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Global Accidents Support US Dollar Rally

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The pending collapse of Japanese government bonds is welcomed.

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The Business Insider has a fantastic interview with Hayman Capital Founder Kyle Bass. Bass testified at the crisis hearings in Washington about Fannie Mae (FNM), Freddie Mac (FRE), bank capital, bank leverage, and derivatives. He discussed those issues with CNBC's David Faber along with his forecast for Japan.

To see the interview and read a partial transcript, see No Way Out for Japan.

US on Path of Japan

The US is on the same path as Japan (with a lag), something I've repeated for years. However, Japan's path is about ready to veer, and Japanese government bonds will soon be in trouble.

Let me rephrase that -- Japanese government bonds are in trouble.

Japan, the nation of savers, is about to start drawing on those savings. And there's no way Japan will be able to finance its long-term debt at 1.4%. Indeed, Japanese government bonds are in much deeper trouble than US treasuries at this point.

Kyle Bass says the US has 10 to 12 years to right the ship; I think five to 10, but closer to five is correct. Even if it's only three years, it's not today's worry. See Worry Over the US Dollar and PIIGS for further discussion and comments from Marc Faber.

In the meantime, the pending collapse of Japanese government bonds won't be good for the carry trade, but should benefit the US dollar. In fact, there are many things good for the US dollar here.

US Dollar Positives

  • Japan demographics as noted above

  • Greece bailout

  • Spain property bubble

  • Baltic state currency collapse

  • Savings rate in US headed north

  • Extreme bearish US dollar sentiment

  • Pending implosion in the UK

  • Canadian property bubble bursting

  • Australian property bubble bursting

  • Hard landing in China, collapse of the RMB

Most would argue against a hard landing in China, but I actually think that's the best China can look forward to after its rampant expansion of credit. All of the above are accidents in progress or accidents that will happen soon enough. The US dollar should benefit when they do.

Finally, I'd like to point out that the Massachusetts special election is likely to be US dollar positive. There will be little sentiment for more bailouts but there will be increasing calls for more fiscal prudence and less government spending. It will be much tougher to pass stimulus bills, or bills of any kind.

Health care may not even pass now, although I do think the Obama administration will manage to cram it through in one last hurrah, possibly by the simple maneuver of the House accepting the Senate version straight up.

However, if the health-care bill doesn't pass, that too would likely be US dollar positive.

Add it all up and most of the possible surprises are likely to be US dollar supportive. Thus, dollar bears should consider hibernating for a while. The stars are aligned for at least a modest dollar rally, and perhaps a lot more than that.
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