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Volcker Sees More Decline in Dollar Ahead
Old 12-04-2004, 10:37 AM   #1
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Volcker Sees More Decline in Dollar Ahead

Link is probably good for up to a week.

http://www.theglobeandmail.com/servl...tory/Business/

Quote:
Despite the plunge, experts warn, the dollar - for years, the darling of foreign exchange markets - is probably still overvalued. More importantly, they say, the U.S. dollar is in the midst of a long-term correction needed to rebalance a global currency and trade picture that is dangerously out of whack.

The correction poses sobering risks for global financial markets and probably has a few more years and another 15 to 20 per cent before it's over. No less an authority than former U.S. Federal Reserve Board chairman Paul Volcker warns that there's a 75-per-cent chance of a dollar-fuelled financial crisis within the next five years, unless Washington adjusts its economic policies.
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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-05-2004, 07:43 PM   #2
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Re: Volcker Sees More Decline in Dollar Ahead

My only practdical thought on this topic is: When you buy your international funds to get exposure to other currencies than the dollar, just check to make sure they don't hedge their exposure back into dollars or you'll have the earnings and cap gains from foreign securities, but you'll still be hedged and thus not gain from the dollar decline (or not have achieved your goal of having exposure to multiple currencies.)

Dollar and US are great but they're just one bloc. World is going to be very different in next 50 years than in the past 50, imho. Get diversified.

One thing I keep waiting to see kick in is the benefit for Europe of all the new countries in Eastern Europe with low priced labor and high demand for goods and services. Europe is now 650 million people in a common market/economy/currency/central bank. It would a bit like the US somehow annexing mexico and much of central and south America -- once the digestion happened you could see it kicking into gear to make us hugely competitive. I know NAFTA was sort of going to do this, but the EU is, I believe, much more unified than that.


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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-05-2004, 09:26 PM   #3
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Re: Volcker Sees More Decline in Dollar Ahead

I'm not sure investing in international equities is a great hedge against a weak dollar. * As the dollar falls, their markets are taking a hit because of fears of exports falling off. * As much as I dislike gold, it's looking like the safest haven right now.
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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-05-2004, 10:25 PM   #4
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Re: Volcker Sees More Decline in Dollar Ahead

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When you buy your international funds to get exposure to other currencies than the dollar, just check to make sure they don't hedge their exposure back into dollars or you'll have the earnings and cap gains from foreign securities, but you'll still be hedged and thus not gain from the dollar decline (or not have achieved your goal of having exposure to multiple currencies.)

Dollar and US are great but they're just one bloc. *World is going to be very different in next 50 years than in the past 50, imho. *Get diversified.

One thing I keep waiting to see kick in is the benefit for Europe of all the new countries in Eastern Europe with low priced labor and high demand for goods and services. Europe is now 650 million people in a common market/economy/currency/central bank. * It would a bit like the US somehow annexing mexico and much of central and south America -- once the digestion happened you could see it kicking into gear to make us hugely competitive. *I know NAFTA was sort of going to do this, but the EU is, I believe, much more unified than that.
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I invest internationally because there's at least as many value stocks in the rest of the world as there are in the U.S. But I don't want to have to worry about which way the dollar's going. (George Soros never returns my calls, either.) Tweedy, Browne Global Value (TBGVX) has managed to beat the MSCI EAFE while hedging out of the dollar, and I believe that this is a case where a little insurance is worth a lot of sleep. They're also mostly invested in Europe. Heck, they have three times as much money in Switzerland & the Netherlands than in Japan.

I also believe that an unhedged fund gives up a lot more when the dollar rises than they gain when the dollar drops. But that may just be my investor psychology interfering with logic.

I acknowledge that the dollar could fall another 20-30%, but at this point isn't there a greater chance that it could start rising again? If so, I'd rather be hedged.
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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-05-2004, 10:39 PM   #5
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Re: Volcker Sees More Decline in Dollar Ahead

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I'm not sure investing in international equities is a great hedge against a weak dollar. * As the dollar falls, their markets are taking a hit because of fears of exports falling off. * As much as I dislike gold, it's looking like the safest haven right now.
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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-05-2004, 11:07 PM   #6
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Re: Volcker Sees More Decline in Dollar Ahead

Don Coxe from Nesbit Burns has a saying that you make your money with what is on page 16, not page 1 of your newspaper.

