Dollar bears will be crushed

M

mtzianos

"Dollar bears will be crushed" (I read it in some ET thread a few days ago). "Buffet will lose his shirt going against Bush". I read a lot of these "patriotic" comments (and maybe much more of those have been written by neo-con [neo-fascist] people waving flags, who I try to add to my ignore list asap, so I probably missed them)

I don't trade currencies, but inevitably i watch them, as I'm in EuroZone and most markets I trade are in USA. So the fluctuations of my USD trading capital when converted back to home currency are substancial.

So, who benefits and who loses from a depreciation of the dollar?

In light of recent market action, here is my interpretation:

1. USA is a big debtor, both in terms of state debt (gov bonds) as well as household debt (MBSs). The holders of this debt are primarily non-Americans, namely Asian countries. The duration of this debt is quite short (by historical standards).

Just the interest payments on the outstanding debt, even at the current historically low rates, will soon consume most of the US state's tax income.

Most US households are loaded with debt, just to afford a regular home (those half-million-usd median house price things, courtesy of negative real interest rates during all these years). And rising interest rates are increasing their burden.

Are incomes or employment in US rising significantly? All evidence (even the fudged gov statistics) say no.

My opinion is that, if we take all factors into consideration, a WEAKER dollar (or even a temporary plunge of the dollar) would be a GIFT to the US debtors (state and citizens), because it would allow them to pay back their debt with "cheaper" dollars.

And all actions (e.g. US pressuring China to revalue) are actually confirming that US wants a lower dollar. Even temporarily for 1-2 years. Even if it causes a small domestic recession in US.

All evidence I see is that US is actively trying to inflate away part of its huge debt. Otherwise it would have to either default on it (like Russia or Argentina). Or the people in the USA would have to work for decades to pay it back, with interest (they'd have to work even harder to repay the debt, if the dollar becomes "stronger" in the future)

Who loses BIG from a weaker dollar? The foreign holders of US assets, namely Japan and China, who take a big hit as a percentage of their GDP. Once they revalue their pegs. (hint: which US is pressuring them to do for some time!). But it was their choice to employ a mercantilistic policy, to subsidize their exports/employment, know-how transfer etc. So don't feel too sorry for them.

So, I suspect that this last spike-up in USD, is being engineered by Asians holders of USD (mostly Japan) as a last-minute desperate attempt to maybe LIGHTEN UP some of their USD holdings and diversifyinto Euro/CAD/AUD/Gold/whatever, by 1) triggering the stops of all those leveraged hedge funds and 2) short EuroFX initiations of the trendfollowing funds.

I know that trendfollowing funds initiate short positions in EuroFX and other currencies today.

So maybe today 13-May-2005 is the day to hedge your USD holdings.
 
Quote from mtzianos:

(1) "... Just the interest payments on the outstanding debt, even at the current historically low rates, will soon consume most of the US state's tax income.

My opinion is that, if we take all factors into consideration, a WEAKER dollar (or even a temporary plunge of the dollar) would be a GIFT to the US debtors (state and citizens), because it would allow them to pay back their debt with "cheaper" dollars.

(2) "... Who loses BIG? The foreign holders of US assets, namely Japan and China, who take a big hit as a percentage of their GDP.
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#1. Not correct. The state's tax income will not be used to pay back the debt. As planned all along, the Gummint will issue enough bonds at each auction to not only retire maturing debt, but raise enough money to pay the interest on outstanding debt. (That's how Ponzi schemes work.) The Gummint NEVER had any intention of retiring debt with tax revenues.

#2. Partially correct. While it is the aim of the Gummint to stiff all who were foolish enough to buy US debt, all US citizens will be hosed as well through currency devaluation... "$USD => $Charmin".

The US Gummint and the Fed have committed and continue to commit the greatest financial crime and fraud in the history of civilization.
 
Quote from mtzianos:


In light of recent market action, here is my interpretation:
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This sentiment has been around for quite some time now and one could easily argue the drop in the dollar for the past several years equally "engineered" in regards to debt valuation (not my assertion, but just in light of what you wrote). I don't see why a recent rise in the dollar makes this view any more relevant now than before, other than that a long-term dollar bear would use this strength for re-entry/adding on to his position if he were so convinced. But that bear should have been short a long time ago if he were doing so for the reasons you've listed above. JMO
 
you certainly have interesting view in this matter. it would be nice if world economy is a simple math and there is a way for us to see who the loser is financially. but there are politics involved. the fact that japan and china hold large amount of us currency/debt has a profound political impact on usa. you have to understand, the treasury officials of china and japan now are people that worked in organization such as world bank or us investment banks, meaning they strategically bought more and more dollars as dollar dropped knowing exactly what the consequences are. governments have different goals than us traders. its difficult to judge who the winners or the losers are.
 
from bill cara's blog site

-I say that if the Bank of China does not revalue the Renminbi yuan this weekend, which is a longshot at best, there will be serious hedge fund failures next week. That’s because traders like me are massively short the dollar and will have to close those positions.-
 
Just see it in a more simple way.

The US (both government and households) borrow massively, and drain more than 1/3 of the world savings every day! Isn't it too much?

Now where is the sustenaible equilibrium point, don't know. May be we are right on it. But if 1/3 is too much for the world economy, the easy way to drop that number is for the exchange rate to fall.
 
Quote from SethArb:

from bill cara's blog site

-I say that if the Bank of China does not revalue the Renminbi yuan this weekend, which is a longshot at best, there will be serious hedge fund failures next week. That’s because traders like me are massively short the dollar and will have to close those positions.-
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BS... the basis now is tiny on a CNY forward, anyone who has had a short USD long CNY position is in the terminal phase of the trade; and it's not a substantial phase. It's just going to be a loss just like any other loss; definitely not a "serious failure" and most HF are not MASSIVELY short the dollar on an outright basis. Even if they were there is no impetus for the dollar to spike significantly higher and squeeze them out. 1.25 on the EURO is definitely in the cards but I don't think that long term we can say that the dollar is going to appreciate substantially.
 
Quote from gnome:


The US Gummint and the Fed have committed and continue to commit the greatest financial crime and fraud in the history of civilization. [/B]
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Right idea, wrong perps. They are just pawns.
 
Some things have to give to bring it down no doubt about that. The most likely factor is of course a fall in dollar or interest rate.

But it seems like most people forget. The US are privileged in that most countries accept dollar as a currency. Meaning that they can buy goods for dollars and not necessarily the home currency. US central bank could also wipe out all loans with just printing money. Of course this would ruin the world economy, but I mean it is a possibility.

ORM
 
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