Many of are familiar with the "Yen Carry Trade" but had we ever heard of a "Dollar Carry Trade"? Google results for "carry trade" 785,000, for "Yen Carry Trade" 80,200, and for "Dollar Carry Trade" 3,690. So a few people had heard of the Dollar carry trade. When I saw that the Dollar and Yen tend to rise and fall against other currencies at the same times I began to wonder why. Then I saw Gold falling during a crises which also confused me. Gold should rise during fear. Gold also should rise during inflationary times. Asset prices and commodity are falling so you could say these are deflationary times and therefore gold should fall but governments are being very expansionary with their money supplies and that should create future inflation. So I thought to myself "who was buying that Gold the previous years and who was driving up commodity futures"? It was people who expected inflation. It was also people who thought Dollar was trash. I was one of them. Betting against the dollar in any way had been a good bet the last few years before 2008. Then we also had all this talk of Hedge fund redemptions creating forced selling in the stock markets. Finally it all clicked and I did a Google search on this phrase "Dollar carry Trade" that I had previously never heard of. My explanation for a lot of what we just saw is that Hedge funds that were Dollar Bears used a lot of borrowed dollars to buy "Anti-Dollars" in the forms of Gold, Commodities and emerging market investments and to a lessor extent Euro denominated investments. Those Dollar Bear hedge funds just got squeezed and had to sell their assets and buy dollars to pay back their dollar loans. We have just witnessed the unwinding of the Dollar Carry Trade. The Dollar Carry Trade was not as obvious as the Yen Carry Trade but it did exist and it was large. You could make a lot of money borrowing super low interest rate Yens and depositing them in higher interest rate German banks. US interest rates were not as low as Yen interest rates but as long as the dollar was falling borrowing in Dollars was very cheap. A lot of us look at the US trade deficit and see that in the long run the dollar must fall. But that is the long run, the short run is now.
I dont know what its like now, but for a long time ICELAND was the best place in the world to park your money...with interest rates in the double digits.
nirakar, You are correct that the "Dollar Bears", including, but not limited to the Hedge Funds, are being being forced to sell assets to make payment to investors who are redeeming their investments and moving into cash. They not only are moving out of Hedge funds, but any and all stocks that present a risk in a bear market. The Emerging markets will be hit especially hard. Those without an extensive reserve of dollars, and yen, on hand will face a severe problem importing needed goods into their countries. The dollar is the world's reserve currency and the yen is the backup currency. What is happening is that the dollars are being pulled out of circulation by investors and 'stuffed into a mattress'. There is a severe liquidity shortage of dollars to keep world trade and financial markets operating. This is what causes the dollar and its backup, the yen, to appreciate in value relative to most all of the world's other currencies. The high interest rates paid by emerging economies will not be enough to draw dollar investment into their economies because their local currencies will de-value relative to the dollar. A world recession is at hand, but it will not be because of a collapse of the dollar's value, but the opposite, a deflation of the dollar. Like in the Great Depression, all the dollar wealth will be in the hands of the relative few who bet the right way. In other words, a dollar will buy an increased amount of goods and commodities, but few people will have the dollars to spend. In the US, most of the problems will be related to high unemployment (fewer people buying fewer goods, resulting in job loss) and a de-valuation of their property (a deflated dollar buys more home, resulting in less equity in the home, and defaults due to the lack of dollars {income}). World trade will be severely restricted and those countries that depend on exports to support their economy will be in a world of hurt. By the way, Billy T, I read in an earlier post where you speculated GWB was meeting with Lula in an attemp to 'borrow money' from Brazil's dollar reserve fund. Exactly wrong. Brazil has been rapidly burning through its dollar reserves to support the real, buying reals on the open exchange with dollars in an attemp to support the value of the real, which is plunging. I guess you noticed today that the US central banks were exchanging $30 billion for reals in an attempt to help Brazil's collapsing currency. It is much more severe than just an unwinding of the carry trade. While the US is heading into a deep recession, much of the rest of the world is facing desperation, with many countries soon defaulting on their debts. Investors are not willing to risk their money in emerging markets. See Billy T, I can paint a gloomy picture too. Please Register or Log in to view the hidden image! I am not happy with this picture, but I think it is at least as likely as a collapsing dollar.
