Tuesday, July 13, 2010

Is the US Dollar in Trouble?

Good Afternoon All!

The rally rolls on.  We closed just below 1100 on the S&P.  The futures are up strong after the close as the bulls continue to get emboldened by their recent winning streak.

I am not surprised we got back up here.  I had said a few days ago that the market becomes an interesting short at the 1100 area.  However, I did not think we would get here so quickly so this rally may have some more legs as we head into OpEx.

With all of the speculation that we are seeing in the markets the economic data simply doesn't matter right now.  Traders have gone hog wild buying calls as the shorts are forced to cover which exacerbates moves higher in the market.

This is why I basically avoid the market all together at this point.  As I have said many times recently:  The stock market has turned into nothing but a speculative casino where the odds are stacked against you because you are not on the inside.

If I want to gamble, I would rather take some money out of the ATM and go to the casino and play some craps.  This seems far more prudent versus trying to trade or invest your life savings in the Wall St casino.

The idea of "buying and holding" makes even less sense if you have a bearish fundamental view as to where we all end up when this roller coaster ride finally ends.  I expect equities to look like the the NASDAQ did in 2000/2001.

Like all gamblers, most of the traders will end up broke.  The problem this go around there will be no jobs to make back their losses this time like they were in 2001 as the housing bubble got started.

Some final advice on trading before I get into some analysis:  If you decide to speculate in this market, use the same amount of money you would take to a regular casino.  Expect to lose it.  If you make some good calls then take some profits and save them.  You are going to need the money to survive on when this whole economy collapses.

Please don't get stuck holding the bag like many did earlier this decade.

Alrighty, let's get to Mr. Market:

Is the US Dollar in Trouble?

I am seeing some really smart money starting to bet on a weaker US dollar and inflation.

I will explain why below.  First let's take a look at the Euro versus the US dollar the past couple weeks:

My Take:

As you can see, the Euro has been soaring in recent days versus the USD.  What's interesting about today's move is the Euro rose sharply despite the bearish news on Portugal:

Portugal’s government bond ratings were cut to A1 from Aa2 at Moody’s Investors Service today.

So why didn't the dollar strengthen against the Euro after such bearish news?

IMO, investors are starting to change their views since Europe has announced severe austerity measures.  If they are able to implement these austerity measures things will dramatically improve when it comes to their debt markets.

If the United States does not come along for the ride its going to find itself in hot water.

As Europe begins to dig themselves out of debt, the bond market will start worrying less about debt downgrades in Europe because they understand that things should improve following massive spending cuts.  We saw an example of this today when the Portugal news was basically ignored.

I think the smart money is beginning to bet that the US does not have the political will to implement severe austerity measures.  The Fed appears to still want to spend like drunken sailors.  They have given us no other indications to think otherwise.  

If we continue to spend as Europe tightens it's financial belt the US dollar is going to get slaughtered.  Inflation will then become a serious threat.

John Paulson seems to be taking this trade with his recent moves by going long housing mainly in Florida and gold.  Here is an excerpt from a recent speech in London:

"But Paulson's own investments -- his fund is rated no. 1 in the world by Barrons -- reflect his inflation concerns: His firm is the largest holder of gold exchange-traded funds in the world. Paulson told his London audience that he fears future currency instability and inflation "due to the large amount of quantitative easing."

Paulson said he denominates all of his assets in gold and is bearish on the dollar. And he thinks we'll see high single and perhaps even double-digit inflation in three to five years, which he why he has been known to advise buying as many homes as you can stuff in your pocket."

The Bottom Line

Now do I think John Paulson is really long housing?  Not one bit.  But he is scared to death of inflation.  One way to protect yourself from inflation is to own housing. 

If you are going to buy housing as a hedge to the dollar, the smartest way to do it would be to find the worst performing housing market and buy. Florida is the perfect place to do so because prices are 70% from the highs in some areas. 

I have been reading about other hedge funds that now share this inflation concern.  Bill Fleckenstein is another smart one who has the same take except he prefers gold.

The bottom line here folks is the world is understanding that Keynesian Ponzi spending isn't working.  Europe is finally concluding that the only answer to this crisis is to suck it up and start digging out of debt.

The problem we have over here is the politicians in DC and the Fed refuse to accept real austerity because it means that many of the elite in this country must be forced to take huge losses.

We are doomed in my opinion unless we are able make some serious changes in Washington.  We need to stop listening to the banking lobbyists and start doing whats best for the country fiscally.  If we attempt to ignore austerity and instead try to attempt a QE2 I think the US Dollar is in serious trouble.

I would advise that you hedge yourself out by holding some assets like gold, TIPS, and other commodities.

If you are 100% in the deflation trade then you risk holding a currency that might get destroyed as a result of our failure to realize losses and accept the pain that eventually will be unavoidable.

Disclosure:  No new positions at the time of publication.


Herb said...

Portugal’s government bond ratings were cut to A1 from Aa2 at Moody’s Investors Service today.

Moody's is about 3 years too late to the party. I can't believe they get paid money to state the bleeding obvious.

Jeff said...


I hear ya.

I think the rally recently being fueled by the fact that there is no other place to find yield.

We could see a melt up here. Working on a post about this.

Anonymous said...

"Now do I think John Paulson is really long housing? Not one bit. But he is scared to death of inflation. One way to protect yourself from inflation is to own housing."

Is there a distinction you are trying to state here? Im not sure I see it.

Jeff said...


What I mean is I am sure he doesn't believe housing has bottomed in most areas.

If he really thought this way then he would be buying houses all over versus buying only in the most distressed areas like FLorida.

Holding assets is a good way to hedge for inflation. The problem we all struggle with is most assets are fundementally way overvalued.

Housing is way overvalued in most areas so it puts an investor who sees inflation in the future but wants to hedge in a tough spot.

He just got finishedshorting the piss out of housing in 2007 years ago and he also knows that housing prices/cycles don't turn around in 3 years.

My guess is he is still down on housing but long inflation. He made the smartest move he could if this is how he sees it.

He bought as cheaply as he could in order to hedge.

You can blame the Fed and its zero rates policy for creating such insane investment conditions where investors are forced to speculate in areas where they are not sure the fundementals are thier.

I bet Paulson isn't very confident in his decision to buy houses but he had no choice if he believes he must hedge his clients against inflation.

Crazy times. Hope this helps.

flipdippy said...

I told you the waters were nice! Too bad you didn't hop in for a quick trade. I have to say, playing both sides this year, has been my best year trading ever.

The last correction, plus the BDI, plus some cyclical analysis, I think you are right but your timing is slightly off.

I'm feeling fairly confident we see the S&P go below 875 after summer. I plan to be all cash in everything I own, mutual fund, IRA, trading account by mid-late August.

Learned a lesson on playing with the leveraged ETFs, and this time I will be buying lots of puts on the 3X bull etfs.

Jeff said...


Nice call dude!

I remember you going bullish.

Glad to hear you are taking some profits.

I think 875 is the next stop as well once this rally rolls over.

The timing here is a tough one. I don't like how fast we rallied. I would have preferred more of a grind upward.

Pretty flat day today fo far. Retail sales were bad but not awful.

Anonymous said...

Crazy times. Hope this helps.

It does - thanks.