Wednesday, February 17, 2010

The Long US Dollar Trade Appears Overdone

Currencies have been the talk of the markets this week.

The dollar vs. the Euro has been all over the place since Monday. Gold soared as the dollar sold off yesterday. Today we have seen the dollar come screaming back.

I can't help but notice that gold didn't sell off with the dollar rise today. Is this a just fluke or the beginning of a new trend? Time will tell.

When it comes to currencies the world seems a little undecided following the dollar's huge move.

Recent events in Greece as well as trouble in Portugal and Spain have strengthened the US dollar considerably.

However, as our economy continues to suffer you need to wonder: Are investors buying the US$ because they think it's a strong currency or are they flocking to it because they believe the Euro is weakening.

This is a distinct difference in my view because this trend could violently reverse if investors are buying the US$ out of fear versus confidence. I say this because it won't take much for Europe to reverse this trend.

There are signs that Europe may be starting to wise up which could be very bearish for the US$.

I say this because it appears more and more evident that Germany will not bailout Greece. Looking at the most recent poll numbers, it would be political suicide to do so:

"A majority of Dutch people want Greece to leave the euro, Dutch daily De Telegraaf reported on Wednesday based on a poll it commissioned.

The poll among 5,300 Dutchmen showed some 92 percent felt Greece should leave the euro currency, while more than 90 percent of the respondents are also in favour of the Netherlands and Germany exiting the euro zone and getting their own currency back, the paper said.

Based on the poll, more than 60 percent of the respondents are worried about developments in Greece, because banks which have bought Greek debt may run into trouble and cause a new crisis, the paper said."

My Take:

I have seen similar poll numbers in Germany. I can't see how they can touch Greece right now with the polls looking like they do. Germany also knows that if a handout is given to Greece, Spain and Portugal will be knocking on there door the next day looking for the same.

The issue Germany has here is they do not have the funds to bailout all three. Portugal and Spain's economies are too large for Germany to bailout. Germany also doesn't have a currency to inflate even if they wanted to do so. As a result, the chances of a Greek bailout are slim.

The dollar has soared as a result because many fear that the Euro may collapse or be damaged by the cost of bailing out the PIGS. I think the odds of either of these two events occurring are slim to none.

The aftershocks of bailing on the Euro would be felt worldwide ,and I don't think the world leaders would consider such a move with the economy being as weak and vulnerable as it is. A bailout seems unlikely because they can't inflate the Euro which means the money simply isn't there for a bailout.

So what would these events do to the dollar rally?

Many think it will create more instability which will only further strengthen the dollar. I disagree.

Ask yourself this question: If the Euro holds together(a risk) and they say no to a Greek/PIGS bailout doesn't this strengthen the fiscal position of the countries that back it?

Could Europe's fiscal responsibility then cause the dollar to plunge?

Let's take it a step further: If Greece or another one of the PIGS then threatens to leave the Euro in a hissy fit won't it only make the currency stronger?

Many are long the dollar right now and it's worked but I am starting to think that this trade may be overdone.

My reasoning for this moving forward is Europe is much more disciplined than the USA when it comes to cleaning up financial messes.

Before I explain why, let me preface this by recognizing that during the good times, the leverage used in Europe was much higher than it was here. Their banks are a mess and in many ways are in much worse shape then our insolvent banks here in the US.

That being said, the million dollar question as we look forward is who will be more disciplined with their regulation when it comes to cleaning up the excesses of the worldwide 30 year credit bubble?

So far I believe Europe has far better policies set in place to begin the cleanup versus the US.

I mean heck...We are still trying to play Ponzi finance over here!

The crooks on Wall St are still allowed to leverage up and make billions as they continue trading taxpayer dollars. If they lose and go broke after taking on too much risk? No problem! The taxpayer is here to clean the mess up.

Washington refuses to stop Wall St's games. This of course will eventually lead to another financial crisis.

Meanwhile over in Europe they have nationalized many of their banks, and they appear to be ready to say no to huge sovereign bailouts. This is a huge step in the right direction in my view.

In England, its the queen who tells the banks how they are allowed to spend their money! The banking criminals in the city have been put in their place.

Meanwhile over here in the US its still the wild wild west on Wall St.

The Bottom Line

The US dollar still reigns supreme as Europe and its currency find their way through their own debt crisis. Greece is Europe's version of our "Subprime Crisis".

However, unlike this country, they seem to be actually trying to contain it by forcing Greece to work through their own problems.