Ive learned something from all this...that the value of money is not entirely determined by its supply, but also by its location. The more goes into mattresses...the higher its value on the street.
We do not disagree much on the current facts; however, I think that it is the lack of credit in dollars, much more than "not willing to risk their money in emerging markets" which is taking funds from emergent markets investments. The strong tendency for the DOW to fall in the last half hour of trading, I think you will agree, supports the idea that many funds, not just those that were "dollar bears" investing in emergent markets, need to sell investments to satisfy the demands of their nervous investors who want to get their money back from the fund. Near close of business these funds have good idea how much they must raise and sell accordingly. Then other investors see the value of their fund falling and theyalso ask for their shares to be converted back into cash before they loss more. Etc. in a "vicious cycle." If you were a fund manager, force to raise more cash than the influx, where what would you sell? Answer: in the emergent markets where you still have some profits from the 3 to 4 hundred percent gains you had at the start of 2008. You certainly do not want to convert your "paper losses" into real losses. So yes there has been significant withdrawal of funds from emergent markets, to meet the redemption demands of funds in the US and EU. Not because the managers of those funds think that investing in negative growth US is more profitable than investing in emergent markets with 4 to 8% positive growth of GDP. The removal of funds from emergent markets by selling stocks and other assets there initially produces a local currency credit, but that is useless for paying the redemption demands of the fund, so they must sell the local currency for dollar. This increases the supply of local currency and reduces the supply of dollars. Hence the dollar is becoming more valuable and the local currencies are losing value wrt the dollar. SUMMARY: One does not need to postulate lack of confidence in the growing GDP countries to explain why their currencies are falling wrt the dollar. The real reason is what has changed recently - namely the business man cannot borrow from his bank as he could a year ago, so he is forced to cash in some of his investments to met his cash needs. For example to financed restocking the shelves, replace a broken machine, etc -things that MUST be done now. Like the funds, he prefers to sell those that still show a profit, instead of those with loses. That means if he was smart enough to have invested in one of the BRICs some years ago (or a fund that mainly does so) he is selling those investment with profits instead of taking losses. We cannot currently decide between your "fear of emergent markets" and my "banks will not lend / forced to sell" where still have profits POVs, but when the central banks have pumped out so much money that the banks are lending again, your and my POVs do predict quite differently things will happen. If "fear of emergents" is true cause, then emergent currency and stock markets will NOT recover sharply. The US and EU sinking deeper into recession, more jobs disappearing etc. should not ease that fear, so dollar would continue to be stronger, if you are correct. If my POV about the cause is correct, emergent currencies and stock will recover even as the US and EU sinks. Thus, I think this is an excellent "second chance" to invest in emergent markets, especially Brazil and India if you have dollars or Euros. Only way to know who has the correct POV is to wait and see. I also agree that a world recession is at hand but think that it is caused by the loss of jobs to Asia, the collapse of the home as an ATM machine via re-finance of the mortgage, the Trickle Down tax policies of the last 8 years which built many of those modern Asian factories instead of helping Joe American etc. I.e. GWB, trickle down concept, and the neo-cons made it happen (and McCain will make it grow worse by continuing the same policies.) The dollar collapse I have spoken of is not yet at hand. It will not be caused by either your "fear of emergent" and certainly not by absence of loans (that in my POV is what is causing exactly the opposite) the dollar will collapse when the Treasure finds a period of net negative sales of US bonds. (Not rolled redemptions exceeding new sales). IMHO, when the banks are lending again and the newly created dollars are circulating holding dollars will be a quick way to lose money, so the "viscous