<My hedge against USD devaluation is in fact being increased to a bet for the USD devaluation. Should matters deteriorate for the USD without compensating circumstances (war in ME), the bet may later turn into a speculation through use of leverage. I do not think I will have much of a chance to reach this last stage because I expect the USD to devalue suddenly, given the number and amount of hedge funds out there high on leverage already. I believe these funds will force Greenspan's trembling hands.>
Well Jay, in brief, I have picked that US$ carcass clean a year ago. From your post, I assume 71% US$ is what you have?!! I don't understand that other than that you expect a stockmarket crash rather than a US$ tumble.
I shall succinctly explain my position. It seems to me that Alan Green$pan has given everyone notice since 1996 that when he judges the stockmarkets are suffering irrational exuberance, the shareholders should flee from stocks immediately and reprice them to non-exuberant levels. That has [mostly] been done, though I suspect there is more to go - in the nature of a more gradual tidying up and sorting into winners and losers.
However, apart from stocks, my idol has told everyone that he is dealing with a world economy, not a US economy. So he is acting to protect US interests by protecting the global economy. He has been saying, by cutting interest rates rapidly and by money printing, that people who hold US$ have been irrationally exuberant too, expecting gains and spending power out of proportion to the productive capacity of the world. He has been telling people that they should NOT expect to hold US$ on deposit and thereby maintain a high income from interest. He is telling those people to get out there and spend the money. He has diluted their ownership of it and handed purchasing power from lenders to borrowers, to get buying and production back on track.
Don't fight the fed is the slogan.
Since there is zero irrational exuberance left in the techwreck, though there might still be some wishful thinking that things will 'come right' in a V shaped recovery back to the glory days, I think my idol is not too worried about a minor wealth effect. His aim now is to get those sitting on dollars to spend them or lend them to those who WILL spend the dollars on credit if needs be. They are doing that! They have refinanced their houses and gone shopping. They are buying cellphones. CDMA cellphones.
The outcome will be people who own US$ ditching them in exchange for euros, yen, kiwis, shares, gold or anything but US$. While currency gains might be nice to have, there is a competing devaluation and printing going on, so people who swap their US$ for yen will find themselves in a pincer movement between the Alan and the Japanese equivalent, who will act in concert, as they did when the yen got to 80 to the dollar, to punish severely those who try to hold one of those currencies. Sure, the yen might rise compared with the US$, but you will get no interest and meanwhile, the true productive assets of the world, techstocks and other companies, will rise quite substantially as people come to realize they are the best place to store wealth, earn profits and benefit from the economic recovery, which won't take long coming.
So, while US stocks are denominated in US$, that doesn't mean they'll drop, other than for a short while. The return on Dow stocks is P:E 25:1 which is not great, twice the historic rate, but better than a poke in the eye with a burnt stick.
The historic rate for stocks is an anachronism. A P:E of 10:1 is history. There is no reason that savings should earn 10%. People have become more sophisticated and earnings of less than that are perfectly acceptable as a return to savers. 5% is fine. There is no law of the universe which says that returns on investment have to be 10%. So, while the Dow at P:E of 25:1 seems pretty bad, check out the alternatives!
To get better rates than that, people need to go hunting in the techwrecks, which are more scary, risky, but much more profitable to those who can pick the winners.
Flee Jay, flee! You are sitting there with 71% US$ cash like a frightened bunny on an American freeway, expecting it to stop. The USA is huge, powerful and going. Save yourself. It is not yet too late. Initially, US stocks will perhaps drop as people flee to yen, euro, gold etc, but the vast ocean of US$, sitting there, shell-shocked after the techwreck and waiting for a 'good entry point' is going to turn to a tsunami of money when the owners realize that THEY are the ones in Green$pan's sights. It will surge off around the world, looking for hidey huts.
That many US$ can't hide. Frightened bunnies can hide, but the US$ is like a herd of frightened elephants. Where the heck are THEY going to hide? The stampede will be very noticeable. They will have to buy euros, though they are fixin' to cut interest rates too, yen will be too dodgy and Japan is NOT laying out the welcome mat, NZ$ is going up and so are interest rates but we can only hide a small deer, not a US$ Elephant. Gold might zoom up somewhat but most people know that's a risky bet and it can't absorb the herd of US Elephants anyway. Now, how about those US stocks? Well, crikey, they aren't all that bad now. Even THEY can't absorb the whole ocean of US$.
I think we will see, fairly quickly [like by the end of the year], a fallen US$, a risen from the dead techwreck to nonexuberant levels [not so much in the dot.bomb sector though], a hefty Dow rise [to 16,000 by Feb], a rise in gold price, a rise in euro and NZ$ and some rise in yen. Many people will just spend it!
It will be quickly after the change is established that Alan Green$pan will raise interest rates again, to warn people not to swing too much in those directions.
The big jobs have been done = rescued the world from the Mexican collapse [mid 1990s], avoided the Asian Contagion and Long Term Capital Management's collapse due to their overleveraged Globalstar position which precipitated the disaster which nearly rolled around the world's derivatives house of cards in 1998, saved the day on the Y2K fizzer, squelched the Sudden Wealth Syndrome [SWS] and irrational exuberance in 2000 and halted the manic panic of 2001.
Now, we can all gently oscillate back onto an even keel and go back to a dull, but happy, life of family, work, learning, earning, saving, investing and fun.
Life is a giggle,
Mqurice |
