Does Disaster Loom from Dollar Funded Carry Trades? 25 comments
-
Font Size:
-
Print
- TweetThis
You can put a fork in us down the road....
The U.S. currency dropped against 12 of its 16 major counterparts as the International Monetary Fund said traders are probably using the dollar to fund so-called carry trades around the world and it may still be overvalued.
I hope everyone here in The United States takes a moment to understand what this means. Let me lay it out for you:
- When the global economy truly recovers oil will skyrocket up to or beyond the $150 where it was in late 2008. If the dollar is indeed still "overvalued" and going to 40 as many technicians predict, oil will likely reach $300 a barrel. This will in turn drive gasoline prices north of $6, heating oil will reach $7-8/gallon, and diesel will be commensurate with heating oil.
- This will in turn decimate the trucking industry. Now you know why Buffett bought BNI. Many things he may be, but dumb isn't one of them. Trucks will of course remain for terminal-to-door deliveries but for long-haul they will simply be uneconomic. Those who currently are employed in this business will lose their jobs. All of them.
- The middle class will be decimated. Those who live in suburbia, who are primarily middle-class Americans, will find themselves faced with commuting costs that are double or more what they pay now. Those in the middle class who live in the Northeast where heating oil is the primary fuel for winter, where natural gas infrastructure does not exist to replace heating oil, will find themselves choosing between heat and food in large numbers.
What's far worse is that all carry trades eventually unwind and in the history of the markets I have never seen it happen in an "orderly" fashion. Japan witnessed the destruction of the Yen Carry last year and it was horrific. We will see it in the future - exactly when cannot be predicted with certainty, but that it will happen in an uncontrolled fashion will be. While this "unwind" will bring relief from sky-high commodity prices it will do so at the expense of asset prices, which will collapse.
Our government has, quite simply, refused to take the steps necessary to stem this ridiculous and self-destructive course of action. Part of the problem does indeed lie with the yuan and China's mercantilist policies, but this is similar to blaming the drug dealer in the entirety for one's addiction. Without the user the dealer has no customer and makes no money. We have become addicted to cheap Chinese crap, even when it is poisonous (e.g. lead-painted toys or adulterated toothpaste) while refusing to address our own debt imbalances by either government or private interests.
The rest of the issue is ours, and ours alone - Bernanke could end this tomorrow by draining the liquidity necessary to cause short term interest rates to rise to 2% - still a very "accommodative" rate, yet one that would make carry trades unprofitable. He and the rest of the FOMC have refused, even though they're aware of the extreme distortions this creates in the foreign exchange markets and the draining of productive capital from the "funding" currency source nation that always accompanies carry trades.
The only remaining question is whether these "carry trades" and the dollar depreciation that they cause will continue to levitate the equity markets. Friday morning there was a stunning correlation between the moves in the dollar and the S&P 500 - but then suddenly about 11:00 AM Central time, it broke down. Many equity and index futures traders have been essentially using the dollar as their "roadmap" for the last several months - but this is a correlation that only works as long as the decline is both orderly and perceived to continue to be so. If and when that perception changes the correlation will break with extremely violent results.
We certainly do and will live in interesting times, but this much I am certain of - the Average Joe will neither understand why oil skyrockets the next time it does, nor will he properly place the blame where it belongs: squarely on Ben Bernanke, President Obama and our Congress.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 25 comments:
Yeah, it's so not, Karl, not anytime soon. Bearishness is always greatest at a bottom, and the current slew of predictions re the 'death' of the dollar are a product of its turn, and thus do Not reflect actual trend.
Here, at the end of the credit deflation, we can reasonably expect to see the price of almost everything drop vs. the dollar.
Do you actually believe in Roubini's nonsense that there is a big bubble in US dollar carry trade? That professor guy at least recognizes that he can not touch any stock himself, or he will lose his pants. He is in his fantasy dream. The real investors, mean while, must make real investment decisions based on facts, not fantasies.