cycle" will turn the other way. The recession will become depression for US and EU. China's GDP growth may fall to 5% and Brazil’s to 1 or 2% as an economic colony of Asia, but you have heard all this from me for a few years, so I stop, except to note one thing about the recent 30billion US/brazil swap: Brazil had already announced about a week prior that it was going to use 30 million dollars of it’s >200 million dollars in reserves to buy Real with dollars. Brazil's central bank has been buying* dollars for several years (Why the reserves went from 30 to >200 billion dollars) and still was not able to keep the Real from growing stronger during this period. A slightly less valuable Real now is a blessing for Brazil's exporters, just when it is needed, as the trade surplus was reducing. As all of Brazil's governmental debt to foreigners has been paid off, the only interest cost is on the local Real debt. Expressed in dollars, that has dropped dramatically as fewer dollars are required to pay it off (and the interest on it). This combined with* has cut total government (all levels) debt down to only 38.3% of GDP. ------------------ *Actually the government mainly made "swaps," which required future delivery of the dollars. Thus the Central Bank has made a profit as it paid fewer Real for the promise of later delivery of X dollars than it would need to pay now for X dollars. I think that until the dollars were delivered the government also collected interest as the dollars due, but not yet collected, were effectively a loan by the government. If I am correct, the US govenment will also make a nice profit on the current 30billion dollar swap (I.e. the Real it now gets from Brazil will increase in value and the dollars Brazil MAY get will be worth less when this swap is "unwound.") "May" because that probably will never happen as this swap is more a "line of mutual credit." Not need, as Brazil already has lots more than 30 billion dollars. The local financial press is stating that the line of credit will never be used. I.e. they agree with me- it is only a good deal for the US, not Brazil. If only the US draws on their side of the mutual line of credit, effectively Brazil is lending Real to the hard pressed US. That is why I speculated GWB was trying to borrow from Brazil. The US needs to borrow from anyone it can now that there is approximately 2 trillion more to finance in the next year. Treasury is expected to issue new three year bonds for first time ever in a few days. US is world's greatest debtor. Brazil is already a "creditor nation." -not much reason to fear investing in it. More of why I think my POV is correct and yours is wrong.
Bingo...I have been posting same POV in most financial magazines (online) every chance I get. Yet no one accepts it nor even comments on it. It is as if that idea does not exist.:bawl:
It is interesting to note the exact wording that appears in articles relating to US treasury bonds and the dollar now as contrasted with only a few years ago. For example the second article of the 1Nov issue of The Economist states: "... dollars and Treasuries rank as safe havens nowadays. ..." A few years ago the words I made bold above would not be there. Instead the above would read: "... dollars and Treasuries are safe havens. ..." If you pay attention to how such statements are made now the suppressed fear that the dollar and Treasury bonds are not assured "safe havens" any more is palpable. Some are even asking, as I have been, why the US treasury bond is rated AAA and Brazil is given only the lowest level of investment grade, despite Brazil being a net creditor nation, with trade surpluss, with no foreign debt owed by the government, domestic debt only 38% of GDP, positive GDP growth (about 5%) and inflation controlled (< 6% peak during last decade), energy self sufficient, a major exported of food and minerals - all the desirable atributes that the US lacks as the world's largest debitor; world's worst trade deficit, and world's worst federal budget deficit, and many states also with huge budget deficits. I acknowledge that if all rating AAA means is the the US will not default but print money to redeam the bonds issued it can not roll, then the AAA rating is justified, but as an index of whose bonds will protect your purchasing power their rating should be reversed (or US well below "investment grade" is more appropriate, as buying US bonds is almost a sure way to continue to lose purchasing power, as it has been in recent years.) It is only a question of time until some little boy says: "Look - the emporia has no clothes!"
