by Sara Nunnally, Senior Research Director, Taipan Publishing Group
The U.S. dollar is a false safety blanket for those fleeing market carnage… Take gains while you can, because next year, the bubble bursts.
For the two and a half months ending October 28, the U.S. dollar index climbed 21%. There’s no question why this rise is happening… Investors are swarming to cash, dumping all their stock and getting out of the markets altogether.
No surprise, really, when the Dow has dropped more than 15% since August 4, with an ultimate low-loss of 31% back in mid-October. The NASDAQ has fared even worse: down 23% since August with its greatest loss at 35%.
So cash is king in these times…
But it’s a false sense of safety. Every fundamental aspect of the dollar’s strength – outside this overwhelming demand – is a bright red flashing warning sign, and no one’s paying attention.
The U.S. Federal Reserve has slashed rates to a paltry 1%. Private consumption has fallen for the first time since 1991. We’ve seen severe and dramatic losses in equity and housing markets. Public-sector debt will be 6.75% of GDP next year, higher even than the debt peak during Regan’s administration. Unemployment rates are rising rapidly.
None of this bodes well for the U.S. economy, and to top it all off, our Federal Reserve has been printing money to raise credit and capital liquidity for struggling financial institutions.
The only reason the bottom of this charade has not fallen out is because investors still continue to see cash as safer than equities.
Losing Money Thanks to the Greenback
Let me say unequivocally: It’s not.
Investors can still “lose money” by holding cash. Look, over the past two and a half months, the U.S. dollar index has climbed 21%. Nice, right?
Not if you consider that from July 9, 2007 through mid-August, the U.S. dollar index fell 6.6%, with an ultimate low-loss of 12.9%.
That means that if you had $1,000 stashed away back in July, that grand would have been worth only $934 in mid-August.
So you can lose money by doing nothing…
FOREX.com notes, “[October] USD-buying demand was most likely behind the late week rebound in the USD and we will be watching closely to see how the USD fares once such buying is no longer present.”
Scotiabank Group’s Foreign Exchange Outlook says, “We maintain our view that the structural systemic deficiencies inherent in the United States credit and equity securities markets, together with a worsening fiscal outlook on the back of massive debt issuance activity, will translate into a weaker USD through the end of 2009.”
The U.S. Dollar vs. Oil
The first thing you should notice about those dollar index loss numbers I quoted is that they are not nearly as large as the recent rise we’ve seen in the dollar index. That should be your first clue as to this bubble forming.
For example, look at what oil prices did… In January, oil prices averaged $84.70 a barrel. They hit an ultimate high of over $147 in mid-July this year. That’s an average monthly gain of about 12% a month.
Absolutely massive… and quite similar to the gains the U.S. dollar index has made.
But oil prices have since imploded. On November 3, a barrel of oil sold for $63.93. That’s a drop of 56.5% in three and a half months. That’s how quickly things can change.
One has to wonder how long this bubble will last before people wake up to find that their cash is worth about as much as Monopoly money… An exaggeration, of course, but do you really expect me to believe that the U.S. dollar has climbed 17.5% against the euro in the past year? In these economic conditions? With the Fed slashing rates to 1% and printing money like mad?
Perhaps it’s not so much of an exaggeration at all.
How You Can Profit From the U.S. Dollar Bubble
So now that I’ve thoroughly depressed you, let me tell you what this means in real terms.
If the dollar drops in value, three things go up: commodity prices, other currencies and exports. Two of these are easily playable for investors.
First, commodity prices rise. Remember that example about oil price I gave you? Well, that historic rise and fall was mainly due to the dollar’s value. And we’ve seen this across the board with commodities…
Look at the price of gold. In January 2008, gold prices averaged $631.17 an ounce. By July, prices had topped out at $986. Gold prices are now trading around the $740 an ounce mark.
Look at the price of corn. In January 2008, futures contracts were trading for $4.84. In late June, they were trading for $7.96, and they’ve recently fallen all the way down to around $4.
Second, the value of other currencies, relative to the dollar, rises. We’re talking about the euro, the yen and a couple others.
We started the year with one euro buying US$1.4603, or 1:1.4603. In July, that ratio was 1:1.58.93. Now that ratio has fallen to 1:1.2626. That’s a massive drop, and it was way over-done.
Same story for the yen… Almost.
January saw one yen buying US$0.009, or 1:0.009. That ratio peaked at 1:0.0102 on March 17, and fell back down to 1:0.009 on August 15. But something interesting has been happening with the yen.
According to Scotiabank Group, “Japan benefited from the recent waves of heightened currency market volatility; the Japanese yen (JPY) appreciated markedly over the past two months as the unwining of carry-trade investment portfolios materialized and global market participants sought refuge in key world economies with floating currencies (China excluded) and massive external savings.”
