What's Ailing the Dollar? Part II: Current Account Balance

[robdidomenico]

Re: What's Ailing the Dollar? Part II: Current Account Balance

i read that this morning - time horizon is too short though. i don't think the dollar's trip will be straight down without any bumps up. i care more about capital preservation for the next 6-12 months, but i would like to get some interest while sleeping at night. i don't want to have to buy a bunch of CDs if I don't have to.

[Guest]

Re: What's Ailing the Dollar? Part II: Current Account Balance

Robdidomenico -

<< i care more about capital preservation for the next 6-12 months >>

What if the USD surprises everyone and takes another big dive without any letup? Stranger things have been known to happen.

____________

CORRECTION - I just re-read Fred's post above and now see that Fred's original text I quoted referred to savings bonds paying 7.49%. Evidently my reading glasses are failing me ( so I'll just blame it on the glasses! ) . Oops! If you can obtain a 7.49% return in a US bond obviously this changes the comparison somewhat. However I still think parking in US instruments is riskier than the percieved safety being discussed here.

[GRG55]

Re: What's Ailing the Dollar? Part II: Current Account Balance

Robdidomenico -

Fred wrote:

<< We'll keep our eyes open for new products which may have similar benefits for buyers in the first years when promotional rates are higher. >>

Here's an alternative 'new product' to look at - the Chinese Yuan, which can be conveniently purchased via an ETF.

Hiding right out there full view, is a cash alternative to the USD with "300% upside" over the next decade, if we are to take Ex Soros fund maverick Jim Rogers at his word. Not bad performance for a mere cash position, no? Of course, this diet may be too 'rich' for some. The percieved safety of remaining in US domestic currency instruments is almost irresistible...

Lukester: Is this a new addition to the Rydex family of currency ETF's? What's the ticker? I watch this stuff fairly closely (maybe not as close as The Brain however) and have not heard of a yuan ETF. Any info would be appreciated.

[jk]

Re: What's Ailing the Dollar? Part II: Current Account Balance

Lukester: Is this a new addition to the Rydex family of currency ETF's? What's the ticker? I watch this stuff fairly closely (maybe not as close as The Brain however) and have not heard of a yuan ETF. Any info would be appreciated.

i'm not aware of a yuan etf, either, and i went looking as soon as i read lukester's post. perhaps there's one in london or some other exchange?

edit- just checked toronto and london. no go.

[Guest]

Re: What's Ailing the Dollar? Part II: Current Account Balance

GRG55 - My bad, an ETF is indeed not even on the horizon yet.

You can however buy the cash currency here in the US through major banks. Example: my brokerage, Peter Schiff's Euro Pac, receives dividend payouts in Yuan into it's Pershing clearing house bank in NY from large caps that Euro Pac clients are placed in. These funds are often not converted to US currency (due to the peg this is a negligible currency exposure carried forward for the clearing bank) and over time supposedly, sizable Yuan balances accumulate.

Clients can contact Pershing, and (I've been told) others such as Bank of America, and purchase lots of Yuan directly right here in the US. I have not done this, so this information is passed on to me by my brokerage.

On reflection this is possibly a dud trade for the moment. The currency will do a 'whole lot of nothing' until it breaks loose, after which it may break upward in a big way. I would not want to bet against Jim Rogers on this call, but *when* his prediction occurs could tie up your capital for potentially a good while first.

Best therefore to invest in other directions and await a more significant break in the currency peg. The problem with this is that it can proceed in stealth, leaving you out of the trade, just as gold's breakout since August left a lot of people standing around looking for a second chance entry point.

Jim Rogers has the chops to play this decade long currency bet, because that's his forte. The rest of us may flounder a bit trying to play it, unless we allocate funds to it that we really don't want to touch for ten years. In that case, by buying a chunk of the currency here and simply parking it, we are making a trade very similar to buying gold bullion and parking it ("off the grid" is a beautiful thing!).

No free ride. You've got to potentially trade ten years of your life to find out how good this bet was. Rogers excels at that, which is why he's a billionaire, and the rest of us suck wind.

[RebbePete]

Re: What's Ailing the Dollar? Part II: Current Account Balance

i read that this morning - time horizon is too short though. i don't think the dollar's trip will be straight down without any bumps up. i care more about capital preservation for the next 6-12 months, but i would like to get some interest while sleeping at night. i don't want to have to buy a bunch of CDs if I don't have to.