How many people actually borrowed US dollar money to buy equity or commodities? How many actually used credit cards to buy gold and silver? Did India borrow money to buy gold? Did China borrow dollars to buy commodities?
Why would any one believe Roubini's fantasy which is not supported by any data or fact at all.
There WILL be a US dollar carry trade. The dollar will collapse at the end. But we have hardly started yet. The US dollar carry trade will be a "short-to-zero" trade. There are very very few actually doing it right now.
Warren Buffet's bet on railway is actually a bet on China. He is betting that the US coal will be transported to west coast and then shipped to China. So if you believe in his bet, buy dry bulk shippers.
Your better bet is buy something that China has zero but America has, and something extremely critical to a big nation's economy. The precious metal palladium is the best China commodity carry trade bet, as indicated by Andrew Snyder:
seekingalpha.com/autho...
The collapse of trucking will mean famine on American soil. I hope not. Some truckers will go out of business. But the bulk of trucking will remain in business. The real collapse will be the lifestyle of people solo-driving a car to and from work 50 miles away every day. People will have to settle for car-pool or public transportation.
The yen carry trade existed because of easy money. It's easy to borrow yen at zero% interest. The same does not exist for US dollar today. The banks are not lending. Getting a 5% mortgage rate to buy a house is hard enough. Stock margin accounts costs almost 7% in interest. I would LOVE to borrow money from the FED at 0.25% interest. I would love to borrow any money at 3%, 4% or 5% to buy precious metal. Tell me how I can borrow the money! The fact of the matter is this easy money is simply not accessible to most people.
So where is the US dollar carry trade? It hasn't even started yet!
is there really no one that can or will do what's necessary to force policy to that that would benefit the majority of people, rather than just a few?
or am i just naive? or off-base?
and officials wonder why there is distrust....
On Nov 09 01:36 PM Jasper M wrote:
> "If indeed the dollar is still 'overvauled' and going to 40 . . .
> "
>
> Yeah, it's so not, Karl, not anytime soon. Bearishness is always
> greatest at a bottom, and the current slew of predictions re the
> 'death' of the dollar are a product of its turn, and thus do Not
> reflect actual trend.
> Here, at the end of the credit deflation, we can reasonably expect
> to see the price of almost everything drop vs. the dollar.
On Nov 09 01:37 PM Nathaniel C wrote:
> Karl I agree with your comments. When this dollar carry unwinds it
> will be huge event that will not be orderly. It will start one day
> without any news and be quite sharp as everyone in the carry trade
> is leveraged 5-20 times. It will be a domino effect with all the
> leveraged longs forced to sell.
On Nov 09 01:53 PM adan wrote:
> powerful case against those we've elected or had appointed to represent
> us -
>
> is there really no one that can or will do what's necessary to force
> policy to that that would benefit the majority of people, rather
> than just a few?
>
> or am i just naive? or off-base?
>
> and officials wonder why there is distrust....
Which is more dangerous to America: lower housing prices; or a spike super-inflation of commodity prices? (Lower housing prices will actually, eventually, save the housing market. A secondary bubble will not save the housing market: it will just make a second housing collapse inevitable.)
This is a GIANT balloon getting puffed up by the Fed and the Treasury at the direction of Barry Obey-Me & the Chi-Town gangsters running the country.
You, or me, cannot borrow at .25%, I wish I could, but GS, MS, BOA, Citi, and traders at London, can, via banks and bonds, and many instruments.. Basically, they are robbing savers (who get 0%) and government (who take tax payers money and give it out at 0%). They want to save the housing market, the unintended consequence is that the liquidity is not going to housing, or business, but liquidate speculative asset, like Gold, Stock
I am not saying short stocks,, it might go a while. but bubble will burst for sure, when that is time you go out.. just follow the market..
Why is that for sure as PE is high, and unemployment won't get better as most unemployed are less educated, with housing, manufacturing jobs out to China, no way, employment get better. Which means less revenue for companies, though they can get better earning by cutting staff, and sell abroad..