The Group thinks that if global financial volatility eases, this currency could tumble.
Here’s the thing, though… Japan has little room left to cut rates, which would (in theory) devalue the yen a bit. But Japan needs to have a cheap currency in order to keep exports flowing. That’s the country’s bread and butter. If it can’t export, it dies.
A cheap currency also allows carry trading: borrowing cheaply and buying a higher-yielding asset.
Commerzbank noted in its November/December 2008 issue of “Economics, Interest Rates, and Exchange Rates” that, “[The yen] should continue to benefit for the time being from rate cuts around the globe. Another factor in its favour is the fact that investors’ willingness to take risks will probably only return very gradually. We do not therefore envisage any counter-movement to the latest strong appreciation before next spring.”
After that, things could get a little dicey for the Japanese currency.
A Good Hedge Against the Falling Dollar
So, a drop in the U.S. dollar value means a boost in commodity prices and currencies. One way of combating the coming dollar bubble is to grab some shares any number of ETFs.
In materials, like gold, silver, oil, grains, there are a wealth of exchange-traded funds (ETFs) that you can acquire, like the PowerShares DB Agriculture ETF (DBA :AMEX), or the United States Oil Fund (USO: AMEX). There are many, many others.
You may also play currency ETFs, like the CurrencyShares Euro Trust (FXE :NYSE) and the CurrencyShares Japanese Yen Trust (FXY: NYSE) in the near term at least, or numerous others with an inverse relationship to the U.S. dollar.
Interestingly, there’s also the PowerShares DB U.S. Dollar Index Bearish ETF (UDN:AMEX).
Any of these options might be a good hedge against falling dollar value.
The key thing to remember is that none of the underlying economic factors have changes that should be behind any rise in currency value. Things still look bleak for the U.S. economy for at least another six months, and that’s being optimistic.
So the question will be, when will people stop buying the dollar and start looking at the real issues?
You should be ready for when they do…
If you’d like to profit off the dollar’s decline, look into Everbank’s Debt-Free Index CD. This FDIC-insured CD is comprised of equal parts Singapore dollar, Japanese yen, Swiss franc, Australian dollar and Brazilian real.
Why these currencies? All five economies have a strong balance of payments-a factor that could aid performance against the U.S. dollar. And of the five economies, only Australia has a trade deficit – and the gap appears to be narrowing.
The U.S. dollar is a false safety blanket for those fleeing market carnage… Take gains while you can, because next year, the bubble bursts.
For the two and a half months ending October 28, the U.S. dollar index climbed 21%. There’s no question why this rise is happening… Investors are swarming to cash, dumping all their stock and getting out of the markets altogether.
No surprise, really, when the Dow has dropped more than 15% since August 4, with an ultimate low-loss of 31% back in mid-October. The NASDAQ has fared even worse: down 23% since August with its greatest loss at 35%.
So cash is king in these times…
But it’s a false sense of safety. Every fundamental aspect of the dollar’s strength – outside this overwhelming demand – is a bright red flashing warning sign, and no one’s paying attention.
The U.S. Federal Reserve has slashed rates to a paltry 1%. Private consumption has fallen for the first time since 1991. We’ve seen severe and dramatic losses in equity and housing markets. Public-sector debt will be 6.75% of GDP next year, higher even than the debt peak during Regan’s administration. Unemployment rates are rising rapidly.
None of this bodes well for the U.S. economy, and to top it all off, our Federal Reserve has been printing money to raise credit and capital liquidity for struggling financial institutions.
The only reason the bottom of this charade has not fallen out is because investors still continue to see cash as safer than equities.
Losing Money Thanks to the Greenback
Let me say unequivocally: It’s not.
Investors can still “lose money” by holding cash. Look, over the past two and a half months, the U.S. dollar index has climbed 21%. Nice, right?
Not if you consider that from July 9, 2007 through mid-August, the U.S. dollar index fell 6.6%, with an ultimate low-loss of 12.9%.
That means that if you had $1,000 stashed away back in July, that grand would have been worth only $934 in mid-August.
So you can lose money by doing nothing…
FOREX.com notes, “[October] USD-buying demand was most likely behind the late week rebound in the USD and we will be watching closely to see how the USD fares once such buying is no longer present.”
Scotiabank Group’s Foreign Exchange Outlook says, “We maintain our view that the structural systemic deficiencies inherent in the United States credit and equity securities markets, together with a worsening fiscal outlook on the back of massive debt issuance activity, will translate into a weaker USD through the end of 2009.”
The U.S. Dollar vs. Oil
The first thing you should notice about those dollar index loss numbers I quoted is that they are not nearly as large as the recent rise we’ve seen in the dollar index. That should be your first clue as to this bubble forming.