Beware of money market funds and CDs! Make sure that the exposure to mortgage backed securities is minimal! I pulled a lot of money out of a money market fund when I found they invested 43% of their portfolio in mortgage backed securities! Treasuries are probably safer than a CD until all the banks and money market funds "come clean" on their holdings.

http://www.bankrate.com may be some help.

[raja]

Re: What's Ailing the Dollar? Part II: Current Account Balance

TIPS vs. T-bills --

If you look at EJ's Ka-Poom Theory chart, 90% of the time inflation is higher than the discount rate during the Poom phase.
TIPS always pay a fixed percentage (lately around 2%) above the CPI. T-bills, however, tend to follow the discount rate:



This suggests to me that over the long run, TIPS would be more profitable than T-bills.

Previously, I wrote the following in praise of T-bills . . . but now I'm beginning to wonder if TIPS wouldn't be better.
--------------------------
Some people criticize Treasuries as "dollar-based assets", but in my opinion this is not accurate . . . .
As the dollar devalues, T-bill rates will go up because the Fed will have to raise rates to find lenders.
Unlike a dollar bill, which shrinks in value as the dollar goes down in relationship to other currencies, T-bills will appreciate.

I see T-bills as a place to park money until the time is right to take advantage of future opportunities.
If you continually re-invest Treasuries you can ride the rates up, then lock in a long-term T-bonds when rates rise to a high level, say 20%. (EJ's KaPoom chart shows them rising to about 24%.)

This is the same idea as buying gold -- riding the bubble for a few years to somewhere near the top, then selling.
Gold will provide higher short-term profits with greater risk, while T-bills/bonds will provide greater long-term profits with little risk.

[c1ue]

Re: What's Ailing the Dollar? Part II: Current Account Balance

Jim Rogers has some interesting arguments, but ultimately his behavior seems more Cramer-ish than Buffet-ish.

He's made any number of predictions which were crap.

I especially liked his one about Russia being a bad investment (ruble and stock market both) in 2003.

Anyone who put their money where his mouth was on that one I think suffered mightily.

[bill]

Re: What's Ailing the Dollar? Part II: Current Account Balance

http://www.bloomberg.com/apps/news?p...N5E&refer=home

The yuan rose to as strong as 7.4834 versus the dollar from 7.4926 yesterday, heading for the biggest weekly gain in five weeks. It has climbed more than 10 percent versus the U.S. currency since the end of a fixed exchange rate in July 2005 and fallen 7 percent against the euro.
There's debate in China on the merits of a stronger currency, which would ease trade tensions and the inflow of cash by making exports more expensive. A report circulated last week by the National Development and Reform Commission, the top planning agency, called for a 15 percent to 20 percent one-off revaluation, Market News reported yesterday.

http://www.bloomberg.com/apps/news?p...efer=worldwide

Oct. 24 (Bloomberg) -- Jim Rogers, chairman of Beeland Interests Inc., said he is shifting all his assets out of the dollar and buying Chinese yuan because the Federal Reserve has eroded the value of the U.S. currency.
``I'm in the process of -- I hope in the next few months -- getting all of my assets out of U.S. dollars,'' said Rogers, 65, who correctly predicted the commodities rally in 1999. ``I'm that pessimistic about what's happening in the U.S.''
Rogers, delivering a presentation late yesterday at an investors' meeting organized by ABN Amro Markets in Amsterdam, said he expects the Chinese currency to quadruple in the next decade and that he is holding on to commodities such as platinum, gold, silver and palladium.
The dollar has dropped against all the 16 most actively traded currencies except the Mexican peso this year as slowing growth and the first interest-rate reduction since 2003 last month dimmed the allure of dollar-denominated assets.
Since the Fed lowered U.S. interest rates on Sept. 18, the first cut in four years, the dollar has fallen 2.8 percent against the euro and touched a record low yesterday. Gold rose to a 27-year high and platinum jumped to a record.
``It's the official policy of the central bank and the U.S. to debase the currency,'' said Rogers, a former partner of George Soros.
Reserve Currency
``The U.S. dollar is and has been the world's reserve currency, the world's medium of exchange,'' he said. ``That's in the process of changing. The pound sterling, which used to be the world's reserve currency, lost 80 percent of its value, top to bottom, as it went through the whole period of losing its status as the world's reserve currency.''
The Chinese currency, known as the renminbi, or yuan, is ``the best currency to buy right now,'' Rogers said. ``I don't see how one can really lose on the renminbi in the next decade or so. It's gotta go. It's gotta triple. It's gotta quadruple.''

