I think mish has it - the dollar is no longer rising so the model breaks down.
news.goldseek.com
This is how the “flight of capital” opportunity works: Just a few years ago when the dollar was rising, one could go to Japan and borrow Yen for almost 0% interest. The Yen could be used to finance U.S. securities, such as Fannie Mae mortgage backed securities. The investor could then lever his equity 20 to 1. In addition, not only would the investor earn the “carry” of the interest rate on the securities, less “the cost of carry” (which was almost zero), but gain from the appreciation of the dollar! The returns were huge and for some funds they were over 100% on invested capital!
Now, the U.S. investment world is “upside down” and the game works in reverse. The Fed allows speculators to borrow dollars at 1%. With the dollar going down, just about any financial or real asset in any decent foreign country will go up in value in dollar terms. With the Fed holding interest rates below the rate of inflation (and most foreign interest rates are above rates in the U.S.), borrowing cheap and getting dollars out of the U.S. and turned into something of value, clearly offers a better return than investing in U.S. factories, stocks or bonds. When you notice that America is committed to running the largest trade deficit in history, and raising its budget to 5% of GDP, the economics get much better!
The dollar should depreciate at least 20% against major currencies, and much more against select currencies. Fortunes will be made, or at least saved, by investors who can get their money out of the U.S. before foreign central banks slow their dollar buying.
If you have a few million dollars to protect, you should be in a position to find a hedge fund that can borrow a few billion from your local money center bank, and run a major sophisticated foreign asset position. If you are a small investor, there are still some things you can do. It is possible to open foreign currency accounts offshore. |