For example, look at what oil prices did… In January, oil prices averaged $84.70 a barrel. They hit an ultimate high of over $147 in mid-July this year. That’s an average monthly gain of about 12% a month.
Absolutely massive… and quite similar to the gains the U.S. dollar index has made.
But oil prices have since imploded. On November 3, a barrel of oil sold for $63.93. That’s a drop of 56.5% in three and a half months. That’s how quickly things can change.
One has to wonder how long this bubble will last before people wake up to find that their cash is worth about as much as Monopoly money… An exaggeration, of course, but do you really expect me to believe that the U.S. dollar has climbed 17.5% against the euro in the past year? In these economic conditions? With the Fed slashing rates to 1% and printing money like mad?
Perhaps it’s not so much of an exaggeration at all.
How You Can Profit From the U.S. Dollar Bubble
So now that I’ve thoroughly depressed you, let me tell you what this means in real terms.
If the dollar drops in value, three things go up: commodity prices, other currencies and exports. Two of these are easily playable for investors.
First, commodity prices rise. Remember that example about oil price I gave you? Well, that historic rise and fall was mainly due to the dollar’s value. And we’ve seen this across the board with commodities…
Look at the price of gold. In January 2008, gold prices averaged $631.17 an ounce. By July, prices had topped out at $986. Gold prices are now trading around the $740 an ounce mark.
Look at the price of corn. In January 2008, futures contracts were trading for $4.84. In late June, they were trading for $7.96, and they’ve recently fallen all the way down to around $4.
Second, the value of other currencies, relative to the dollar, rises. We’re talking about the euro, the yen and a couple others.
We started the year with one euro buying US$1.4603, or 1:1.4603. In July, that ratio was 1:1.58.93. Now that ratio has fallen to 1:1.2626. That’s a massive drop, and it was way over-done.
Same story for the yen… Almost.
January saw one yen buying US$0.009, or 1:0.009. That ratio peaked at 1:0.0102 on March 17, and fell back down to 1:0.009 on August 15. But something interesting has been happening with the yen.
According to Scotiabank Group, “Japan benefited from the recent waves of heightened currency market volatility; the Japanese yen (JPY) appreciated markedly over the past two months as the unwining of carry-trade investment portfolios materialized and global market participants sought refuge in key world economies with floating currencies (China excluded) and massive external savings.”
The Group thinks that if global financial volatility eases, this currency could tumble.
Here’s the thing, though… Japan has little room left to cut rates, which would (in theory) devalue the yen a bit. But Japan needs to have a cheap currency in order to keep exports flowing. That’s the country’s bread and butter. If it can’t export, it dies.
A cheap currency also allows carry trading: borrowing cheaply and buying a higher-yielding asset.
Commerzbank noted in its November/December 2008 issue of “Economics, Interest Rates, and Exchange Rates” that, “[The yen] should continue to benefit for the time being from rate cuts around the globe. Another factor in its favour is the fact that investors’ willingness to take risks will probably only return very gradually. We do not therefore envisage any counter-movement to the latest strong appreciation before next spring.”
After that, things could get a little dicey for the Japanese currency.
A Good Hedge Against the Falling Dollar
So, a drop in the U.S. dollar value means a boost in commodity prices and currencies. One way of combating the coming dollar bubble is to grab some shares any number of ETFs.
In materials, like gold, silver, oil, grains, there are a wealth of exchange-traded funds (ETFs) that you can acquire, like the PowerShares DB Agriculture ETF (DBA :AMEX), or the United States Oil Fund (USO: AMEX). There are many, many others.
You may also play currency ETFs, like the CurrencyShares Euro Trust (FXE :NYSE) and the CurrencyShares Japanese Yen Trust (FXY: NYSE) in the near term at least, or numerous others with an inverse relationship to the U.S. dollar.
Interestingly, there’s also the PowerShares DB U.S. Dollar Index Bearish ETF (UDN:AMEX).
Any of these options might be a good hedge against falling dollar value.
The key thing to remember is that none of the underlying economic factors have changes that should be behind any rise in currency value. Things still look bleak for the U.S. economy for at least another six months, and that’s being optimistic.
So the question will be, when will people stop buying the dollar and start looking at the real issues?
You should be ready for when they do…
If you’d like to profit off the dollar’s decline, look into Everbank’s Debt-Free Index CD. This FDIC-insured CD is comprised of equal parts Singapore dollar, Japanese yen, Swiss franc, Australian dollar and Brazilian real.
Why these currencies? All five economies have a strong balance of payments-a factor that could aid performance against the U.S. dollar. And of the five economies, only Australia has a trade deficit – and the gap appears to be narrowing.
