philzuco

Getting Net Short

Just a question Tim -- just how much client money have you lost with your senseless long UUP position? It bewilders me that you get paid to manage other people's money.

You're missing a big piece of the puzzle with your senseless theory on the dollar: THE CARRY TRADE. Inflation or deflation in the US right now is only one determinant of currency value.

You're overlooking 2 other massive components:

1) the US economy will offer low interest rates for the foreseeable future (ie, low-yielding currency -- you've got emerging markets offering 3-8% yields)
2) economic growth in the US will underperform that of many countries around the world (take Brazil, for instance, with expected GDP growth of 4% next year)

Also, there's a limit to how much government stimulus the US can continue to dish out given just how near the limit the country is in terms of debt. At some point, debt markets will either demand much higher yields or just say no (it's happened before: think Mexico in 1994).

On the other hand, emerging economies with low debt/GDP ratios (think Brazil and China, in particular) have plenty of juice to continue implementing countercyclical policies should economic conditions continue soft into the medium run.

Hence, if investors can obtain better yield and better economic growth abroad, why would they deploy their cash in US Treasuries or the US dollar?

The bid under the dollar over the years has come, by and large, from abroad due to a "perception of low risk and stability" in America and robust economic growth. That perception has changed in the last year. The US is now seen as a slow-moving behemoth, loaded with debt (its safe haven status is under seige).

Foreign purchasing power from hedge funds, pension funds and sovereign governments will continue to move towards investing in economies with better yield and better economic growth prospects, the result is the CONTINUED WEAKNESS OF THE DOLLAR VIS-À-VIS THE REST OF THE WORLD (ESPECIALLY EMERGING MARKETS).