U.S. Dollar Still in Terminal Bear Move

We realize more than ever that we'd better reduce our long-term "policy allocation" for U.S. assets, and increase our developing markets policy allocation.  Our policy allocation had been 60% equities, consisting of 40% U.S. and 20% rest of world.  We'll be reversing that gradually, as opportunities present themselves.

The link (and comments) that give us the raw material for coming to this conclusion are here.

Despite the recent rally in the U.S. dollar, we think it's still in a terminal bear market that will make itself evident in the next few months or couple of years.  The U.S. is losing its creditworthiness as a result of its skyrocketing debt, particularly given its response to the current economic crisis, the Iraq war, and political failures.  The current "flight to safety" that is boosting the dollar will end as soon as China shows it can weather the current economic slowdown without collapsing.  When that becomes apparent, assets will leave dollars for yuan so rapidly that the dollar will plunge, and anyone holding U.S. dollar assets will feel poor compared to yuan holders.  

Maybe China isn't the only major nation whose currency will become the world's fiat currency. We could enter a multi-polar fiat....the Brazilian real, the euro, perhaps the rupee could be included.  Actually, we'll need to find nations that are thriving and that do not have a ton of exposure to U.S. dollars!  China is less attractive by this standard.  The point is, we want to get positioned for the bursting of the treasury bond and dollar bubbles.

The biggest risk to our bearish U.S. view is that the government will take decisive action over the next 5-10 years and beyond to dramatically reduce spending relative to revenue. We doubt this is politically possible, because the public won't accept the cost of suffering fewer handouts, as it won't understand that the system is in peril.