Buy, Hold or Sell? The U.S. $

Once upon a time in a land called Back Then...there was a currency. A piece of fiat loved and respected throughout the world. The almighty U.S. dollar opened doors and brought greasy sweat beads to the palms of those who saw as much as a single Andrew Jackson in their future.

So popular and respected was the mighty greenback, we had to come out with a whole new line due to all the copycats. These tricksters with their printers made the literal "making" of dollars and industry all it's own. If only they had gotten an internship with Greenspan, things may have been better for all of us.

Funny how times have changed. The faces that once lit up at the sight of U.S. currency are now turning to dead stares and dismissive mumbles.

The situation can be explained by multiple factors, related to the far different global and domestic economic environment of the past decade. The real question, however, is how long will the dollar flux last? It is not just the Fed's policy which effects the currency issues playing with the dollar .

It seems that the U.S. having so little competition in the financial realm for so long is a prime factor (not discussed or recognized) our spastic monetary confusion. More and more I feel like we are following the trends of others, rather then setting our own. Something our bumbling regulators refuse to address. Something they refuse to even acknowledge.

Whenever their is a lone dissenter in any situation, I tend to want to hear him/her out. Whenever someone dissents to Fed policy, my ears perk up even more. When that person is Tom Hoenig I put down my coffee and focus all my attention.

Hoenig:
"Monetary policy is a useful tool, but it cannot solve every problem faced by the United States. In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long."
I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no shortcut."

Over the past year or so, I have spoken to several dozen currency traders who flip at the mention of the $. Some are wary, but most speak excitedly about an undervalued asset (some would argue, commodity) which can be depended on as a long term vehicle for growth.

"I am long the dollar, period".

My question is always the same, "how long?".

I rarely get a straight answer to that one.

Do you guys trust the dollar? My head and my heart are still in debate over the issue.

Comments (12)

 
Aug 15, 2010 - 1:37pm

The dollar is doomed...Ticking time bomb tbh.
When theres crisis, the dollar becomes stronger...but in the end we will print until we have huge run away inflation.

The contrarian trade of the decade would be going long the dollar though..

Id rather put my money in Canada, Switzerland, and Australia's currency

 
Aug 15, 2010 - 4:36pm

Midas Mulligan Magoo:
Affirmative_Action_Walrus:
the top? i wish! nah, i think 1.20

i think it'll hover around 1.20-1.30 in the near future, but always trending down closer to 1.20

Any Walrasian logic to this or just a itch of the tusk?

the notion popped into my head whilst foraging for mollusks on the sea floor

 
Aug 15, 2010 - 11:41pm

First off, the dollar and the eurozone are very similar economies. They both have similar GDP, similar population (though the Euro is more on both counts), but the US is the world's reserve currency because of its status as the world premier military power. Not to mention, other metrics such as debt/GDP, deficits/GDP are similar between certain major Eurozone countries and the US (I don't feel like running the numbers now). Thus, the two currencies, in an ideal world, should hover at an exchange rate around par, in my own opinion.

I think part of the confusion stems from the fact that you must be long the dollar relative to some other currency. So people who say the dollar will fall might not realize that if that happens, other major currencies (ie the Euro) will also fall.

For example, suppose the dollar falls really hard. This would basically destroy demand that Americans currently have for Chinese goods, since these would be more expensive. China, however, runs a surplus with the US, and a deficit with the rest of the world. So countries that supply China, like Australia and Brazil, will see their currencies fall, since demand for those currencies will fall as the Chinese will no longer demand raw materials from those nations. With less Chinese demand, the prices of commodities from Australia and Brazil will fall, and since these commodities are priced in dollars, it will appear as if nothing happened, since the currency they are priced in also fell. To sum up really Quickly:
Fall in US$ = Fall in Demand for Chinese Goods = Fall in Demand for Commodities from Australia and Brazil = Fall in A$ and Brazilian Real = Commodity prices remain neutral in US $ terms. Confusing, right?

Not to mention, if the US$ crashes, the Euro will crash as well (probably even harder), because the Eurozone faces even greater challenges than the US (we can borrow for a lot less than they can because of reserve currency status... though this might seem like it contradicts my first paragraph I don't believe that to be the case... since the Eurozone is so intertwined diplomatically/militarily with the US, their currency should be the same value as the US$, but they might not get all the benefits that the US does from reserve currency status). Again, this is very tough to wrap one's head around.

I don't think the Yen looks good either. Demographically, the country is slowly dying (literally, more people die than are born there, thus the population is shrinking). Thus, in the really long term (when all of us are dead, not just the old in Japan), the currency should weaken as the economy stops growing and demand for the currency begins to falter.

The Swiss economy runs a trade surplus. The country's central bank recently has been intervening in FX markets to weaken the Franc against the Euro, to keep exports competitive.
http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=…
The Swiss run a trade surplus, and if the dollar crashed (and subsequently, the Euro), then US$ and Euro goods would be cheaper, and the Swiss might not be able to compete. Further down the line, the Franc would fall in value simply because of less demand, returning it to an equilibrium with US/Euro.

Obviously, I am all over the place, as its getting late and I'm in a hotel lounge just fucking around thinking about this. My main point is that its all relative: you can find a way in which a $ crash could potentially impact other currencies. And I am sure I am missing tons of factors in all of this anyway.

At the end of the day, I don't think the $ is trash. In fact, I have all my money in it. The US is the world's reserve currency because it has the strongest military. It can borrow at exceptionally low rates. It is the world leading manufacturer, third in oil production, and first in consumption.

