Posted on 11/02/2009 9:05:00 PM PST by blam
Is the U.S. Dollar About To Crush Stocks?
Currencies / US Dollar
Nov 02, 2009 - 07:00 AM
By: Graham_Summers
Long-time readers know that I’ve begun to develop a love/hate relationship with the US Dollar. On one hand I believe the US currency is horribly flawed given our unserviceable debt load and the Fed’s profligate spending.
However, on the other hand, to make money investing you have to be willing to go against the crowd. And with less than 3% of investors currently bullish on the US Dollar, the contrarian in me can’t help but wonder if we have the makings of a serious Dollar rally similar to the one that kicked off the 2008 Crash in stocks.
Thanks to Ben Bernanke and pals, the US Dollar has essentially become THE carry trade for the entire world. If you’re unfamiliar with “carry trades” these are investment strategies in which you borrow in one currency (usually one with very low interest rates like the Dollar today) and invest in another currency or investment class of higher returns. Provided the second investment returns substantially more than interest rate on the currency you’re borrowing in, this can be a highly profitable strategy.
With interest rates at 0.25% or so today, the US Dollar has become the carry trade of choice, with investors all over the world borrowing in Dollars and investing in stocks, gold, oil, virtually any investment class you can name. The end result is that the Dollar has begun to trade at a near perfect inverse relationship to pretty much everything out there:
[snip]
I give up....
wake me when its all over.
The USA is being set up for the greatest fall in history.
When the Fed finally decides to raise interest rates again (which they will eventually have to), the enormous USD carry trade going on now will unwind, sucking all the liquidity out of stocks and commodities as everyone falls over themselves to cover their short USD positions.
Potentially HUGE profit opportunity for those who know how to trade this.
What is the ETF for the US Dollar or is there one? I would watch a moving average of that ETF. There may be a big rally in the dollar and then short the S&P 500 index.
Not entirely. A big portion of these trades are overseas investors who are shorting the US dollar to invest in non-USA equities. That type of artificial pressure on a currency can only be maintained for so long before the bubble pops. When it does, the short covering will be epic, and foreign equities and investments are going to get hammered. Not just hammered, massacred. What will also get hammered are the gold bugs. In the meantime, US exporters are going to benefit from the weaker dollar.
If there's one thing I have faith in right now in the United States, its the ability of people to act in their own self-interest and figure out how to make money.
I subscribe to Graham Summers’ investment newsletter. He seems to know what he’s talking about.
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