The biggest US dollar carry trade borrower, is the US federal government itself, to the tune of $12 trillion. No one else even borrow any money remotely close to that amount. The unwinding of the US government's carrying of its debt will destroy the dollar itself.
That's the biggest bubble in the marketplace.
On Nov 09 03:37 PM Income Tax wrote:
> Mark Anthony,
>
> You, or me, cannot borrow at .25%, I wish I could, but GS, MS, BOA,
> Citi, and traders at London, can, via banks and bonds, and many instruments..
> Basically, they are robbing savers (who get 0%) and government (who
> take tax payers money and give it out at 0%). They want to save the
> housing market, the unintended consequence is that the liquidity
> is not going to housing, or business, but liquidate speculative asset,
> like Gold, Stock
>
> I am not saying short stocks,, it might go a while. but bubble will
> burst for sure, when that is time you go out.. just follow the market..
>
>
> Why is that for sure as PE is high, and unemployment won't get better
> as most unemployed are less educated, with housing, manufacturing
> jobs out to China, no way, employment get better. Which means less
> revenue for companies, though they can get better earning by cutting
> staff, and sell abroad..
My answer to that question is, "Society will not function, and the FIRST indication of such malfunction is a panic in the stock market. I've studied history's stock market bubbles ... in every case ... the market goes down before the currency falls apart." I know your response will be to note Argentina or Zimbawbe or Germany ... but the end result was the same ... those who continued to hold onto stock assets in these inflated currencies ... were destroyed just the same ... the stock market in all cases always folds before the currency ... even if it's just a week before as in the case of Russia in 1998.
Mr. Denninger is correct. There are currently four companies who are holding the U.S. stock market "together." They are C, GS, BAC, and MS. One of these companies will fold before next April ... when one company tells Uncle Sam they have the ability to take over the assests of the company and keep the country "together" for a while longer. Unless you are willing to buy and hold your commodity position for five years, I doubt you will make money in this DEFLATIONARY cycle which has yet to complete.
On Nov 09 01:49 PM Mark Anthony wrote:
> Let me explain again why US dollar carry trade is virtually NON-EXIST.
>
>
> The yen carry trade existed because of easy money. It's easy to borrow
> yen at zero% interest. The same does not exist for US dollar today.
> The banks are not lending. Getting a 5% mortgage rate to buy a house
> is hard enough. Stock margin accounts costs almost 7% in interest.
> I would LOVE to borrow money from the FED at 0.25% interest. I would
> love to borrow any money at 3%, 4% or 5% to buy precious metal. Tell
> me how I can borrow the money! The fact of the matter is this easy
> money is simply not accessible to most people.
>
> So where is the US dollar carry trade? It hasn't even started yet!
On Nov 09 02:08 PM Michael Clark wrote:
> Karl: If this carry trade is so dangerous to America, why are we
> not raising interest rates now? (Is it because we're putting the
> mortgage re-bubble ahead of the possibility of a commodities super
> ascent?)
>
> Which is more dangerous to America: lower housing prices; or a spike
> super-inflation of commodity prices? (Lower housing prices will actually,
> eventually, save the housing market. A secondary bubble will not
> save the housing market: it will just make a second housing collapse
> inevitable.)
IF NOT, THE DOLLAR WILL CRASH. By the time you read about it in the Wall Street Journal it will be too late ... there will be absolutely no warning for the comman man.
IF THE ECONOMY DOES MAKE JOBS IN Q1 of 2010, THEY WILL BE THE WRONG JOBS ... unless Bernake can figure out a way to export health care and education to the world.
On Nov 09 01:36 PM Jasper M wrote:
> "If indeed the dollar is still 'overvauled' and going to 40 . . .
> "
>
> Yeah, it's so not, Karl, not anytime soon. Bearishness is always
> greatest at a bottom, and the current slew of predictions re the
> 'death' of the dollar are a product of its turn, and thus do Not
> reflect actual trend.
