The Thursday Daily Pfennig has some limited comments about Paul Volker assigning a 75% probability to a dollar crisis in the next couple of years and to hear Chuck Butler (author of the Pfennig) tell it, Robert Rubin doesn't disagree.
Whatever the truth of that story this is something to monitor. I am not really a big believer in doom and collapses but I think it is worthwhile to understand what can hurt the markets we invest in. The threats to the dollar have to do with various imbalances, dependence on the kindness of strangers with regard to our bonds and so on.
I am in the weaker dollar camp, not collapse just weaker. In general too much study on all the wonderful things that can go right may not be very productive. Things' going right doesn't hurt your portfolio. My sentiment has been much more bearish than my positioning through this rally as an indication of what I am trying to convey here.
Proud Member Of
Random Roger
© 2009 | Gadget Theme Blogger Template
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
Original WPtheme By Blogger Template | Converted By Gadget Lover
| Distributed by eFree Blogger Help
4 comments:
In case you missed The New York Times had a very interesting article couple of days ago on how Mr Rubin lost money on his bearish dollar bet.
http://www.iht.com/articles/2006/11/01/business/rubin.php
Hi Roger,
What steps can investors take to protect themselves from a potential collapse? Will international currency and equity investments help?
- Ryan
The sky is falling crowd always predicts a collapse. Which is probablly why the dollar has held its ground.
I would agree with a long term decline. But there is no alternative to the dollar for world commerce. The EU would do anything and everything possible to prevent the Euro from the increase in value associated with being the worlds reserve currency.
So the dollar will just fade from its former glory, but no collapse in sight
Roger, there's an interesting article at Economist's View (http://tinyurl.com/yffuvc) concerning the impact of carry trade on currencies. It's fairly dry reading but does provide a plausible explanation for $USD support (at least temporarily) as well as movements in other currencies that might have otherwise seemed rather counter-intuitive. I think there are also some implications for currency investing generally particularly WRT synthetic carry trade instruments such as DBV. Here's the conclusion to the article:
"Market participants and commentators have often linked the swings in exchange rates over recent years to the use of carry trades, that is, investors' strategies that exploit interest rate differentials across countries. What is puzzling from a theoretical standpoint, however, is that investors should even engage in carry trades, because the textbook theory of interest parity conditions implies that these strategies should yield no predictable profits. As this Economic Letter has explained, the key to the puzzle is yet another puzzle - the forward premium puzzle - wherein currencies with high or rising interest rates tend to appreciate, and currencies with low or declining interest rates tend to depreciate, as investors are lured into buying currencies with positive interest rate differentials and selling short currencies with negative interest rate differentials. The evidence on the quantitative importance of carry trades is fairly limited, but to date it suggests that these strategies may well have been an important factor in recent exchange rate swings."
It seems apparent that strategies depending upon the "forward premium puzzle" -- the current mechanism for pricing currency forward contracts -- will probably continue to work reasonably well, at least until such time as currency swaps are priced using a different theory. Hope we get some warning if (when) that occurs.
Post a Comment