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Don’t bet against the 220 year trend for the dollar
Any trader will tell you the trend is your friend, and the overwhelming direction for the US dollar for the last 220 years has been down.
Our first Treasury Secretary, Alexander Hamilton, found himself constantly embroiled in sex scandals. Take a ten dollar bill out of your wallet and you’re looking at a world class horndog, a swordsman of the first order. When he wasn’t fighting accusations in the press and the courts, he spent much of his six years in office orchestrating a rescue of our new currency, the US dollar.
Winning the Revolutionary War bankrupted the young United States, draining it of resources and leaving it with huge debts. Hamilton settled many of these by giving creditors notes exchangeable for then worthless Indian land West of the Appalachians. As soon as the ink was dry on these promissory notes, they traded in the secondary market at 25% of face value, beginning a centuries long government tradition of stiffing its lenders, a practice that continues to this day.
My unfortunate ancestors took him up on his offer, the end result being that I am now writing this letter to you from California—and am part Indian. It all ended in tears for Hamilton, who, misjudging former Vice President Aaron Burr’s intentions in a New Jersey duel, ended up with a bullet in his back that severed his spinal cord. Cheney, eat your heart out.
Since Bloomberg machines weren’t around in 1782, we have to rely on alternative valuation measures for the dollar then, like purchasing power parity, and the value of goods priced in gold. A chart of this data shows an undeniable permanent downtrend, which greatly accelerates after 1933 when we ended the gold standard and moved to a fiat paper currency.
Today, going short the currency of the world’s largest borrower, running the greatest trade and current account deficits in history, with a diminishing long term growth rate is a no brainer. But once it became every hedge fund trader’s free lunch, and positions became so lopsided against the buck, a reversal was inevitable. We seem to be solidly in one of those periodic corrections, which began a month ago, and could continue for several more months.
The euro has its own particular problems, with the cost of a generous social safety net sending EC budget deficits careening. Just look at Greece, with a deficit of 12.7% of GDP, against the 3% it promised on admission to the once exclusive club. Unwinding of “hot” longs could easily take us into the $1.30’s against the euro, and new momentum driven longs could take us to the $1.20’s.
Use this strength in the greenback to scale into core long positions in the currencies of countries that are major commodity exporters, boast rising trade and current account surpluses, and possess small consuming populations. I’m talking about the Canadian dollar (FXC), the Australian dollar (FXA), and the New Zealand dollar (BNZ), all of which will eventually hit parity with the greenback. Think of these as emerging markets where they speak English, best played through the local currencies.
If you’re looking for a risk controlled pairs trade, I vote for going long the Canadian dollar and short the Euro. For a sleeper, buy the Chinese Yuan ETF (CYB) for your back book. A major revaluation by the Middle Kingdom is just a matter of time.
I’m sure that if Alexander Hamilton were alive today, he would counsel our modern Treasury Secretary, Tim Geithner, to talk the dollar up, but to do everything he could to undermine the buck behind the scenes, thus over time depreciating our national debt down to nothing through a stealth devaluation. Given Geithner’s performance so far, I’d say he studied his history well. Hamilton must be smiling from the grave.
For more iconoclastic, out of consensus analysis, visit www.madhedgefundtrader.com, where conventional wisdom is drawn and quartered daily. You can also listen to my weekly show on Hedge Fund Radio by clicking here at http://www.madhedgefundtrader.com/Hedge_Fund_Radio.html
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My silver, gold, platinum and palladium coins clank in approval. It's clear some countries are doing it right (Canada, Australia, Brazil) and most are doing it wrong. But how it all washes out I have no idea. The POWERS that control the world place an enormous emphasis on stability. Except Obama who wants to destroy the capiltalist system and replace it with big government and big union. Our economy and finances appear to be in a death spiral--decreasing revenue, increasing debt, and increasing cost to service the debt. It's sad to see the Declaration of Independence and Constitution become irrelevant relics of a more idealistic age. Anyway, convert your paper to commodities or they own you.
