Nicole Elliott, technical analyst from Mizuho whose opinion I respect, was just on CNBC Europe calling for the dollar index to hit 66 within the next nine months. Yikes.She was correct in terms of magnitude about the yield of the ten year US treasury, but I do not recall if her timing was correct or not.
I drew in the thick pick-ish line on the chart, which is similar to what she put up during the interview.
I've been a dollar bear for a long time but this call exceeds my bearishness and if correct would cause a lot of dislocations.
That the chart looks horrible and that the Fed is going to embark on some sort of rate cutting cycle clears a path for more weakness even if 66 ends up being too far.
It makes sense to give a little thought to what you would do if her scenario plays out.
22 comments:
Hey Roger,
Maybe a bit off target from your blog, but can you tell me from your experience, how hard is it for the average Joe to make money trading currencies?
my impression is that trading for pips is very difficult. There are leverage issues, there are a lot of moving parts and there don't seem to be a lot of do-it-yourselfers trying to do it.
I seem to have good luck with big macro trends but have not tried to trade this market.
I do read the FXstreet Advisor Weblog which might be a good starting point.
I've used MER and GS as overall barometers for the market for a while now. They seem to be fairly accurate; so looking at today I'd say all this greenery is not long for this world. I'd sell here if I was a trader.....hey I am a trader...lol
I'd like to agree with Roger's statements and add a tiny bit more.
There are other things to consider such as interest rates and cost of carry and definitely leverage. Not too mention the 24 hour aspect which requires strict discipline with stop losses.
Once you have a firm grasp of all of these items and having a system, you'll definitely want to take these forex shops up on the free demo. This trades with their platform using real prices. Don't even consider using real money until you can consistently profit in the demo.
But be warned, it is indeed a tough, tough market.
Hi Roger,
I too have been concerned about USD devaluation for some time. In 2005, I overweighted my portfolio ~5% in the precious metals sector (GLD, TGLDX), and ~5% in the natural resources sector (IGE) in the hope that it would act as a USD hedge (I still hold these investments). What investments do you currently recommend as hedges against USD devaluation? Thanks!
Rich
Rich,
I touched on this in more detail several times, so it should be in the archives.
In no particular order, foreign stocks, foreign bonds, foreign currency and commodities.
For bonds I have one CEF and individual government bonds from a couple of other countries. For currencies I use Rydex ETFs. For commodities I use GLD and am starting to add DBA for a couple of people.
Foreign stocks for me, as well.
Roger's point is very valid (prepare for the big event) even if the prediction (66?) is unlikely.
See Paul Hickey of Bespoke discuss the prospects for the dollar on CNBC here:
http://www.cnbc.com/id/15840232?video=509559001&play=1
or
http://tinyurl.com/28tnvy
That is a huge move.
I think we will get there eventually maybe even lower, but I still think there is a possibility of the dollar surging up due to a crisis before it heads back down.
I readily admit I could be wrong but this does not seem easily predictable to me.
I do agree there are serrious issues ahead I am just not sure of the near term results. Ive seen people basically correct in their predictions and have the market zig zag on them and loose a lot of money.
Roger,
Any thoughts on the FNI as an additon to a portfolio?
thanks
I wonder what FDPIX (Profund falling dollar) would do from here on out?
It takes a sizeable 15K initial investment and carries a rather large 1.5% expense ratio. High for Profunds anyway.
It's up 6.18% YTD. 2.33 & 4.4% for the last 3 & 6 months. Subtract the expense ratio and it may be a dog. You know, money market type returns with a whole lot more risk.
Does anyone know of a double short dollar play? Profunds doesn't have one.
re dollar short fund:
rw...or someone told me about Direxion funds...how about an inverse of 2.5?
Google:
Inverse Family Member Charts
fwiw.. folks were asking about software that gives sharpe and other metrics for given time periods...Monocle does.
yes check with Direxion funds, I believe they have a levered fund.
FNI; I have not studied it but from the top down I have been broadly out of China for a while. I would expect this fund adds volatility which for now I am underweight. my emerging market exposure for now is mostly a broad based etf and a brazilian stock. a few other folks have Russia and or Vietnam.
Roger,
Do you think that volatility is going to be a longer term phenomenon, for who knows whatever reason? Paranoid enough to think that this is what the hedge funds want and they will exploit ways to amplify it. If so, I like your idea of using double shorts and I think it is worth expanding upon. Keep x% as always in either cash or double short(s). Use timing which you already do do with the 200dma but I think there are more dynamic ways of when to pull the trigger without doing it more than 5x per year, or so. Even a 50percent hit rate will make money, smoothe the ride, and set you up good insurance for a deep correction. Personally, I use a relative strength ratio: short fund/total mkt and then use moving averages for buy sell signals. A little more complicated because I also compare it to ratio of money mkt/total mkt. So far, working for me. The trick is to accept a few nicks which will be made up by a prolonged downturn.
re volatility,
I think VIX at 10 will be a rarity over the next couple of years. While 30 is probably too high I think low 20s as a norm is very possible, especially if the cycle does end.
to the extent that interest rates play into calculating vol of options i think that when the curve normalizes, whenever that might be, simply imputing higher interest rates could put some upward pressure on VIX--here I mean if the risk free rate of return goes to something like 5.50%-6%.
roger...thanks...puts a little reality and perspective around this volatile mkt....makes good sense...it's about the uncertainty of interest rates while the yield curve was inverted and the prospect of lower earnings. Would you say it's still odd that for thelongest the yield curve was inverted and the mkt was not this volatile?
Roger, this dollar to $66 stuck in my head last night. If the USD were to tumble to this level (17.5% decline from current levels) then that would portend higher oil at $91 per barrel (assuming all other things remain constant).
Bernanke surely has a sleepless night or two himself. The dollar vs the economy--surely feels like a King Solomonesque decision. Sacrificing one or the other is tough. Oil at $91 (if I did my math correctly)will likely have bigger effects on the economy than leaving interest rates unchanged. I still cannot believe the increases in simple things such as milk (50%) and bacon (25%)over the past year. Events and information will unfold as they will. Makes me glad that I'm a minion.
$1 US bought only 85 yen in 1995. When we hit that level I'll start to worry. Remember that the Europeans have tossed out several crap currencies and replaced them with solid Euros. Going lower against the Euro is not the same thing as falling against the Lira.
Personally, I think the drop is political. Bush & Snow wanted a lower dollar and they got it. Watch who the Rep and Dem nominees put on their economic team. If it's someone from the Rubin or Forbes side of the ledger, use next year as an oppurtunity to build a nice position in the greenback.
anon 640pm, I am sorry I don't quite follow your question. Are you asking about the number of months the curve has been inverted before it finally caused stock market problems?
If so, my thought would be that it might belie a maturing/evolving of our market. The more mature the slower things move, IMO.
It may be as simple as it just takes longer for some things to matter.
Matthew I kind of take your comment as equating to I'll worry when the S&P 500 gets to 1100. Sorry if I am misunderstanding.
Roger, you could say that.
I wasn't sure what you meant by dislocations. I'm not worried about the U.S. economy (recessions don't worry me). This chart is what I'm getting at. The dollar has been lower, and I think the advent of the Euro plus a rising China means the dollar can go even lower and it wouldn't be shocking. For the time being, I see the weak dollar as a trade and as causing some economic adjustment, but nothing dire.
I own FXY.
Here here, Matthew, agree with your comments wholeheartedly.
I have several"goldbug" friends, and have seen others all pointing out USD index 80 as "the line in the sand!"
Well, guess what, we are below it, and the sun still came up today.
Its a brave new world out there, and people need to stay flexible with their thinking.
Here is my simple thinking:
US National Debt > 700,000,000,000,000,000,000,000
Yearly Interest we taxpayers must pay on that debt >
500,000,000,000
= Dollar is going much much lower.
Thank the Bush administration, a corrupt blank check congress, and an unjustified war against a country that never threatened the USA nor had any anit-us terrorists.
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