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Dollar Shortage Traction

Mother's Little Helper portfolio was DOWN today -$957.34 (+0.83%)

Overall LOSS YTD: -$2,105.31 (-1.80%).

Our benchmark index, the S&P 500 is UP Year-To-Date (+0.97%)

"I will always choose the dollar bill carrying a wildly fluctuating discount

rather than the dollar bill selling for a quite stable premium.

- Dr. Michael Burry

I made my buys for the year on December 28, 2017, see the new portfolio here (Click Here).

The portfolio has taken a tumble over the past few weeks but I'm still confident it will do fine by year end. What's interesting is our biggest losses are in gold and emerging markets. The bull market is continuing and that's putting pressure on gold which is seen as a safe haven against all uncertainty. Emerging Markets are seen by analysts as a loser in thew trade wars and have sold off; in my mind providing a buying opportunity. Being down more than the market is counter to what this site is all about, but with the whipsaw volatility the market is displaying I think it's perfectly normal. The DOW will most likely finish the year with a 9%-10% gain and the S&P 500 will close at about 2900-3000.

Last May I talked about the concept of a Dollar Shortage, an old economic term that found new life in 2008 and is beginning to resurface again. As the dollar strengthens and the Fed unwinds its balance sheet, foreign governments will find it more and more expensive to use dollars to hedge, and our bonds will simply become unattractive. The higher cost of hedging reduces the value of the bonds. Imagine buying a car and the insurance on the car costs more than the car is worth. But those governments have to stay liquid and they have to hedge their imports and exports; China will most likely step in to fulfill that role and we’ll begin to see the U.S Dollar get supplanted by the Chinese yuan as the preferred currency of international trade.

While a prediction like this seems hard to track all we have to do is look at a long term chart of foreign purchases of U.S Treasuries. I try to find research that both supports and rejects my thesis on economic and market events. To date all I'm getting are confirmations. According to an article out today on Yahoo Finance, foreign purchases of US Treasuries have declined from 50% to 43% since 2013. ( The patriotic view says, 'Isn't that great, we're reducing foreign indebtedness'. The economic view says, 'Wow, who's going to loan the US money to fund all this stuff we need to fund. Maybe it's belt tightening time'.

So how crazy is this notion that the Chinese Yuan will supplant the dollar as the international currency of trade? As an event that could happen in our life time to-date this would seem unthinkable, just nonsense. Historically the dollar as an international currency is a recent event. The chart below illustrates that not until the US Industrial Revolution did we begin to emerge as an economic power. By 1900 the US dominated the world, but only 50 years later in 1950 we peaked.

Trump didn't inherit Obama's economic woes; he inherited Harry Truman's.

The economies of China and India are beginning to resume their dominance. China will need to do everything it can to restrict the US's ability to grow in order to achieve this goal. Just look at the One Belt, One Road plan, the control of their currency valuation and the constant brain drain from the US to China through the transfer (Theft) of intellectual property. I experienced this first hand when I co-founded a company that made a consumer product. We tried to manufacture overseas to lower the cost but found that our tooling and intellectual property would get stolen.

The solutions are plain and simple, but politicians make them hard. The US must reduce the debt, expand our markets, advance our education system on the scale of the Manhattan Project, make a dramatic increase in productivity and significantly reduce overhead on businesses by reducing the hidden costs of filing government forms and collecting taxes on behalf of the government. These are all needed, quickly, to combat the decline of the US economy.

Keep Me Honest

I am attempting to keep track of my calls and predictions by logging them at the bottom of every post.

  1. Bond prices will decline as a result of rising rates and a Dollar Shortage.

  2. Invest in China stocks. NetEase, YY, JD, Baidu, Alibaba, mobile phone services and makers, and China BioTech

  3. Invest in Whirlpool (see Whirlpool caveats above), Kohl’s, Costco Wholesale, Home Depot, Dollar General and Casey’s, Ingersoll-Rand, Illinois Tool works, Paccar, Honeywell, and DowDupont, PayPal, Square, Goldman Sachs, Citibank, Bank of America, JP Morgan, DBC, Apple, Microsoft and Caterpillar.

  4. Goldman Sachs slides to around $210/share

  5. Proctor & Gamble, Coca-Cola, Merck and Pfizer will go lower as rates rise.

  6. The Chinese yuan will replace the dollar in international trade. Not this year, but it will happen in coming years.

  7. The DOW will close the year with 9-10% gain.

  8. The S&P 500 will close the year at 2900-3000.

Stay Invested,

Clay Baker

Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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