--why do you think the devaluation is coming and what effects do you see from it, apart from the obvious ones such as less overseas tourism on the part of Americans, stimulated exports, and a decline in imports?
i think we are in a very credit-dependent situation in our economy. since we consume more than we produce--i.e., we run a trade deficit--we depend on the "kindness of strangers" to fulfill our credit needs. they have been willing to do this on increasingly easy terms over the years, but i suspect this will now be swinging back the other way.
since i am US based, i will almost by definition be "overweight" the dollar when compared to a balanced global portfolio. so i really need to work at it in order to hedge my exposure to dollar weakness. this is something i believe a lot of people don't think about much since we've had a benign inflationary environment with a strong dollar for a good while now.
foreigners are no longer going to feel so safe with their very large exposure to our overpriced equity markets as the US loses some of its "best of breed" appeal (thanks to the likes of Enron, the high-tech bubble, poor earnings quality, scumbag CEOs, etc.). meanwhile, we have all kinds of geopolitical worries that challenge our hegemony, even as we exacerbate the situation by fomenting trade wars.
at the end of the day, i expect foreigners to demand a higher return for parking their excess funds here. that means higher interest rates, which is bearish for stocks and bonds. also, a dollar declining from its secular high is very bearish for US equities, because our high multiples depend on foreign capital committments (i believe this multiple contraction will override any foreign-exchange benefit to the profits of transnationals in all but the most exceptional of cases). these things move in cycles, and right now the cycle of maximum foreign net ownership is ending imo. that means the next trough is minimum foreign net ownership (a/k/a liquidation).
although we have a housing bubble thanks to artificially low Fed rates and artificially low mortgage rates (thanks to the GSEs), it is not like our world is monolithically inflationary--after all, the hundreds of millions of Chinese entering the labor pool should be a deflationary force on many finished goods.
at the same time, they will be an inflationary demand on raw materials and commodities--which i expect to appreciate relative to the clownbuck (not just because or even mainly because the Chinese are coming "online"; i think the main problem has been our inflationary credit policies which have driven up assets [stocks and housing] and which in the wake of asset deflation i suspect will drive up all sorts of commodities). as for how i play these things, my policy is a healthy short interest in US stocks (even as i am long many dividend payers such as REITs, among others, such as commodity plays), as well as overweighting in a number of foreign markets without currency hedging, and a bit of precious metal exposure don't hurt me neither!
i have been very impressed by what this mixture has done in the face of a rather unappealing US broad market (as an example, my portfolio has set another 52-week high today even as the broad markets are bleeding). in particular, the shorts and gold miners, while not huge positions percentagewise, have been an excellent counteractive force.
it took me a while to overcome the mental hangup about shorting, but now i consider it a very important portfolio component. it is also nice because i think it's easier to find overvalued stocks than undervalued ones. and then there's the secular tailwind of being in a bear market. none of these plays are attempts at "home runs"--just trying to gather enough singles to keep the game going.
and the name of the game in a bear market is SURVIVAL. |
