Tuesday, September 2, 2008

The Surge of the US Dollar

Good evening folks!

I wanted to talk about the US dollar tonight. Take a look at the chart below:

As you can see, the dollar has soared over the past month. Now one would think this would be a good thing for our economy right? Wrong.

Now don't misunderstand me, I think its very important that the USA has a strong currency. Its good for our country and great when you want to travel abroad!

However, what we need to look at during when we look at this recent surge in the dollar is why is it happening? Normally you see the dollar strengthen when the Fed raises interest rates. Now we all know that that isn't the case today as the Fed has sharply cut rates since the end of last summer.

Notice up above how the value of our dollar started to weaken in Sept. as the Fed started slashing rates. Now we all know the Fed has kept rates low so the question then becomes why have we had this huge surge in the dollar over the past month?

The reason for the surge is traders are now beginning to see that the Eurozone and Japanese economies are starting to fall apart. The belief going forward is you will start seeing rate cuts overseas just like we saw over here last summer.

Certian countries like Spain and the UK have worse housing bubbles than we do! Australia dropped their rates yesterday for the first time in 7 years.

Traders are starting to realize that many countries are in worse shape than we are economically and we will see a global slowdown. I guess now itbecomes a race to the bottom economically for all of us! Some are guessing that we will be the first ones out of the global slowdown because we were the first ones in.

The bulls say this is why you should be buying US equities. Get in now because we will recover first. I say BULL****. I believe we are in just as bad a shape as these other countries, and we will all have to wallow in this together for years before we can start working our way out of it.

So beware people! The strong US dollar is a huge warning sign that the whole world is slowing down. Throughout history, countries always flock to the US whenever things get bad globally. Why do you think countries fall all over each other to buy our treasuries? We are still considered to be the safest haven in the world. If I was a FCB I sure as hell would be buying UStreasuries.

Bottom Line

The strengthening of the dollar is an ominous sign that the world is slowing down. If this is the case, the whole global growth story goes out the window. Combine weak global growth with our crippled consumers and banks and you build a strong case to stay the heck away from US equities.

I mean think about it. How can our multinational companies going to grow when imports have become 30-40% of their earnings? There growth in the US is anemic so the only conclusion you can make is its going to be very difficult to grow earnings in this environment.

The strengthening dollar should not be perceived as positive at this point of the economic cycle. The 10-year plummeted today because money was soaring into treasuries not equities. Follow the smart money.

Sadly, treasuries are slowly becoming the only place to be as an investor.


Jeff said...

A major commodity hedge fund blew up tonight after posting a 38% loss for the year.

This probably explains a lot of the craziness in commodities yesterday. Lehman owns 20% of this..OOPS

Getting interesting folks. The plot thickens:

Ospraie Will Close Hedge Fund After 38 Percent Loss (Update1)

By Katherine Burton and Saijel Kishan

Sept. 2 (Bloomberg) -- Ospraie Management LLC, the investment firm run by Dwight Anderson, will close its biggest hedge fund after it fell 38.6 percent this year because of losing wagers on commodity stocks, according to a letter to investors.

The Ospraie Fund lost 26.7 percent in August, after a ``substantial sell-off in a number of our energy, mining and resource equity holdings,'' Anderson, 41, wrote in the letter today.

``I am extremely disappointed with this result and the fund's sudden reversal in performance,'' he said. ``After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.''

Anderson started the Ospraie Fund in 1999, when he worked at Tudor Investment Corp., the Greenwich, Connecticut-based hedge- fund company run by Paul Tudor Jones. He spun off from Tudor at the end of 2003.

The closing of the Ospraie Fund, which managed $2.8 billion as of the beginning of August, leaves the New York-based firm overseeing three remaining funds with more than $4 billion in assets, down from $9 billion in March.


Minton Mckarkquey said...

Great analysis - all the apparent good news is because the situation elsewhere is looking uglier by the day. It's hardly a bull story when your rationale is "we're not as screwed up as everyone else".

The weak dollar has essentially been holding up the blue chips on exports - as the $ strengthens and US consumption remains sluggish, I'd expect Q4 results to be surprisingly down.

Wow, Ospraie blew up... Lehman seems to have the anti-Midas touch!

Jeff said...

LOL Minton

Poor Lehman. They can't seem to catch a break.

Its going to be interesting to see if they make it.

They are expected to announce a $4 billion loss when they release earnings. They will have to have a capital infusion to survive and they can't seem to close the Korean deal.

My best guess is if they can't get a deal done they are toast.

Minton Mckarkquey said...

Just a comment on Ospraie, since it has echoes of an Amaranth-style screw-up.

Both of these funds collapsed due to the lack of hedging that makes hedge funds so famous. It's high-time that the SEC regulated these funds to ensure their investment decisions are in line with their prospectuses.

Betting the shop on a one-way guess about energy prices is tantamount to "putting in all on red" in roulette, and just as shareholders ask questions about why banks were so exposed to subprime, hedge fund participants should have legal recourse when their funds take these extreme positions.

Needless to say, the head trader at Amaranth - who lost $6.6bn of the fund - immediately got hired at another fund, while 600 other folk lost their jobs. Accountability, anyone?

Jeff said...


Thats crazy! Why do these people get second chances. Everytime I see Abby J Cohen from Goldman Sachs I always think about the tech bubble.

There is word on the street that another commodity fund just blew up. Just put up a post.


Avl Guy said...

Minton, why should Hedge Funds be regulated by the SEC regarding their prospectus? Why not full unadulterated caveat emptor?

Let some of them keep blowing up and let their investors keep losing their money until they shy away. A fool and his money are soon what?

If there are fund managers in hedge funds who do not adequately disclose that they are in there, they and their firms should disciplined/prosecuted and properly discredited.

Im not against hedge funds or risk-taking, I just believe it should be exactly that...unregulated private risks with no undisclosed investments by public funds and no public regulators.

Minton Mckarkquey said...

avl, you might well we right but it seems like criminal negligence in some of these cases!