> Here, at the end of the credit deflation, we can reasonably expect
> to see the price of almost everything drop vs. the dollar.
On Nov 09 02:08 PM Michael Clark wrote:
> Karl: If this carry trade is so dangerous to America, why are we
> not raising interest rates now? (Is it because we're putting the
> mortgage re-bubble ahead of the possibility of a commodities super
> ascent?)
The Banks are insolvent. The attempt being made is to allow them to cash-flow defaulted debt without anyone being the wiser. "Extend and pretend" writ large. This requires huge spreads, ergo, zero rates.
> Which is more dangerous to America: lower housing prices; or a spike
> super-inflation of commodity prices? (Lower housing prices will actually,
> eventually, save the housing market. A secondary bubble will not
> save the housing market: it will just make a second housing collapse
> inevitable.)
The super-inflation in commodities and a trashed currency. Bernanke and the rest of the bankers don't care. They need to be ring-fenced, broken up, and the pieces that are insolvent jettisoned.
But that means no more billion-dollar bonuses and no more obscene acts performed by Congresspeople in exchange for "campaign contributions."
My children will someday look at me in disbelief when I tell them that the US dollar was once the reserve currency of the world. It will then be called the Amero backed by silver worth $150 ounce.
Those who are sure that the dollar will swirl the bowl and flush are counting on Bernanke, at the end of the day, inserting the gun in his own mouth and pulling the trigger.
He might shoot himself, but I argue that if he does it will be by accident, not intent. If there is a collapse in our currency it will almost certainly come with violent "regime change"; the least of your problems will be your investments.
As I am known to say: "If you think you will need gold or silver you will need lead and tubular steel more."
What evidence do you have that carry trades drain productive capital from an economy? It seems like you are confusing the symptom with the root cause.
On Nov 09 02:08 PM Michael Clark wrote:
> Karl: If this carry trade is so dangerous to America, why are we
> not raising interest rates now? (Is it because we're putting the
> mortgage re-bubble ahead of the possibility of a commodities super
> ascent?)
>
> Which is more dangerous to America: lower housing prices; or a spike
> super-inflation of commodity prices? (Lower housing prices will
> actually, eventually, save the housing market. A secondary bubble
> will not save the housing market: it will just make a second housing
> collapse inevitable.)
Hey, good question. I am certainly not Karl but let me take a shot at what I believe to be one of the main reasons: OBAMACARE!, Those in power who advocate for this KNOW that if the economy begins to slow even a little bit from this "new bubble", that there will be an increasingly widespread belief on mainstreet that we simply as a nation, cannot afford this- especially now. A fact that any objective economic horse sense easily reveals. Did you see how many banks have now EASED their credit criteria, to help keep the bubble inflated? Backed of course by the full faith of TBTF policies.
Anyone who could possibly believe that this economy is not being manipulated along POLITICAL lines is naive indeed.
Most appalling is the cynicism and arrogance with which this is being carried out before a public who apparently place more value on "feeling good" than on the reality of "a unit of product/work for a unit of pay"
I am saddened by what is in store for our children, especially those who buy into the easy money something for nothing doctrine.
ONE WORD: JAPAN
On Nov 10 09:48 AM OstrichHater wrote:
> re: He and the rest of the FOMC have refused, even though they're
>
> What evidence do you have that carry trades drain productive capital
> from an economy? It seems like you are confusing the symptom with
> the root cause.
I am not counting on Bernanke doing or not doing anything. I am counting on basic free market priciples work and it must lead to unavoidable collapse of the US dollar. It no longer matters what Bernanke does, he, or any one on this planet no longer has the power to salvage the US dollar. Doesn't matter it's Bernanke, Fernankie, Pernankie, Vernankie be the FED chairman.
The analogy is if Bernankie has terminal cancer, it doesn't matter a bit if he shot himself or not in the mouth.
