The Collapsing Dollar and the Potential Impact on Bonds
Sobering stuff, I know, but hey, I can't hide from the truth with other people's money on the line.
US Dollar Index
This picture is undeniably bearish and ugly.
But what are the ramifications? Many people have cited the recent sell-off in stocks as a result of the fall of the dollar. I am sorry but I beg to differ. Foreigners bought nearly $115 billion of US securities a couple of months ago, $112 billion of which was bonds.
So the sell-off, in my humble opinion, is due more to prices being too high and optimism too high. Also, I continue to see smart money selling (insiders, Sam Zell, etc.) to private equity firms. The real problem with the dollar is the bond market.
The problem arises because the US needs foreign inflows to support its horrendous deficit. If they stop buying, because the value of the bonds in their terms falls, rates should rise. If they became net sellers of our bonds, the US could have hyperinflation on its hands. In addition, we would see a possible "crowding out" of the US private sector as the US government soaks up the demand. As such, my firm is going to likely take profits in our recently established preferred stock (corporate securities) in favor of Treasuries and agencies. I already sold the Morgan Stanley (MS) preferred today at a tidy profit and hate to generate short-term gains from a perspective of taxes, but better than a realized loss.
Finally, Chairman Bernanke was out today talking hawkish about inflation and rates. He does this as year-over-year PPI turns negative. I think they should be cutting rates but the paradox they have dug for themselves is this: They talk hawkish, but act dovish by growing the money supply at double digit rates.
But the one thing they can't afford is a dollar collapse. Sobering stuff, I know, but hey, I can't hide from the truth with other people's money on the line.
P.S. I just saw a quote that Alan Greenspan said the dollar was "undervalued." Once again, they are talking up the dollar. Why? Because they have to.
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