Will Germany stick to their guns and continue to say no to a Greece bailout? Time will tell. If they do, I think there is a good chance Europe climbs out of this mess before the US does unless we decide to stop the madness on Wall St.

Our reputation as the world's "safe haven" will only last so long without real financial reform. All of the talk around reform in this country has been just that: TALK!

If we continue the gunslinger mentality when it comes to our policies on bailouts and financial reform there is no doubt that our economy will once again crash and our currency could very well go down with it.

Disclosure: No positions in any currencies. Long gold and silver via GLD and SLV.


getyourselfconnected said...

Hey Jeff!

Nice post. I think the US state insolvency issue should make some a bit more clear on the dollar's all powerful place. Maybe Modern Monetary Theory (MMT) is the FED's final plan?

Gold tanked at days end on an IMF sale story, but it is the other half of the sale they announced a while ago (and India bought it all) so that was weird. Selling gold to raise cash to bail oit the PIIGS may seem funny later on I think.

flipdippy said...

This story is one to which I am paying very close attention.

There are more and more details coming out suggesting Goldman Sachs played an integral role with Greece and may be using their AIG playbook here. I'm assuming you saw the NYT piece about how they were paid to help them hide their debt. You have to assume they also were placing massive derivative bets on a sovereign default.

I'm assuming Greece will be bailed out. We'll see what form it takes.

But what if the Europeans force the bail out onto the USA via the IMF? What happens to the Euro? What happens to the USD? What happens if J6P finds out GS is again being made whole for gaming the system to the tune of hundreds of billions of dollars? What happens if Germany bails out Greece with a handshake and wink arrangement with the US that they'll be responsible for Spain + Portugal while the UK will be responsible for Ireland?

What if GS puts their cards on the table and demands to be paid?

This all may blow over or it may be a canary in the coal mine like Bear Stearns was in 08.

Like I said, pay attention to this one.

Jeff said...

Hey Get


Yeah I saw gold dropped off. I was wondering why.

Yeah the only way out for the PIGS is the IMF.

Since its mainly USA backed a bailout wouldn't surprise me.

That could also strengthen the euro because that looming debt risk would be mopped up.


Jeff said...



Been following all of that Goldman Suchs crap.

I hope that Europe bans them from trading over there like they said they might.

You raise a very plausible scenario. I don't think Europe will bite but the IMF might.

Like I told get, I see it as a positive on the Euro and a negative on the USD.

I will be watching closely as well!

Anonymous said...

"That being said, the million dollar question as we look forward is who will be more disciplined with their regulation when it comes to cleaning up the excesses of the worldwide 30 year credit bubble?"

No question they will but respectfully, you are only looking at 1/2 of the picture.

Europe's biggest problem going forward (next 30 years) is a declining population and massive, massive, entitlements coming due. Its like our social security, medicare benefits, on steoroids.

With the declining population and declining amount of workers (relative to the elderly) producing and adding to the GDP/govt coffers, Europe is gonna look like Japan.

How they attempt to "solve" this (via immigration, reduced benefits, currency inflation, or a combination thereof) will greatly determine the strenth of the Euro in the years to come.

Anonymous said...

Nobel Prize Winning Economist Joe Stiglitz joins Paul Krugman, Calculated Risk, Nouriel Roubini, et al - the Govt must go into debt now and talk of reigning it in at the present time is "short sighted". The blogger "Jeff" disagrees. News at 11.,tbt,uup,spy,dia,%5Egspc,%5Edji

jeff said...


The Fed raised rates.

Tomorrow will be ugly for the markets. Lets see if they continue to tighten.

Hopefully we continue down this path.

Anonymous said...

Hey is everybody still here?

That wasnt any of the regular posters here who flew into an IRS building yesterday was it?

Judging from the doom laden posts, ya never know...

Jeff said...


Keep drinking the economic kool aid.

That worked out so well for you in the last 10years hasn't it?

The bottom will be in on the markets when people like you capitulate and sell their stocks.

Only then will I become bullish.

I am a realist. If you want to call it gloom and doom have at it. Go stick your head back in the sand and go long the S&P.

I am sure that will work out great!

Banditfist said...

Been wondering when I should sell my UUP. It has done real well in the last 3 months.

Anonymous said...

"I am a realist. If you want to call it gloom and doom have at it."

Its funny - of all the people ive met the more permabearish or more permabullish they are, the more likely they are to have to continue to insist "I am a realist".