's where the light is shining.'"  It's the same thing with the dollar.  The dollar is slowly eroding in value everyday and the signs are all around us to be seen if you know where to look.  But by the time the obvious signal of its demise hits - an outright collapse - it will be too late.  It's the same situation as in Weimar Germany.  On November 13, 1923, many wealthy people had most of their wealth in the bank when they went to bed but woke up the next day as paupers because the German mark collapsed and was devalued away over night, as the rest of the world would no longer accept it as payment.

I bring this up because a news item was announced late Friday evening, after most people has shut their business eyes and ears for the long holiday weekend, that will have significant consequences for the U.S. dollar's reserve currency status.  China and Japan announced that they are going to start directly trading in their respective currencies - the yuan and the yen - and completely bypass using the U.S. dollar as the currency for exchange.  This news report is dated from Sunday, but the first reports hit the newswires on Friday evening:  LINK.  It blows my mind that more is not being commented on or reported about this.  China is methodically and slowly withdrawing from its use of the U.S. dollar. This is a significant step to that end, as China is now the world's largest importer/exporter and Japan is a major trading partner for them.

Most people in this country are completely clueless about what China is doing with regard to the dollar, instead preferring to look under the light that CNBC or their trusty financial adviser shines for them for knowledge on the markets.  Remember, the collapse of the dollar will happen gradually, then suddenly. 

For the relevance of the quote above from the PBOC official, see this article:  LINK  China's demand for gold surged 51% in 2011.  What the article doesn't contain is that in Q1 2012, China imported 138 tonnes of gold - more than half of the total amount hoovered up by China in all of 2011.  I would like to point out that China's gold consumption in 2011 represents about 10% of the total global gold production...Don't let the sudden collapse of the dollar leave you holding worthless paper and no gold/silver...