As expected, the dollar has once again begun to show signs of serious strain against a variety of measures including gold which once again recently passed the $1000 mark. There has still been no responsible plan for confronting the dramatically increasing structural deficits. The only plan has been to print more and spend more.  In the words of Vice President, Joe Biden, “We have to spend more to avoid bankruptcy.” On September 9th at an investment conference in New York, former Fed Chief Alan Greenspan said the recent gains in gold are “strictly a monetary phenomenon.” Rising prices of precious metals and other commodities are “an indication of a very early stage of an endeavor to move away from paper currencies…What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment,” Greenspan said. This is quite a statement coming from the man who has been behind the curtain, controlling the printing presses of the world’s reserve currency from 1987-2006.

The one area where many in Congress seem to be beginning to try to be more responsible with taxpayer funds is in Federal Reserve transparency. The Fed recently doled out trillions of taxpayer dollars to whomever it chose. Neither the public nor Congress has little to any knowledge of how much money went to whom.  One piece of potential legislation that has not gotten nearly as much media attention as healthcare and executive pay reform is House Resolution 1207, also known as the Federal Reserve Transparency Act of 2009, which would allow for complete audits of the Federal Reserve by the Government Accountability Office (GAO). The bill has two-thirds of the House of Representatives co-sponsoring the bill. This is remarkable, especially considering that the bills creator, Congressman Ron Paul of Texas, is not known to give out political favors nor have any leverage over other members of congress other than pressure from his grass roots supporters. This might suggest that the issue is resonating strongly among the American public in favor of transparency. In fact, a recent poll conducted by Rasmussen Reports determined that 75 percent of Americans support an audit of the Federal Reserve. The Senate version of the bill (S604) sponsored by Senator Bernard Sanders has 25 co-sponsors but that number is likely to increase. This bill, if it becomes law (and potentially before), may be a further catalyst for dollar depreciation. The reason for this is most likely not because the Federal Reserve will become more expansionary due to political pressure, but because possible revelations may harm the credibility of the Federal Reserve as a gatekeeper to the dollar. Officials at the Federal Reserve are not the only ones that are concerned about having their feet to the fire. Despite the fact that HR1207 has had hundreds of co-sponsors for several months, leadership in the Congress have ignored its relevance and prevented it from coming to a vote. This stonewall appears to be finally showing some cracks as Barney Frank, chairman of the House Financial Services Committee, has officially scheduled hearings for HR1207 on September 25th  and has also publicly said the measure will be voted on but has not given a date.  Even though the bill has deep bipartisan support, it will still face steep hurdles from the political establishment including a possible veto from Obama (he has not commented on it but has proposed that the Fed receive more power) if it is not watered down significantly. Nevertheless, we can expect more scrutiny on the Fed and a continued demand for transparency in the coming weeks and months.

How should a retail investor play this expected weakness in the dollar? As I have often outlined in my previous newsletters, this is one of the reasons why I have been bullish on commodities in general and increasingly some areas of real estate. However, investors need to become cautious about how the government will respond to all of this. A recent disturbing trend has been the restrictions placed on Exchange Traded Funds’ (ETF) and other investors’ ability to fully participate in commodities futures exchanges. Even though many commodities have decreased significantly from their all time highs set not too long ago, government regulatory agencies such as the Commodities Futures Trading Commission (CFTC) are stepping in order to preempt what they deem to be destructive speculative behavior. Imagine what will happen to the CFTC’s sense of urgency if these commodities begin the skyrocket. This very unfortunate mindset appears to be the reality that we face. Commodities seem to be the one of the areas where the government feels at most liberty to regulate trading in the “public interest.” Therefore, investors need to be somewhat alert for of potential interference in these markets. It may be better to own the shares certain commodity producers than the commodity ETFs or ETNs. This is a change from my previous perspective that had viewed the commodity ETFs or ETNs as a better vehicle to hedge against inflationary pressures and profit from rising international commodity prices.

Real estate will be another hard asset that will likely benefit from monetary imbalances. The government seems to be more content with people making money on real estate than on commodity speculation. Commercial real estate still has some blood to be spilt as the 2005 vintage of 5-year loans come due this coming year. In most cases, these loans will be very difficult to refinance. Because many of these loans were securitized and owned by unorganized groups of investors, it complicates restructuring efforts that could normally extend maturities. In a way, that is a good thing because we should see more fallout happen sooner, allowing opportunistic investors to take advantage rather than having to wait on the sidelines.