Australia and Canada are just lucky they have commodity based economies. I lived in Australia for 25 years and they are the most over governed country on Earth. They shoot themselves in the foot time and again. They should be the richest country per capita on Earth bar none, but are not. The Howard government actually succeeded in betting their fiscal deficit in the black. But the stupid electorate voted them out and now the current Rudd govt is back to the old ways. Common sense out the window. As Churchill said, "The best argument against democracy is your average voter." I amagine the same goes for Canada, but I don't know a lot about Brazil.
Re: Canada -
As an ex-pat living in British Columbia, I've found that watching the USD/CAN rate has become as much of a Canadian habit as Hockey nights and wearing tooks. I play a certain level of arbitrage between currencies by simple dint of having revenue streams from both sides of the border and stashing those from the US side in a US-Funds acct until the rate becomes favorable.
While investing in CAD currencies long term is probably a good idea, short term volatility can be brutal. Keep in mind that a year ago U/C rates were at 1.30, now they're at 1.02, meaning that as the US economy has "recovered" the dollar has lost 22% of its value against the loonie. Harper is unfortunately unable to do much about the continued erosion (it may very well hit parity in the next couple of weeks). While he could ordinarily try to jawbone the loonie down by threatening to drop interest rates, Canadian overnight rates are already about as low as they can get, and the economy is still too fragile (though improving relative to the US) to withstand such a rate hike.
For the next couple of months, the Canadians will probably not put much of a bar in the way of those rising rates - the Olympics in Vancouver should bring a fair amount of well-heeled traffic into BC, and once there they'll spend, so a high conversion rate means more revenue into BC coffers. Past that, however, I expect Harper and his cronies to do anything they can to cool the loonie's rise.
When, exactly, has Harper ever "jawboned" the loonie down? He leaves interest rate policy up to the Bank of Canada. And, in a year-end interview with CTV that was just a few weeks ago (so it probably has already exceeded the limits of your short term memory), Harper actually warned that Canadian interest rates would probably go UP in 2010, not down.
And the word is "toques".
Hmmm, if the CAD ever overshoots above parity, I'd be heavily shorting it. Stay long stocks (selective sectors) and greenback in 2010.
So... 1,2,3% inflation is a good thing.
Deflation incents people to hold money in mattresses and this is very dangerous, bc taking ZERO risk should have mild negative returns.
The right inflation target is prob 2.5% annually.
Gold has advanced by 4.5%/yr for 100 years.
So can we all say "kumbaya" now?
You will have to convince me why an inflation target of 0% isn't preferrable since 0% gives the investor and everyone else the confidence that the money will be owrth as much now as then and growth can be accomplished how it should be through actual economic advancement and production and the lowering of costs and increaqses in efficiencies.
I am also very skeptical of any inflation number produced by governments or that use government provided data as their sources of reference. Too easily manipulated by the very people who enefit most by that manipulation to be trusted.
An example I like to use is the 1963 90% silver quarter I carry with me every day (was born in 1963). I use it for explaing inflation. That quarter would buy a gallon of gasoline in 1963 - 47 years ago. Today a quarter buys less than a pint of gasoline but that silver quarter, the one that isn't FIAT buys 1 gallon plus a pint.
IMO, inflation is BS.
what if you took your fiat quarter and left it in an interest bearing deposit account since 1963 ? isn't that a more fair analysis ?
exactly... if inf = 0% then RFR = 0%.
this causes all kinda of problems, mostly bc there is some volatility in the inf rate and then deflation comes in crisis rewarding cash holders (exactly when everyone wants to hold cash).
a far more stable system is inf at 2.5% +/-1% and then a RFR of about 2.5% (in a steady state... maybe more or less depending on whether one wants to stimulate risk or dis-incent risk).
given wealthy society's preference for "Safety" at all costs... i bet the avg RFR over time is << inflation. bc there is excess demand for safety and not enough demand for risk and consumption.
the world is generally demand poor. WWII and Nazi germany and Y2K should've shown everyone that.
