'Greater Fool' (Venezuela) Shorts the Dollar? Time for a Reversal

You know the saying. Those who buy the “hot trend” do so eventually hoping to sell to the greater fool. In the case of the dollar trade, the greater fool would be the last guy to short it before the rebound.

If you remember “Davidson” has submitted a few posts on the dollar. Read them here and here. For those who wish not to read them, he essentially was saying that the dollar had most likely bottomed and was due for a rebound.

Then this from Barron’s:

At least Chavez didn’t have to worry about ponying up the bucks to pay for his Big Apple junket. His government was issuing some $3 billion in dollar bonds, split even between a 10-year maturity expected to carry a 7.75% coupon and a 15-year maturity with an expected 8.25% coupon. So, he’ll have plenty of greenbacks for his hotel bill, including whatever he got from the minibar.

The bond issue was designed to provide dollars to meet the demand for greenbacks among Venezuelans who, for some reason, would rather have dollar assets than their own bolivars. And the deal was working. Dow Jones Newswires reports from Caracas that the bolivar is up 25% from its August low, at 5.2 to the dollar in the “parallel” market, versus 7 to the buck a month or so ago, when greenbacks were scarce.

Venezuela thus joins the parade of foreign borrowers issuing bonds denominated in dollars. That means they’re expecting to pay back those debts in devalued dollars.

As noted in this space previously, borrowing dollars to put to work elsewhere at higher yields is an example of global carry trade. And that effectively is a short sale of dollars, a bet on their decline.

The dollar-carry trade has been gathering steam since it was written about here months ago (”Money for Nothing and Bucks for Free,” June 5,.) Earlier this month, Germany confirmed it would borrow in dollars to produce “savings for the federal budget,” which would result from the currency gain generated by the dollar’s decline.

Germany was followed by a flood of other offshore borrowers, from Abu Dhabi’s national energy company to Sweden’s Export Credit Corp to Hong Kong’s Hutchinson Whampoa, all eager to borrow and repay in ever-depreciating dollars. Now, comes Hugo Chavez and Venezuela jumping on the bandwagon, borrowing and thus shorting the greenback.

“That to me is a sign the short-U.S. dollar trade is ripe for a reversal, when basically the biggest idiot in the house is short,” writes Nic Lenoir of ICAP,

This may just be the clearest sign of a bottom there could ever be……

Comments

[Tom Armistead:]

I was reading about the Mexican peso crisis of 1994. Mexico had been issuing tesebonos, some sort of bond issued in pesos but pegged to the dollar.

Somehow this sounds kind of similar. The Mexican crisis was resolved by loans and guarantees from the US, IMF, BIS and Canada. Geithner played a role.

But Chavez has been very unfriendly to US interests and it is doubtful we will ride to his rescue as we did with Mexico.

Oct 04 07:41 AM

[EUARTE:]

One factor you forget and it is quite serious. Obama favors dictators so long as they are or pretend to be socialists. He would bail out Chavez in a minute.


On Oct 04 07:41 AM Tom Armistead wrote:

> I was reading about the Mexican peso crisis of 1994. Mexico had been
> issuing tesebonos, some sort of bond issued in pesos but pegged to
> the dollar.
>
> Somehow this sounds kind of similar. The Mexican crisis was resolved
> by loans and guarantees from the US, IMF, BIS and Canada. Geithner
> played a role.
>
> But Chavez has been very unfriendly to US interests and it is doubtful
> we will ride to his rescue as we did with Mexico.

Oct 04 09:01 AM

[Fiorano:]

Issuing debt in dollars not neceesarily implies a short position on the dollar. Often times the dollar bond market is just the most efficient (liquid) avenue for issuers in Latin America. Many times issuers then turn around and swap their future outflows back into local currency. Evidence of a peso/usd swap or lack thereof would roundup the hypothesis.

Oct 04 09:19 AM

[Chris Cook:]

I'm not convinced that being long oil and short dollars is the act of an idiot.

Oct 04 09:45 AM

[notsosmart:]

a broken clock is on time 2x a day. an idiot dictator could be right.he wasnt the leader here but a follower.

Oct 04 11:34 AM

[Solon:]

You mean to say " I WISH this was the clearest sign of a bottom there could ever be..." It is nice to hear from the Tinker Bell school from time to time.

Oct 04 12:56 PM

[E Nuff Sed:]

These trends take a long time to play out. Look at gold - its been in a bull market nearly 7 years. Unless the world goes into a depression the dollar will be treading water.

Obviously Chavez is playing a generational shift - the relative decline of the US and rise of the BRIC's.

Oct 04 04:45 PM

[Bond Radar:]

"Venezuela thus joins the parade of foreign borrowers issuing bonds denominated in dollars. That means they’re expecting to pay back those debts in devalued dollars."

This article, and the above statement in particular, demonstrates a lack of understanding of the workings of the international bond markets. The reason that Venezuela, and a host of other sovereigns, agencies and corporates are borrowing in large size in US dollars is that it is the most liquid market, enabling the borrowers to raise the volume of funds required at the most attractive rates.

Consequently, whilst the largest borrowers are generally active in a range of currencies (including the euro, yen, sterling, etc), ultimately the US dollar is always the most popular currency and has been since the establishment of the Eurobond markets in the early 1960s.

Oct 05 08:53 AM

[Brian McMorris:]

Todd, I love your positions and ideas, but I think you are a little off on this. No one is more disgusted with Chavez' egomaniacal charades than me. But just because he is certainly, "the bigger fool", does not mean the dollar is going to get better any time soon. As long as we keep our interest rates depressed and deficit spend, the dollar is going down. But I am no dollar perma-bear. I think it will make a secular turn and get stronger once the worst of the credit crisis is behind us and unemployment starts trending lower, interest rates higher But this may be 12-18 months from now. So we are in for a long bout of a weakening dollar. I think the USD to Euro ratio may be 2:1 before the dollar stops declining.

Plan to see lots of French and Germans at Disneyworld!!

Oct 08 08:09 PM

[Brian McMorris:]

Another, less cycnical thought on this subject: any petro-economy needs to lock in their profits vis-a-vis the dollar by buying as many dollars as they sell. So, this is really a hedge for Chavez. He gets dollars for his oil and then he gets rid of them to others who buy his bonds.

Oct 08 08:11 PM