These Predictions are made as of February 22, 2009:
(Note: these are my personal predictions and I do not recommend that you act on these predictions. I am not a professional financial advisor. You should consult professional advice when considering investing in any market.)
1.) The Yen will tank....
The yen currently stands at about 93 to the dollar. There is every reason to think that the BOJ will intervene on behalf of the yen if it sustains levels below 85, as the huge drop-off in Japanese exports has lead to a decrease in Japanese GDP of over 12% annualized!! Also, as risk aversion runs its course, the carry trade on the yen will wind up once again (although it will have a bit of competition with the dollar, with the target rate near 0% in the U.S.) If you bet against the yen now, you stand to take all the upside.
2.) Buy into the GBP/EURO....
It is a foregone conclusion that England will come out of this crisis long before the rest of the Eurozone. And part of the reason for England bounce-back is because of a very weak pound, which has caused British exports to fare far better than the Eurozone's. Also, the Eurozone is suffering a far worse banking crisis than England. The eurozone has 63 tillion (measured in British pounds) in toxic assets, and will likely not make the move to nationalize their banking sector before England, if at all. England has already nationalized RBS and has taken its writedowns much faster than the Eurozone without even having to change their FASB mark-to-market rules!! Also, it would seem that all of Eastern Europe is on watch for credit rating downgrades. This pick is a no-brainer.
3.) There is a bubble in U.S. Government debt....
The two-year is below 1% once again, and AAA rated commercial paper stands at still lofty spreads against the Treasuries. The U.S. government has issued and will continue to issue record amounts of debt in the months to come, pushing yields higher. There are already signs of weakening foreign demand for U.S. debt, as central banks the world over are forced to focus their spending on their own domestic economies. As Yves Smith puts it, the rest of the world is forcing nationalisation upon themselves. The balance sheets of the world's major economies will be more focused on their own internal problems. There will still be high dollar demand from the world's emerging economies, which will likely stave off a massive sell off in U.S. gov debt. Domestic demand will also wane in the near term as AAA and BAA rated corporate debt is selling at attractive rates with huge issuances. (Just take a look at Cisco's sales on Feb 9!) So now is the time to get out of Treasuries.
4.) There will be a run on the dollar, but nothing too scary, and the dollar will still remain the world's reserve currency....
For the reasons mentioned in #3, the dollar is in for a difficult ride, but there are absolutely no alternatives to the dollar as the world's reserve currency, especially in light of the ECB's comedy of monetary policy errors and the fact that they can't get their shit together in a coordinated fiscal policy action. Aside from the Euro, there are absolutely no contenders to the dollar, and I think the Euro will stop being a contender within the next decade. Just look at the unlimited dollar swaps that the Fed has with every major central bank in the world as proof of the dollar's long-term prospects!!
But to safeguard against a bumpy dollar ride, I suggest buying into TIPS, as the government is practically giving away inflation protection for the next few years. Gold is also an attractive bet, but those metal commodities tend to be very fickle, and India (the world's largest consumer of gold products by far) is slowing their consumption of jewelry at an alarming rate. But no one buys gold these days as a commodity, but rather as a hedge on inflation.
5.) Commercial Real Estate and Commercial Mortgage Backed Securities are about to tank....
The Credit Default Swap numbers on CRE moved above 8.5% 3 months ago, and Moody's just put $300 billion in CMBS up for downgrade!!! And with capacity utilization tanking, retail sales near lows, and industrial production at lows the world over, rents are about to enter free fall. And leases will likely not rollover very easily as not as many purchasers will have the cashflow to sign for new leases. Commercial Real Estate will suffer a slump about as bad as residential real estate in the next couple of months. Buy CDS on CRE and CMBS now.
2 years ago
The dollar is accepted as legal tender by most countries; meanings that I can use my dollar hoard and go to Poland and buy their goods, services and/or assets.
ReplyDeleteChina is using their dollar hoard to buy commodities, equipment to build out their infrastructure, send students overseas to get an education, and the list goes on.
The Middle East oil countries are putting their dollar hoard and other currency hoards in investment funds and the investment funds are investing their currencies in income producing assets. Under President Bush, we invested our dollar hoard in nonproductive activities, such as war; build up of military forces, and other wasteful activities.
President Obama is investing his dollars in infrastructure investments, health care, and other activities that benefit the general citizenry.
In short, the dollar is a universal currency and I doubt that dollar abandonment will occur during a major economic crisis. Changes on the use of currencies for international transactions will occur (and for the better) but not during this economic crisis.
Thanks Darrell for being the first to post on my new blog!
ReplyDeleteI too doubt that the dollar will be abandoned during extreme circumstances such as these. Dollar demand is quite strong in global downturns. Afterall, I believe over half of all debts worldwide are denominated in dollars, and they must be repayed in dollars. Develeraging on the global scale also takes the form of dollars (look at the emerging market numbers). And the safety of the dollar is far and away its most attractive feature during systemic crises. However, this giant global hiccup will end at some point, and risk aversion will wind down and work against the currencies that have skyrocketed since last summer.
Like I said in the post, a run on the dollar is inevitable, but I don't think there will be any devastating impacts on the U.S. Emerging markets may actually get burned due to a massive import of inflation thanks to the U.S. And I am not alone in thinking that a run on the dollar will occur (in fact, I am in good company: http://www.economic-policy.org/abstract.asp?vid=22&iid=51&date=July+2007&aid=183).
I am also with you in advocating productive government spending, like infrastructure. However, there is a point where even the most well-intentioned spending goes awry and becomes entirely counterproductive. Take the case of Japan: http://www.nytimes.com/2009/02/06/world/asia/06japan.html?_r=1&partner=permalink&exprod=permalink
I am skeptical of your thoughts on the spending the Chinese are undertaking. And I fear that China is not using its reserves and debt the way it needs to in order to ensure long term stability. China has made some downright dumb investments via the CIC and SAFE. And the Chinese have no safety net--companies don't have pensions, there is no social security, and there is virtually no adequate healthcare for Chinese citizens. The Chinese must sock away their earnings for retirement and in case disaster strikes, which puts a big damper on their consumption. And to see more of the bonehead moves that the Chinese policymakers are making of late, please visit this site: http://www.nakedcapitalism.com/2009/02/so-much-for-stimulus-chinese-loans.html
However, I hope you are right about Obama.
Thanks again for your post!