Why Are Investors Returning to the Dollar? 27 comments
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Why is the U.S. dollar so strong, given the trillions of dollars the Treasury is borrowing and printing?
Because when the lights go out, you’d like to be at home. You know where all the furniture is, even in the dark. It’s the same with investing. When a panic hits, and U.S. investors look to raise their cash positions, they act predictably – and perhaps rationally. Let’s say, for simplification and illustration, you are an American and you own just three stocks. One is a U.S. diversified energy exploration and regulated utility holding company, the second is the same type of firm in India, and the third is the same type of firm in RSA – South Africa. When there’s blood in the streets, where are you most comfortable investing? At home or abroad? Where, when you need current news the most, do you expect to find the fastest information about your holdings? In your home country or abroad?
Most of us would answer that question: “In the U.S.” I spent 30 years in the Intelligence Community as, among other things, a geopolitical analyst, so I might answer the question differently. But for most of us, Dorothy had it right: “There’s no place like home.” As a result, the facts show that Americans are repatriating their dollars held overseas at a record rate and, indeed, are even selling US-traded ADRs of well-established and highly-regarded foreign firms.
We know we have the best politicians and regulators that money can buy (!) and, however bad things are here, the niggling suspicion is that things are probably worse “over there.” So zlotys and yuan are being exchanged for dollars at a rapid pace. And not just any dollars, Johnny. We are buying U.S. Treasuries at such a clip that the yield for 30-year Treasuries has declined to 4.31%. Some people are willing to believe that 4.31% will keep them ahead of inflation and taxes from now until 2038. For holding a 1-year Treasury, investors are OK getting just 1.28%. Anything to “preserve” their cash. After inflation and taxes, 1.28% will leave you with less than you started with but many believe, perhaps realistically, that keeping 97 or 98 cents for certain at least gives you 97 or 98 cents to buy the bargains later on when things are even cheaper.
So dollars keep coming home and going into Treasuries, making dollars more scarce as a unit of exchange for transactions like buying oil from Saudi Arabia or unwinding a CDS in Sweden. You can pay for your oil in Euros or Yen or Zimbabwean Dollars (well, for a teaspoon or two, anyway) but the price is figured in U.S. Dollars, so a strong dollar hurts everyone not using dollars as their primary mode of exchange. Add to this the fact that financial institutions worldwide now need U.S. Dollars. Why? Because much of the international financial chicanery is dollar-denominated and unraveling faster than a ball of yarn in the paws of a 6-week-old kitten. To pay off dollar obligations, it’s best to have dollars.
That’s the short reason why the U.S. Dollar is strong right now. But let’s talk about what comes next. We’ll sell our current buys some time in the future, be it tomorrow or 10 years from now, so it’s the future that interests me most. And there I see a radically different picture. The need for U.S. Dollars to unwind derivatives positions is temporary. The flight to Treasuries will abate. The U.S. will, regrettably, have a lessened role in international finance. Would you trust a bunch of unruly children who violated the rules of the playground with impunity – until they got caught? We’ll need to re-build credibility with responsible stewardship, solid corporate governance, and appropriate regulation.
Since the U.S. economic “miracle” created out of thin air and thinner derivatives during the “let’s keep the party going” years was based on easy credit, we need to show that we can extend credit to grow businesses and actually have a scintilla of hope that those loans will be repaid out of future earnings – not eternal home price appreciation or financial engineering from a bunch of quants who haven’t a clue about the real world of actions and consequences.
What do you do about it? You can panic and sell everything, you can buy Treasuries, or you can catch falling knives. I’m willing to accept some scarring from that last alternative as long as it leaves me with the world’s best knife collection. I know the strength in the U.S. Dollar has to be short-term. So as part of building my knife collection, I am doing three things:
For the Short term (2-6 months), I am gingerly stepping in and buying some U.S. stocks that are down 60, 70 and 80%. You can buy large-cap U.S. leaders today like Alcoa (AA), US Steel (X), Chesapeake Energy (CHK), Terex (TEX), Gannett (GCI), Joy Global (JOYG) and Freeport-McMoRan Copper & Gold (FCX) for 25-30 cents on the dollar. (Current price vs. high for the past 12 months.) Since money is coming back to the U.S. and since mutual funds have been pressuring these kinds of companies the first half of October, they’re often good for a fine rebound during the traditionally-stronger November-April seasonal time frame.