I agree with your last paragraph. But your better bet is get your money out of the country before it is too late, and hopefully move to a safe haven place before TSHTF. That is exactly what many smart rich investors have been doing, like Jim Rogers. This is the reason why the hot money is MASSIVELY flowing out of the USA and into emerging markets. This massive outflow of capital money is the fundamental reason why the US dollar is DOOMed.
seekingalpha.com/autho...
Just don't know how long can one survive, holed up in his/her residence with some guns and munitions, if thing turn to that bad. A few days, maybe. A few years, tough. Don't count on that. Fleeing and getting your money out of the country is the best option.
On Nov 10 08:17 AM Karl Denninger wrote:
> Brad: Don't be so sure about "The Amero".
>
> Those who are sure that the dollar will swirl the bowl and flush
> are counting on Bernanke, at the end of the day, inserting the gun
> in his own mouth and pulling the trigger.
>
> He might shoot himself, but I argue that if he does it will be by
> accident, not intent. If there is a collapse in our currency it will
> almost certainly come with violent "regime change"; the least of
> your problems will be your investments.
>
> As I am known to say: "If you think you will need gold or silver
> you will need lead and tubular steel more."
Certainly if you have enough money to move all your assets (and your loved ones) to a foreign country you have enough $$ to hire a consultant (if you can't figure it out on your own) to discover a domestic location (inside the United States) where you would be able to wait out the storm (civility restored).
This location would preferably be near fresh water, relatively isolated (read: near a trustworthy rural community used to "making due" (you won't make it all alone)), and allow secure small-scale food production (gardening, chickens/goats, hunting) to avoid burning through your long-term food storage while adjusting to the learning curve of 19th century life.
And like Karl says, if you need precious metals you're going to need weaponry even more.
Let's say you move to Costa Rica, instead of finding a "retreat" in the Rocky Mountains. Ultimately, what guarantee do you have of safety for your investments and your life? Do you speak Spanish, Tagalog, French, etc well enough to discover the locals don't appreciate a dirty, rotten, corrupt, rich American that caused all this mess (even though the impact on the natives' life will probably be very low)? Or are you just going to become a local god like Sean Connery and dole out items of value (certainly not cash) to keep them from breaking in and helping themselves to your wealth?
Certainly you will have to interact with the locals on a regular basis - unless you have somehow managed to store up everything you might need and can just close the hatch of your bunker until the US government magically sorts itself out.
Flee! Or not. I'm not going anywhere. Even if the United States ceases to exist I will be surrounded by individuals that tasted democratic freedom (even if it was slowly becoming a figment of their imagination). Local communities of self-reliant individuals will rebuild. This is not Armageddon - this is another chapter in history.
Absurd! you say? Well, I am not surprised. But, if you feel tickled with interest I suggest you visit survivalblog dot com and look into an author by the name of Boston T. Party.
On Nov 10 09:01 PM Mark Anthony wrote:
> Karl:
>
> I am not counting on Bernanke doing or not doing anything. I am counting
> on basic free market priciples work and it must lead to unavoidable
> collapse of the US dollar. It no longer matters what Bernanke does,
> he, or any one on this planet no longer has the power to salvage
> the US dollar. Doesn't matter it's Bernanke, Fernankie, Pernankie,
> Vernankie be the FED chairman.
>
> The analogy is if Bernankie has terminal cancer, it doesn't matter
> a bit if he shot himself or not in the mouth.
>
> I agree with your last paragraph. But your better bet is get your
> money out of the country before it is too late, and hopefully move
> to a safe haven place before TSHTF. That is exactly what many smart
> rich investors have been doing, like Jim Rogers. This is the reason
> why the hot money is MASSIVELY flowing out of the USA and into emerging
> markets. This massive outflow of capital money is the fundamental
> reason why the US dollar is DOOMed.
>
> seekingalpha.com/autho...
>
> Just don't know how long can one survive, holed up in his/her residence
> with some guns and munitions, if thing turn to that bad. A few days,
> maybe. A few years, tough. Don't count on that. Fleeing and getting
> your money out of the country is the best option.
