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Today's commentary is by Jack Crooks, Editor of World Currency Options and President of Black Swan Capital.

Good Day Currency Traders!

Well, it looks like they did it! One has to marvel at the power of money, pumped out by central banks and governments, and cheap money's continuous ability to stoke the flames of risk taking.

At least for now, confidence in global growth and demand appear restored. And it seems the quintessential Risk Appetite trade is back in style. The risk-thirsty traders are now inclined to:

Buy stocks

Buy commodities

Sell the dollar with both feet
The dollar is getting smoked, in case you hadn't noticed. The dollar had a wholesale-type move on Tuesday. All the major currencies ran higher against the battered buck. And yesterday wasn't that much better for the world's reserve currency (we like to use that term while we still have time).

We're back into a fresh all-time new low territory on the U.S. dollar index...



What's Up with Commodities Hitting
All-Time Highs?

The stunning part of all this is the huge moves in commodities prices. Raw materials are moving higher now at the same time, including industrial metals, energy and food.

Thinking about the move in commodities, a couple of thoughts
pop in:

Commodities are the best investment class alternative if you believe Asian demand will continue even if the West slows.


Soaring inflation expectations mean hard assets are the place to be.
Needless to say, category number two is where the real danger comes into play. This represents the "careful what you wish for Mr. Policymaker as you may have juiced Mr. Market beyond repair."

No one summarizes the inherent danger of credit expansion (now the full-time job of central banks and governments in the West) better than the late great Austrian School economist Ludwig von Mises.

"Sooner or later, credit expansion, through the creation of additional fiduciary, must come to a standstill. Even if the banks wanted to, they could not carry on this policy indefinitely, not even if they were being forced to do so by the strongest pressure from outside..."

"Inflation can continue only so long as the opinion persists that it will stop in the foreseeable future. However, once the conviction gains a foothold that the inflation will not come to a halt, then a panic breaks out...People turn away from using money which is comprised by the increase in fiduciary media. They ‘flee' to foreign money, metal bars, ‘real values,' barter. In short, the currency breaks down."

I don't think we have reached panic stage. But, we seem to be heading down the path that Mr. von Mises so eloquently defines. Besides his brilliant understanding of market valuation, the credit cycle and human nature, Mises also experienced hyperinflation during the Weimar Republic years.


The Real Threat Could Be Deflation...Not Inflation

Of course hyperinflation is not the only near-term path. I believe you can make a very good case for global deflation.

With headline inflation and commodity prices roaring higher, it's difficult to understand how quickly the current environment could morph into a deflationary environment. The trigger would be a worldwide repudiation of debt, and likely accompanied by some type of dislocation on the "free trade" front.

Our policymakers seem to have made it clear they prefer inflation to deflation. That's always politically more palatable, with the huge caveat that said inflation is "controlled."

And as I've said before, controlling Mr. Market, in a world where massive amounts of capital can cross borders in a few keystrokes, makes herding cats look easy.


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Making 'Cents' of the Headlines
Why U.S. Consumer Confidence Just Sank to a 5-Year Low!

From Currency Director: Sean Hyman

What Happened:

You know they say a picture is worth a thousand words. Well, you only need to look at the chart below to see where the confidence is going in America...it's in the tank! Sad but true.



What I Say:

Why is consumer confidence so low?

Credit is getting cheaper, yet you can't get a hold of it because banks are approving only three or four out of 10 loans right now. There goes the hope of that new car or home remodeling job huh?

House prices are becoming more affordable by the day yet consumers can't get their hands on them...oh yeah, it's because of that "credit crunch" monster once again.

Fed's Kohn stated on Tuesday that there's a good possibility of even slower economic growth ahead.

We'll get more insight from the Fed again as Ben Bernanke gives his semi-annual speech to Congress on the economy. I'm sure all eyes will be on that now more than ever because the economy is in such a bind lately.

The last we heard from good ole Ben, he was talking about "insuring" (not just ensuring) that stocks would not ultimately falter.

So he watches the markets closely and worships it as he sacrifices "dollars" at the altar. These days the theme is "print money to prop up stocks so that it looks like they are doing well. And this is exactly what the Fed has done (and will keep doing).

This is why the dollar can't catch a break in the long run. So once this year's bounce happens, the party may be over for a long time for the buck.

Back to stocks....if the Dow were priced in gold (rather than dollars), then it would show that we've been in an eight-year downtrend. However, the falling dollar makes it look like we're really getting somewhere with the Dow overall. Too bad it's all an illusion.

So with stocks in the tank and existing homes at the lowest they've been since they started keeping records 9 years ago, it's easy to see why consumer confidence is dropping.

After the rate cuts stop and the economy gets its footing, expect the Fed to take those rate cuts back just as quickly as they see feasible. That will probably be in the latter half of the year. And coincidentally, that's also when the buck is likely to rally in the short term.