(A word on why the mutual funds are panic-selling now: most mutual funds have adopted October 31 as their “year-end” for realizing gains and losses. These portfolio managers, hoping not to be fired, are loathe to carry their bad performers into the “new year” beginning November 1. If I were a cynical sort just because I’ve been in this business for nearly 40 years, I might note, too, that their bonuses are based solely on what they do in a given “accounting year” so, like doctors, they can bury their mistakes in October and start brand-new fresh in November. With an incentive like that, why not sell everything now and buy back in November? But I am not a cynic. Just a realist.)
For the Intermediate term (6-18 months), I’m buying GOLD. I may be a bit early buying today since I believe the U.S. Dollar will need to adjust downward (a slam dunk, in my view) and oil will need to climb from current levels (a slam dunk, in my view) before gold makes a sustained move through $1000 on its way to $1500+. But at these prices it's just too cheap not to begin positioning for the intermediate term. I like Goldcorp (GG), Freeport-McMoRan (FCX) and Anglo-Ashanti (AU) the best, but I’m also buying bullion via Central Fund of Canada (CEF) and SPDR Gold Trust (GLD) as well as stocks via Market Vectors Gold Miners (GDX) and a number of mutual funds. The world cannot borrow or print $4 trillion and not see inflation. Gold is the best way to protect yourself against inflation. Especially at these fire-sale prices.
For the Long term (18 months-Forever), I’ll buy The Market. “Buy when others are terrified.” They’re terrified. Hard as it is to put a few shekels aside for the distant future in such times, I’m buying the ETFs corresponding to the Dow (DIA), Nasdaq (QQQQ), and S&P 500 (SPY). If we’re quick, we can catch these by the handle, bolster or spine instead of the blade...
Disclosure: Currently long TEX, FCX, JOYG, GG, AU, CEF, GDX, DIA, QQQQ, SPY. Will be long others above over the next week...
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This article has 27 comments:
As for the rest of your article, I only want to say one thing, your first recommendation, Alcoa. When Stan O'Neal departed from Merrill Lynch with a $160 million golden parachute, he was snapped up to join the board of Alcoa. That's what I love about the great American plutocracy. They look after their own, no matter what.
He may see the influx of $$$ into treasuries unwind and bet those $$$ are going into stocks starting Nov. 1? The old fox is always a step ahead.
Good insight, thanks.
don't you feel like a totally complete idiot AND IF YOU DON'T YOU SHOULD.
I agree entirely with your investment suggestions but; "We know we have the best politicians and regulators money can buy", at first I thought you were kidding, were you? Remember it's these poiticians who had the Glass/Steagal Act repealed and whose predecessors established the central banking system in this country, laying the ground work for end- less interference in the natural market cycles and causing recessions and depressions from 1913 onward! Have you ever in your professional career read any of the works of Ludwig Von Mises? You are, I'm quite
sure, familiar with the economic idealogy of Mr. Keynes, no doubt! Or
am I doing you an injustice in some way?
EDT
Chicago, Illinois
As for recommendations, gold is a bunk. Don't buy. Buying market might be a good idea, but we just might get into Great Depression, in which case market has about 50% more to fall (if not more).
I've been wondering about the strength of short Treasuries also. I wonder if it's just that people need a place to park the proceeds from selling some other asset, and they have too much (over FDIC limit) to risk putting it into a bank that they are afraid could go under. So, with Treasuries at least you are sure you will get it back, whereas you can't necessarily say that for anything else out there.
cash is king, but the king is naked
your timing can be good ... or not ...
yen, swiss francs anyone?
I dont see them
falling vs the greenback.
Is 1982 Reaganomics again,
~but Ben guessing 1929...
my bet is 2009 = 1974
good luck
Like you I don't see it able to sustain itself as it is so much built by emotion and emotion burns out and reality settles in the aftermath.
What about buying OIL instead of gold??
After all, every "bottom" in oil price used to be significantly higher than the previous one.
Obviously, I haven't panicked and sold my shrinking portfolio. I'm not quite sure what a treasury is, but it sounds like "the government," to me. So, I too am still grasping for falling knives... Five times, I have bought shares in POT, each time lower than the time before. I broke open my last CD, in order to handle a margin call, and to buy more POT. I like American companies, be it North American, Central American, or South American. As long as it's American, I don't discriminate, at least not by latitude. Solid companies, with great long-term outlooks and wise management teams, have a peculiar appeal to me. Potash fits the description. Earnings will be out, 10/23.
Best regards to all who take the time to keep these discussions lively and relevant,
JS
The problem with Seeking Alpha is that it is like Myspace. Everyone thinks that their opinion matters and should speak out when they really need to shut up and stop looking retarded.
I appreciate your advice and plan to put it to good use.
Thank you once again,
Clark Jenkins
FishGoneBad.com