The Emperor Has No Clothes
I continue to see this as an "emperor with no clothes" situation: almost everyone seems to be looking the other way at debt, while it is only the fools who incredulously point out the naked facts.
Scott and Laurie have accurately described these facts and their implications. The falling dollar can only do serious harm, however, when and if it begins to affect long rates in the U.S. Rising long rates would be death to our economy at this point, so there are Herculean efforts to keep that from happening. Thanks to our Japanese friends, long rates have remained low with the yield curve even flattening as of late, creating an illusion of stability.
Our fund is now fully positioned for an increase in volatility. Unlike most who believe that at worst the emperor will be able to maintain the illusion through the Presidential election, we believe that the markets at some point will recognize the instability due to the debt and current account imbalances inherent in the system.
This recognition will come just as the emperor discovered that he had no clothes. And once it is discovered, there is no going back.
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