Posted on 05/03/2009 7:25:40 AM PDT by SeekAndFind
Recently there's been a wave of blogosphere opinion that USD is a win-win bet. It goes like this: if the world economy gets worse or stays in the dumps, then USD will remain strong, as demonstrated by its performance since Sept 08; if the world economy rebounds, then USD will of course be strong.
It is the "of course" part that I have a problem with. There're two scenarios under which USD will drop, and only one under which USD will remain strong in the intermediate term (a year or two). But even under the last scenario, USD is likely to drop in the longer term.
1. The world economy stabilizes. Make no mistake, we're not there yet. It won't happen until at least the clouds of CEE debt/currency crisis, US/European banking and credit crisis, housing price, unemployment, and consumer demand start to dissipate. But when that happens, the world will be shifting away from USD assets. Furthermore, it is very unlikely that the Fed has enough political will to siphon the massive amount of USD cash it will have printed off the system early enough and fast enough to pre-empt the surge of inflation once the economy stablizes and credit starts to flow again.
2. The world economy stays sickly for years. Under this scenario, the Fed would likely continue printing massive amounts of money for awhile. This would put other countries at a disadvantage since nobody else has this kind of monetary leverage. Therefore, they would be increasingly determined to seek alternative reserve currencies. True, right now there is no alternative. But I don't think it's wise to underestimate the world's determination and creativity when defending their own economic and strategic interests. When such alternatives emerge, a big part of the world would not feel sorry to abandon USD, a once safe asset abused and discredited by the Fed and US government.
3. As I mentioned above, there're still numerous cloud overhangs. We are quite likely yet to encounter a few more trigger events. Under this scenario, USD would strengthen. But there's a limit to how long the perception of USD being the safe harbor can last. If the crisis mode continues for another year or two, the world would increasingly re-examine the assumption and seek alternatives.
In particular, I find the assumption that China will remain content sitting in the USD trap laughably arrogant, short-sighted, and lacking imagination. It may happen in the end. But don't take it for granted. It'd take a fundamental shift in US's China policy for China to stop trying to get out of the trap. So far they've talked about SDR, arranged a slew of bilateral currency swaps, and piled up on gold. None of the approaches is the end solution. But it'd be foolish not to take their effort seriously.
I've been long USD (against EUR and JPY), gold and TIPS (TIP) since the beginning of the year. I remain comfortable with all three right now. I trade the intermediate time horizon, from weeks to months. But I'll be ready to flip USD in short order going forward. Against what I don't know yet. We'll find out. But with the wave of opinion of USD win-win bet, I suspect we'll find out soon.
Disclosure: Long USD, gold, TIPS.
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Bo Peng specializes in credit derivatives risk. He had been gearing up for the academia until his postdoctoral research in chemical physics at Stanford, whereupon the law of supply and demand for food led him to Wall Street. His writings here are not related to his day job, however. They are merely results of his personal fascination with various aspects (quantitative, economic, operational, legal, etc) of capital markets, finance, and investment.
Visit Bo's blog: http://derivethis.blogspot.com
And George Soros will make billions more.
The government needs to strengthen the dollat as much as possible but given the near communistic anti capitalism economic policies of this administration I do not see that happening...the collapse of our country is at hand and it will happen because of disastroyus economic and financial policies, not terrorism and it will happen from within. Thank you Mr. Soros, you asshole.
I say buy some junk silver just to be safe.
If you know the dollar is going to drop, you have the same opportunity to profit from it as Soros does. And it isnt’ an UnAmerican thing to do.
......The government needs to strengthen the dollat as much as possible .....
Why?
A weak $$$ means jobs
We either have to have a strong dollar or an effective trade policy with other countries. The Obummer administration’s trade policy is abysmal and falls way short of any good long term strategy that will help America well into the future.
Soros makes Louie the liquidator look like Mother Teresa!
True enough but oil may not continue to drop in the future. We have to prepare for that possibility right now, both individually and as an entire country!
Aye, there's the rub. Check out The Great Asset Bubble Built on Debt
The "aging boomers" part was especially interesting as I wonder who is going to replace the consumers this economy is so desperately based upon.
What needs to happen is an absolution of the Federal Reserve, place the USD back on the gold standard and place the American monetary policy back where the constitution mandated it to begin with.
The difference is that George Soros is using his power to force the dollar to drop, he has been at it for years.
That is the criminal thing to do.
He is not just along for the ride.
The millions of dollars he has spent on liberal causes are in fact forcing the dollar down. He help ensure enforcement of laws that forced banks to give bad loans by funding ACORN and other lib organizations. He has his hand all over the spending in DC now.
He is using his influence to write the government policy that is causing the destruction of the USD.
Either way, if you know what the dollar is going to do, why not profit from it?
There is nothing wrong with profiting if you happen to know what something is going to do.
But to help destroy a currency while falsely claiming to be sympathetic to liberal causes so that he can turn and make billions is disgusting.
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