<How do you feel the dollar fares in the credit bust vs. other major currencies?>
Not a simple answer, it will be a function of Ponzi scheme finance, and leverage. Actually a case could be made that as the US consumer busts (or Asia first?), the trade deficit might contract fairly rapidly, as does the vendor financing from foreigners. So the supply of new Ponzi debt would be choked off at the same time there is a credit revulsion. The risk to the USD, is that foreigners try to bring their money home? However, we might also get a large spike in US rates, totally out of the control of the Fed, that keeps the USD in place, by keeping foreigners in place. It will be very hard to gauge capital flows because we just don't know the leverage and how foreigners (especially FCBs) will react in a crisis. It may happen in stages. I absolutely DO NOT see some kind of benign reaction (Humpty Dumpty's playbook) where US rates go down or stay stable, and the USD just sits there merrily stable.
About the only currency trade I have a sense for now is the Yen carry trade unwinding, causing at least an initial spike in the JY (maybe caused by the end of ZIRP or Chinese revaluation, or both), which in turn sets off the rout.
The rule of thumb in this scenario is to avoid assets that have aggressive speculative positions, or poor solvency. You also have to the ability to move finds around with some liquidity and without big transactions costs. Right now that has made my personal strategy centered around short term Treasury bills. I think US Treasury debt gets a downgrade (spiking rates), but remains solvent, at least I hope. So if rates spike, the old rate will come off quickly and be replaced. I have a small JY futures play on, and did use the SF, and may again. I don't know how solvent Switz. is right now however. And I've been pissing away money on long puts and bear spreads (at least they are very cheap). However if this unfolds, those would work big. I'm not using gold now, it trades exactly like IWM and XBD, the buy everything trade. |