2inqusitive regarding your post 4 & my post 6 reply: Your POV is mentioned below (“investment xenohobia” = fear of foreign investments). I have made it bold. Please note that The economist thinks (and I agree) the real cause is as explained in detail, not your POV. I.e. your POV (“fear of foreign investments,”) does “LOOK LIKE” it is the cause, BUT THAT IS AN APPEARANCE, NOT THE CAUSE. (of drop in BRICs stock markets and the recent sharp rise of the dollar) Quoting the The Economist: “Many investors have been following a version of the “carry trade”, borrowing money in a low-yielding currency. All they had to do was earn a higher return from assets than the cost of their financing. Since the two big currencies with the lowest yields over the past year have been the dollar and the yen, those were the natural ones to borrow. When asset prices fall, however, this strategy is disastrous. Investors dash to sell assets and repay their debts. Since those debts were incurred in dollars and yen, that means they have to buy back those two currencies—hence their sharp recent rises. (The yen has performed even better than the dollar because it had even lower rates, and thus was a more popular financing vehicle for carry trades.) This process can be self-perpetuating. As the dollar and yen rise, those investors that have borrowed the two currencies face an increased cost of repaying their debts. So they sell assets to meet the bill, causing other speculative investors to cut their positions and so on. The result of all these shifts looks like investment xenophobia. According to State Street Global Markets, American investors hold more than $5 trillion of foreign equities and are repatriating their money. Dismally though Wall Street has performed this year, it has still fallen less than emerging markets. Figures from AMG Data Services show that international mutual funds suffered $31 billion of redemptions in the third quarter, whereas American-based funds attracted $28 billion of inflows. As American investors bring their money home, that boosts the dollar.” From: http://www.economist.com/finance/displaystory.cfm?story_id=12516680 I will admit that the taking of profits in the BRICs has overshoot - namely unless the intial application was made 4 or 5 years ago, the profits have been wipped out. Some of the continued selling in the BRICs is due to redemptions of funds that targeted the BRICs (they have no choice) and some is done even with loses to offset taxable gains if they were earily out with profits, but that taking taxes loses is not limited to the BRICs. There is usually a tendency for such rapid large changes in asset values to "overshoot." Again, even though the The Economist also thinks that the selling in the BRICs is forced (to meet redemptions or as I also pointed out, to raise necessary cash the banks will not lend) we will need to wait and see which of the predictions we differ on comes true. - I.e. both I and The Economist could be wrong.
To 2inqusitive: Below is quote from a free market advisery service. I do not own EWZ shairs as think I know as much about Brazil's stocks as they do, so why pay them? (or risk the psychological swings of the public buying this ETF? - I am always in only for the multi-year haul as I can predict that. Even with the recent recoveries India and Brazil offer "screeming buys" still for one with that POV.) "...iShares MSCI Brazil Index (EWZ), an exchange-traded fund (ETF) that was the topic of the popular "Buy, Sell or Hold" feature a week ago Monday (Oct. 27), surged another 9.82% yesterday (Tuesday) and is now up 42% in the six days ..." I also note that the LIBOR has dramaticly fallen in the last week and credit is returning to be available, as I said it would with the flood currency the central banks are printing. Rapid inflation in a few months will return even though all the "experts" are pointing at the many deflationary forces such as DECLINING metal, oil, home, grain, prices and growing stocks of consumer goods unsold. I.e. imho THEY TOO ARE WRONG, but it will take a few months before they understand that this flood of printed money can not be sterilized without great damage to the already stagnet economy. I.e. to soak up this flood with issue of bonds PLUS finance about 2 trillion of the total deficit would require double digit interest rates on the bonds. When forceD to chose between rapid inflation and total GDP collapse, governments always chose inflation. So it you can borrow now, with more than a year term, for a solid investment; "do so" would be my advice. The real cost of the loan will be negative. If I were living in the US, I think I would buy a house or two to rent, with as little down as I could put. Your "Fear of emergents" would not disapear is 6 days, but as I predicted, when credit became availble again and it was no longer necessary to sell in the BRICs to raise essential NOW cash, the BRICs stock markets and their currencies wouold rapidly recover. I.e. as I said and the The Economist repeated a few days later, the CAUSE of the dollar rise was the demand for dollars that the banks would not lend, not your "fear of emergents" - Althought both I and The Economist do agree the fall of BRIC stock markets and value of their currencies do LOOK THE SAME as fear of emergents would produce. I have not checked the other BRICs, yet but am confident they too are seeing rising stock markets and strengthening currencies - especially in India I bet this is true as I do know that the government there just cut 0.5% the basic interest rate and has taken several other steps to make credit available. I own share of the largest private bank there ICICI (as ADR IBN) so get daily information about banking rule changes in India.