EverBank offers RMB accounts, however the forex trade is around .50-.75%.
http://www.everbank.com/001WorldCurr...?LinkID=Column

[grapejelly]

Re: What's Ailing the Dollar? Part II: Current Account Balance

I'm not sure that the trade deficit per se is what is ailing the dollar. Not a novel thought (I am not a novel thinker) but isn't is just pure inflation that ails the dollar? Spending more than we produce, and financing the excess with borrowing from foreigners or borrowing from the Fed...the effect is currency depreciation.

Shouldn't we be looking at it that way?

It is perfectly fine for a country to have a major trade deficit or current account deficit for many years without there being a whiff of inflation.

Look at the US vs. Europe during the 19th century, for instance. I don't think that was inflationary because the growth rate of the US was so high.

As to the US$ vs. the RMB...this reminds me of the "how many angels can dance on the head of a pin" type of question. It assumes so much...


Isn't it more a question of "which asset class will outperform over the next 5 or ten years?" and my answer is "precious metals". Paper is paper.

[Guest]

Re: What's Ailing the Dollar? Part II: Current Account Balance

<< Paper is paper. >>

Right on Grapejelly. You've got the long term view.

Grapejelly reiterates Charles Mackay. Indeed Grapejelly and Charles Mackay seem the 'zero fuss and bother' guys on this topic.

[GRG55]

Re: What's Ailing the Dollar? Part II: Current Account Balance

What's Ailing the Dollar? Part II: Current Account Balance

by Eric Janszen

In my last comment on the sliding US dollar, we compared the US current account deficit to deficits and surpluses of other countries. The US has by far the largest current account deficit, and this is putting pressure on the dollar. This time we look at US current account balance over time. We see that the balance underwent a fundamental change around 1970 after forty years of stability, experienced turbulence in the 1980s, and went into steep decline starting in 1991.

Balance of Current Account

The current account has three main components....

Meaning of Divergence from Historical Trend in 1980

The current-account balance measures the difference between what residents of the US collectively earn and what they spend.

If a nation's income is greater than its spending...

What are the implications for the dollar?

The negative and declining US current account balance results from both positive and negative factors, some persistent and other non-repeatable. Optimists focus on the positive factors...

What's been happening to the dollar recently?

As the housing bubble correction proceeds, the US has little choice but to continue to use currency depreciation to stimulate the economy...


Any way you look at it, the dollar is going to continue to decline long term until a major structural re-adjustment to the US economy and global economy occur. The Weak Dollar policy can only delay the inevitable: the US must close the savings gap by increasing its savings rate. It is not clear how this can be accomplished now that we are passed the top of a credit and economic cycle; the best time to work on making that adjustment was during the recovery since 2004.

Such adjustments if made by markets versus by policy are rarely benign events. Hedging the continued decline of the dollar with gold and/or a basket of sovereign foreign bonds as we have recommended since August 2001 still makes sense.

Next we discuss another additional factor contributing to dollar weakness: the US fiscal deficits and unfunded liabilities.

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Greenspan says the fall in the dollar is a "market phenomenon". Isn't that what Hank wants...a competitive market sets the exchange rate.

It's the rest of his comments I found a bit astonishing.

Greenspan Says Dollar's Decline Has No `Real' Impact

By Anthony Massucci
Nov. 18 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the dollar's decline hasn't affected the global economy and is a ``market phenomenon.''

``So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it's a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences,'' he said today..."

Link:
http://www.bloomberg.com/apps/news?p...d=a29f6FXaxvBc

[c1ue]

Re: What's Ailing the Dollar? Part II: Current Account Balance

Yep, the latest establishment line is that average income is up $6000 in the past 6 years so the $1000 increase in gasoline costs is no big deal.

Of course, the problem with this is that the 'average wage' includes the top.

http://www.wsws.org/articles/2007/se...exec-s07.shtml

According to this, the top 20 hedge fund managers averaged $657M in earnings.

Put another way, these 20 individuals represent over $40 of income for each person in the entire country. From a per-household basis, it is more like $65 of income.

Given real wages have been trending lower, it seems logical that the recent 'average wage' increases are likely due to wage phenomena exactly as has been seen with real estate 'median prices' recently.

[Rajiv]

Re: What's Ailing the Dollar? Part II: Current Account Balance

For a critical look at this report, see "The Income Mobility Ladder of Lies" by Patricia L Johnson