Why @dollarvigillante is wrong about the dollar and inflation

This is a response to the tinfoil hat stuff that @dollarvigilante has been publishing.

Lets start with the dollar

Here is a graph of the US dollar against an index of the world's currencies:

source tradingeconomics.com

As you can see, it starts to fall when President Nixon took the US dollar off the gold standard, it had a brief surge in value in the mid 1980's when Paul Volcker was putting up interest rates to squeeze inflation out of the system, but then resumed falling. It bottomed out under George W Bush. But since then it has formed a double bottom and is on an upwards trajectory. It is higher than where it was in 1975, and has further to go, helped by the fact that the American economy is the strongest in the world.

The dollar vigilantes were right from 1985 to 2008 - but now they are fighting the last war. They've missed that we're at the start of a dollar bull run. That double bottom that formed from 2008 to 2011 is screaming it out loud.

Lets talk about oil

A big driver of inflation in the 1970's was the OPEC price hike followed by the Iranian revolution. But then the price started to moderate as western govts implemented policies to cut the amount of oil consumed. Britain for example consumes less oil than it did in the 1970's despite having 20 million more people - fuel taxes brought in by the Thatcher govt and continued by every govt since have forced people into smaller more fuel efficient cars. This story is replicated in other countries.

Here is a chart of the oil price over the last decade:

Souce: Nasdaq

What we see is speculation based on China's prospects (they were supposed to become voracious consumers of oil) until the 2008 financial crash brought some reality into the situation. The global recession cut demand, like it always does. However, in 2011 there was a black swan event - the Fukushima disaster caused by a Tsunami. As a precaution Japan closed down all it's nuclear reactions till they checked them all for safety, and began to burn oil to generate their electricity. In 2014 they switched the nuclear reactors back on, cutting demand for oil. At the same time frackers started to drill the Permian Basin in the USA, increasing supply. Meanwhile, western economies got even more fuel efficient during the period 2011 to 2014.

Unsurprisingly the oil price collapsed back down again. No economy is going to reverse it's fuel efficiency gains. The frackers arn't going to give up. Reduced demand in China as their economy slows is also playing a part. We're going to have an oil price that is less than half it was in 2014 for a long time. This means a key driver of inflation - the price of oil - is going to stay suppressed.

Lets talk about Iron Ore

Iron ore is a core component in manufacturing - we literally couldn't have the modern world without it. So when it's price goes up, you get inflation.

Here is a chart of iron ore prices since 1986:

Source: Indexmundi

Notice the similarity with the oil chart? There is a speculative hike from 2004 onwards as commodity traders convinced themselves that China was going to be the next thing and suck in a lot of iron ore and build a super economy and replace the USA. The Chinese tried to encourage this by borrowing to build their ghost cities and their surplus manufacturing. But, reality has caught up with them.

Once again, western economies adapted to recycle and use less, so when the Chinese demand stopped, the whole thing collapsed. Those efficiencies aren't going to be reversed just because the price is down. And the price has a lot further to fall as the Chinese economy shrinks.

Lets talk about Gold

Source: bullionvault

See that double top in the chart in 2011-2012? That signalled the top of a 30 year bull market. We're now in a bear market - there will be a few spikes when @dollarvigilante and his fellow gurus try to scare people into buying (so some other people can offload their holdings?) but the trend is down.

Gold is a hedge against inflation. But as we have seen with the oil and iron ore charts (which are replicated in many commodities), prices are falling. We're in a global deflationary cycle. This is exacerbated by aging populations. Japan's population is in outright decline, and while China's population grew by 7 million last year, the figures disguised that the working age population had fallen by 3 million and the pensioner population had risen by 10 million. Older people don't spend as much, and their falling demand is the key driver to deflation. The demographic problem exists in Europe and South America too. Only the middle east is exempt - but they are controlling their population through war.

Conclusion

Notice the double top in the gold chart? It mirrors the double bottom in the dollar chart with a slight delay. What it means is the 30 year bull run for gold and the 30 year bear run for the dollar are over. We're at the start of a great dollar bull run. But gurus tend to miss signals like this, partly because they are gold bag-holders and that is clouding their judgement and partly because they are so busy fighting the last war...