Generally agree; a perspective from here, though, is that 'we' like a cheap C$ as we are net exporting nation....mostly to US. So, though prob true, watch signs from our central bank / and/ or Fed gov try to resist rising $C vs $US through fiscal policy / int rate moves.
FT
The oligarchs will not let the dollar crash and bring down their wealth and power. More likely, they will let the serfs get as much into debt as possible then strengthen the dollar and gain even more control of the USA.
the oligarchs won't be in the dollar then. the only people in the dollr will be us citizens. Just like when fed and treasury were preparing for the melt down, the banks know, but were telling the public all was fine.
the public had to stay in until the oligarchs were short.
the oligarchs are international!!!!
They don't have to stay in dollars, and they will be the first to know when it is time to move on.
Just look at Ron Pauls book.... End the Fed.
There's a graph showing relative purchasing power of currencies with 1913 => $1 : $1...
The trend is so glaringly obvious even a grade school-er wouldn't continue to hold $.
Exactly! An excellent book and available from the Mises Institute (with other great books).
BTW the FEDERAL RESERVE NOTE (some call the US dollar) has actually been a FIAT currency for only about 40 years. Before that is was backed by gold per the United States Constitution. The 220 year 'dollar' analysis is faulty from the get-go.
BANK RUN BITCHES!!!
Love Ron Paul on drugs, govt waste, even HC.
On Economics... RP would lead us straight into the great depression.
Hint - "grandpa" is not good at economics (or investing).
How could he lead us into that which we are already in?
You've been indoctrinated by those who think human action can be engineered.
Paul's investment portfolio is up something like five fold over the last decade, and he is one of the top thinkers in the Austrian school of economics.
Pauls investment portfolio was down 75% over the prior decade.
So that's a 25% increase in 20-yrs... or 1%/yr.
No wonder he thinks there is rampant inflation.
The dollar WILL be devalued 3 old ones for 1 new one, and that's that. Sweet talk don't go anywhere these days mr. Mad.
Btw, u guys seen the 35min interview with Ron Paul and Steve Forbes?? It's OUT OF THIS WORLD....
Is this the interview?
http://www.forbes.com/2010/01/08/ron-paul-federal-reserve-intelligent-in...
Where can I see that? Link?
http://www.forbes.com/2010/01/08/ron-paul-federal-reserve-intelligent-in...
CYB is an ETF I've been looking at for a couple months as a safe and stable place to park some money, as the next several months seem very difficult for me to predict. I agree that a revaluation is a given, maybe not for a while, but certain nonetheless.
Thanks, great read.
Do you have links/suggestions on where to read more about Hamilton from a more focused finance/economics perspective?
Try Hamilton's Curse by Thomas DiLorenzo.
A quick read.
lookma, you might want to start at this recent post (from Tuesday) on Niederhoffer's blog Daily Speculations:
http://www.dailyspeculations.com/wordpress/?p=4303
Dick Sylla has a book about Hamilton's economic and financial contributions in the works
Brutal!
Bravo. Sound advice all round, you obviously know what drives exchange rates. However, i feel a word of caution is in order for the casual reader.
The past 6+ weeks have been witness to sudden - almost unrelenting - flows of capital (speculative?) into the loonie. Now i can't say how many hundred billions' worth it has been, just that it began soon after that surprisingly bullish report on canadian employment sometime towards the end of 2009.
Now, for the average american, if the intention is to protect one's retirement nest egg then i'd say the canadian dollar is an attractive option (sure beats doing nothing); for speculative purposes, there lies dual risks: that the boat may have already sailed, plus its rate is heavily influenced by oil prices.
Could there be more hot monies waiting to jump on the loonie? Well, who knows such things. i only offer a word of caution.
C'mon.... super dumb!
The USD is down ~2%/yr versus the EUR since Dec '04.
Inflation has been on a massive 40-yr decline to roughly 0-2% over the last 5 years.
But if what you mean is -- "buy stocks bc cash does not earn anything" -- that is prob good advice at this point in the cycle.