>
> On Nov 10 08:17 AM Karl Denninger wrote:
This is something individuals will have to decide for themselves. Safe havens, whether physical ones for your physical well being, or financial ones, MUST necessarily be SMALL and can not accomodate too many people. I have discussed the philosophy in my previous articles that you may find interesting:
seekingalpha.com/autho...
Karl Denninger is absolutely right that hoarding physical precious metals without also hoarding arms and munitions is meaningless. But having a gun at hand is also meaningless for long term survival, and could even attract more danger to yourself, because you yourself has become dangerous.
In the ensuring Peak Oil crisis, rest assured that global population will be reduced to below one billion, or less, to within the carrying capacity of the earth. No one knows how that will be done. The best case scenary is it's achieved gradually over a few decades, through consious birth control and reduced marriages, hence peacefully. Less desirable is through massive famine and population die out. Even less desirable is through complete chaos of society, violence, crimes, global resource wars between nations, or even nuclear holocaust! I don't know which case will play out.
The best individuals can prepare is accumulate some fortune, maybe through US dollar carry trade. There is opportunity here because in reality, opposite to what Roubini believes extremely few people are actually practicing US dollar carry trade right now.
More important than accumulate fortune, is to accumulate knowledge and survival skills. Your material fortune will be looted and you could be killed in the process (doesn't matter you have a gun, they have guns, too). But if you process special skills that they need, you in the physical person will be a valuable possession and will be protected and preserved.
Physical safe haven countries? I am thinking about Australia, South Africa, Sri Lanka, Cuba, and even Zimbabwe. Yes Zimbabwe the broken country could soon be a safe haven. It has rich natural resources, and few outsiders want to go there, and Mugabe is so old he will die soon, removing one disadvantage of obstacle.
And maybe some South America countries. Got to learn some Spanish now.
On Nov 11 11:44 AM Newspeak wrote:
> The question is: where is a reasonable "safe haven" in the advent
> of a worldwide fiat currency collapse?
>
> Certainly if you have enough money to move all your assets (and your
> loved ones) to a foreign country you have enough $$ to hire a consultant
> (if you can't figure it out on your own) to discover a domestic location
> (inside the United States) where you would be able to wait out the
> storm (civility restored).
>
> This location would preferably be near fresh water, relatively isolated
> (read: near a trustworthy rural community used to "making due" (you
> won't make it all alone)), and allow secure small-scale food production
> (gardening, chickens/goats, hunting) to avoid burning through your
> long-term food storage while adjusting to the learning curve of 19th
> century life.
>
> And like Karl says, if you need precious metals you're going to need
> weaponry even more.
>
> Let's say you move to Costa Rica, instead of finding a "retreat"
> in the Rocky Mountains. Ultimately, what guarantee do you have of
> safety for your investments and your life? Do you speak Spanish,
> Tagalog, French, etc well enough to discover the locals don't appreciate
> a dirty, rotten, corrupt, rich American that caused all this mess
> (even though the impact on the natives' life will probably be very
> low)? Or are you just going to become a local god like Sean Connery
> and dole out items of value (certainly not cash) to keep them from
> breaking in and helping themselves to your wealth?
>
> Certainly you will have to interact with the locals on a regular
> basis - unless you have somehow managed to store up everything you
> might need and can just close the hatch of your bunker until the
> US government magically sorts itself out.
>
> Flee! Or not. I'm not going anywhere. Even if the United States ceases
> to exist I will be surrounded by individuals that tasted democratic
> freedom (even if it was slowly becoming a figment of their imagination).
> Local communities of self-reliant individuals will rebuild. This
> is not Armageddon - this is another chapter in history.
>
> Absurd! you say? Well, I am not surprised. But, if you feel tickled
> with interest I suggest you visit survivalblog dot com and look into
> an author by the name of Boston T. Party.
>
> On Nov 10 09:01 PM Mark Anthony wrote: