Friday, December 18, 2015

Strong Dollar Acts As A Magnet

Earlier this year I wrote a piece that indicated a great deal of wealth would be flowing into America seeking protection from the ravages fostered upon it. This is driven by policies that have been even worse than those America's leaders have chosen to pursue. The strong dollar acts like a magnet pulling wealth towards America and it may soon get much stronger. Throughout history, strong currencies have attracted wealth and this means money and wealth from all over the world are headed towards our shores. The money coming into America is flowing into both bonds and stocks. This creates a self-feeding loop that supports lower interest rates and drives the stock market ever higher. Those of you who have read other articles I have written know I think the market is overvalued and the bond market is a bubble ready to pop, but as long as we remain the best and safest place to hide money do not discount the dollar.

Drawing Money Like A Magnet
While America has been described recently as the cleanest dirty shirt in the closet, or the best house in a bad neighborhood, both place it as the least worse option. The reality is other options fail to pass the smell test. This means what is coming to America is wealth and money seeking a "safer" place to take refuge from the coming storm. Today America has become a money magnet, Lady Liberty the symbol of America that stands in the harbor of New York while a bit tarnished is still giving people hope even if Washington is not overwhelming us with the same glowing feeling.

Do not underestimate the power of cross-border money traveling into the country as a driving economic force. Another thing you should not underestimate is the advantage our currency has because of its role as the world reserve currency. This makes it the "default currency" and by the size of its market, float, and liquidity the currency by which all others are weighed, measured, and often pegged. The chickens are coming home to roost for countries that face growing debt and policies that make them uncompetitive. Some of these countries are increasing looking at ways to confiscate the wealth of their citizens, it is only logical that as people begin to realize the dead end path of their homelands they take action to move their money to a safer place. 

A Very Important Chart In Understanding The Dollar
The chart to the left is very important. Today four major currencies dominate the world stage, they are the pound, the euro, the yen, and of course the dollar. The remaining currencies remain small bit players in the overall scheme of things. John Maynard Keynes said, By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. As the central banks print like crazy to control interest rates on bonds they devalue the currency. While there are not many Bond Vigilantes there is a slew of  Currency Vigilantes and they are ready to make their presence known.

The yen and the euro are in trouble, with the pound being very vulnerable to contagion. Weakness in the value of the Yen, Pound, and Euro must not go unnoticed as they are a precursor to the wealth fleeing the countries that use them in everyday life. What is occurring in the currency markets and the huge shift in wealth are not uncommon. History has shown countries can steal wealth by way of various Trojan horse methods such as monetizing debt through printing massive amounts of new currency or new taxes. If you look close you will see the currency markets are beginning to reflect diminished confidence in the system central banks have created and as the currency games continue to ratchet ever higher it is becoming more apparent that much of the world financial structure is built on shifting sand.

The schemes bankers have used for years to hide and transfer debt are coming under attack, if they crumble under the assault it will culminate in a reset of the economic system across the globe. If  people all over the world try to get out of their home currencies a surge in the value of the dollar is logical. In the end, this will not be the salvation of America or its economy but it sure does help create a bit of a lift that we would be wise to take advantage of.  As things turn ugly across the world it is only expected that as in Neil Diamond's patriotic song the wealth of the world like its people just wants to be free. Like the people Diamond sings about it seems wealth also appears to have legs and as the people, everywhere around the world the money is coming to America! Yes, it is coming to America, today, today!

Footnote; For fun, if you haven' heard if in a while the link for the song "Coming To America" is below. It comes complete with some very good visuals, enjoy.

Footnote #2; Last night the yen took a blip up based on a surprise move by the BOJ that was interpreted as not easing enough, I'm short the yen and see such blips as expected. Note the yen often jumps on bad news from China, I feel this has to do with money leaving Chine via Japan, it then moves its way into the dollar.


  1. Hey Bruce, Understanding that you are not my or - as far as I know - anyone else's financial advisor, can I sound you out on how much of a yen "short" a resident of Japan should be making (in terms of buying and hoarding physical USD)? I agree that this train, Kurota is driving down into the canyon, but the yen as the world's carry trade of choice seems to be remarkably resistant to efforts of devaluation... And even some in the BoJ are hinting that it is time to reign in the QE.
    I am a bear of very modest means. Japan makes it difficult for foreigners to trade in equities so I pretty much am limited to things that I can keep in a safe deposit box or that have no counterparty component (like bitcoin). Just wondering how much of your monthly paycheck you'd save as USD as opposed to JPY.

    1. Ron, thanks for your comment. The currency games are wild, unpredictable, and difficult to time. Many currency players take large highly leveraged positions and exit or enter positions with predetermined stops that can cause volatility to jump. Understand what I'm predicting will really test markets, and that is is one of the major currencies melting down.
      Logically the yen falling into a trap like Greece or Argentina has experienced is the most likely scenario. Being aware this might happen and protecting yourself from harm resulting from a large currency devaluation is a first and very important step in capital preservation. Remember I may be wrong, or appear to be wrong before it becomes obvious I'm right. How much a person puts at risk is always a very personal decision and caution is advised.

    2. Really appreciate the response. Caution is advised and heeded... But which is the greatest risk, saving a little in dollars or hoping the yen can carry on? That I have to figure out for myself - but I think I will continue hoarding about 15% gross in USD script for the time being. Happy holidays to you! Really enjoy reading your thoughts.