Not to sound like a broken record, but I don't think you can go wrong with a position in gold. I am by no means a gold bug, but I do think its a safe place to put money considering all the volatility in currency markets. Gold has an inelastic supply curve in the short run, and demand (Aside from jewelry, check out gold sales in India, and some electronics), its main purpose is to be a store of value, which it has done a decent job of for several thousand years (also, take a look at a chart of Gold vs. US $ between today and the mid-70s).

My order of being long would be:

  1. Gold or US Dollar

  2. Everything else

Stick with what is safe... thats my own view... then again, I only follow markets/economies as a hobby, and I am by no means a professional investor qualified to give advice.

looking for that pick-me-up to power through an all-nighter?
 
Aug 16, 2010 - 1:45am

<span><a href=//www.wallstreetoasis.com/finance-dictionary/what-is-london-interbank-offer-rate-libor>LIBOR</a></span>:
First off, the dollar and the eurozone are very similar economies. They both have similar GDP, similar population (though the Euro is more on both counts), but the US is the world's reserve currency because of its status as the world premier military power. Not to mention, other metrics such as debt/GDP, deficits/GDP are similar between certain major Eurozone countries and the US (I don't feel like running the numbers now). Thus, the two currencies, in an ideal world, should hover at an exchange rate around par, in my own opinion.

I think part of the confusion stems from the fact that you must be long the dollar relative to some other currency. So people who say the dollar will fall might not realize that if that happens, other major currencies (ie the Euro) will also fall.

For example, suppose the dollar falls really hard. This would basically destroy demand that Americans currently have for Chinese goods, since these would be more expensive. China, however, runs a surplus with the US, and a deficit with the rest of the world. So countries that supply China, like Australia and Brazil, will see their currencies fall, since demand for those currencies will fall as the Chinese will no longer demand raw materials from those nations. With less Chinese demand, the prices of commodities from Australia and Brazil will fall, and since these commodities are priced in dollars, it will appear as if nothing happened, since the currency they are priced in also fell. To sum up really Quickly:
Fall in US$ = Fall in Demand for Chinese Goods = Fall in Demand for Commodities from Australia and Brazil = Fall in A$ and Brazilian Real = Commodity prices remain neutral in US $ terms. Confusing, right?

Not to mention, if the US$ crashes, the Euro will crash as well (probably even harder), because the Eurozone faces even greater challenges than the US (we can borrow for a lot less than they can because of reserve currency status... though this might seem like it contradicts my first paragraph I don't believe that to be the case... since the Eurozone is so intertwined diplomatically/militarily with the US, their currency should be the same value as the US$, but they might not get all the benefits that the US does from reserve currency status). Again, this is very tough to wrap one's head around.

I don't think the Yen looks good either. Demographically, the country is slowly dying (literally, more people die than are born there, thus the population is shrinking). Thus, in the really long term (when all of us are dead, not just the old in Japan), the currency should weaken as the economy stops growing and demand for the currency begins to falter.

The Swiss economy runs a trade surplus. The country's central bank recently has been intervening in FX markets to weaken the Franc against the Euro, to keep exports competitive.
http://www.tradingeconomics.com/Economics/Balance-of-Trade.aspx?Symbol=…
The Swiss run a trade surplus, and if the dollar crashed (and subsequently, the Euro), then US$ and Euro goods would be cheaper, and the Swiss might not be able to compete. Further down the line, the Franc would fall in value simply because of less demand, returning it to an equilibrium with US/Euro.

Obviously, I am all over the place, as its getting late and I'm in a hotel lounge just fucking around thinking about this. My main point is that its all relative: you can find a way in which a $ crash could potentially impact other currencies. And I am sure I am missing tons of factors in all of this anyway.

At the end of the day, I don't think the $ is trash. In fact, I have all my money in it. The US is the world's reserve currency because it has the strongest military. It can borrow at exceptionally low rates. It is the world leading manufacturer, third in oil production, and first in consumption.

Not to sound like a broken record, but I don't think you can go wrong with a position in gold. I am by no means a gold bug, but I do think its a safe place to put money considering all the volatility in currency markets. Gold has an inelastic supply curve in the short run, and demand (Aside from jewelry, check out gold sales in India, and some electronics), its main purpose is to be a store of value, which it has done a decent job of for several thousand years (also, take a look at a chart of Gold vs. US $ between today and the mid-70s).

My order of being long would be:

  1. Gold or US Dollar

  2. Everything else

Stick with what is safe... thats my own view... then again, I only follow markets/economies as a hobby, and I am by no means a professional investor qualified to give advice.

Nice job, LIBOR. This is the kind of response I was expecting from you. That having been said my one and only complaint with gold is that it is much harder to unload (at fair value) these days. I definitely agree that the words "reserve currency" and "military" go hand in hand...often ignored point.

 
Aug 16, 2010 - 6:16am

There will be inflation in the U.S. within the next few years, 100%.

There is a pattern in history that is: small inflation(during good times), then deflation(when the recession hits), massive inflation(when the FED prints 24/7 to get out of the recession)

Ever heard of 'fractional banking'? It expands the money supply. With the huge housing market the money supply was greatly increased. When the housing collapsed and home equity were destroyed, it actually shrank the money supply. Now we have a time of deflation like circumstances and the FED is giving away money.

It follows the same process: small inflation, deflation, massive inflation.

At least that's what I think.

Yours truly, The Young Investor
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