The dollar is definitely not on page 16 anymore, probably actually page 1. So near term, anything could happen I would suppose. Including a strong upmove. The Europeans in particular must be getting nervous about what the Euro at US$1.30 could do to their competitiveness. Especially vis a vis China, with its dollar link. So if they see the dollar downmove flagging, they could jump in and buy dollars, helping to create a contra move.

But my bet is that 3 years form now the dollar will be lower against the Canadian dollar, the yen, the renminbi and maybe the Euro. I bought assets in all but the Renminbi at various times over the last 10 years, and I am holding. I am not sure that I would do it now, as a fresh commitment, because it hurts so much to get slammed right away, and these things can be really volatile. Central banks are always looking for opportunities to ambush the traders, and they can really cause trouble. But I believe it is true that currencies can really trend, once they get going.

One of the truly difficult lessons to learn is how long trends can run. I bought San Juan Basin Royalty trust in mid 1986, around $4. At the time natural gas was trash. I kept it until last year, took out huge dividends and sold between $14 and $16. Now, it is $28!!

I think the safest bet today is contra the S&P, and contra the NASDAQ. If I were making new commitments, I would wait until January.

Disclosure- so far my contra bets are losing money. But they can turn around very fast :)

Also, I am not trying to act like I know a lot or anything; you are all experts. I am just sharing how I look at it.

Mikey
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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-05-2004, 11:35 PM   #7
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Re: Volcker Sees More Decline in Dollar Ahead

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I think the safest bet today is contra the S&P, and contra the NASDAQ
How is that a safe bet in the context of a falling dollar, which is pretty much universally considered to be bullish for the US economy and stock market?
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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-06-2004, 11:23 AM   #8
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Re: Volcker Sees More Decline in Dollar Ahead

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How is that a safe bet in the context of a falling dollar, which is pretty much universally considered to be bullish for the US economy and stock market?
I agree that in the intermediate to longer term a falling dollar would help the manufacturing part of our economy, which I think is a very worthy goal.

But it will be hard to get a falling dollar without rising interest rates, which might have an adverse effect on other sectors like mortgage lending and housing and thus the consumer. Also, rising rates might directly stress the stock market and certainly the bond market as well.

The other thing is that valuation is so high that reversion to the mean on this dimension would like trump whatever positive economic effects there might be.

So my contra large US stocks position does not depend on a faltering real economy. It is more valuation and interest rate based.

I should amend myself regarding this being a "safe bet". There may be no safe bets right now beyond T-Bills. At current rates bills guarantee a low return.

I do think this may be the best shot at a T-Bill beating return that is still reasonably likely to occur. Obviously it would not be a good idea to implement with more than a small part of one's portfolio.

And it passes the page 16 test.

Mikey

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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-06-2004, 12:39 PM   #9
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Re: Volcker Sees More Decline in Dollar Ahead

Mikey,
I like your "Page 16 test", and by that definition we can expect a short term surge in the dollar. But as a Bernstein/Boglehead, I can't think about short term, but just try to find as much diversification as I can into things that don't correlate that much with each other, thus the interest in unhedged foreign assets. But it isn't an investment recommendation so much as an investing philosophy for the long term. Short term I'm not smart enough to call anything.

Also, short term, things are more correlated than we think, and a weak US stock market or dollar can be tough for other markets, too, but a falling dollar by definition makes non-dollar assets worth more in dollar terms, which is a nice (and rare) instance of reliable negative correlation. (foreign bonds would seem to be good for this)

One thing you said, though, made me puzzled: I thought I remembered from school that if interest rates went up, then foreigners would plow into the dollar and it would be strong for the dollar? Yet you seemed to be suggesting the opposite, either causally or associatively. Could you go into your logic a little more? Maybe there are secondary effects that swamp the primary effect?

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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-06-2004, 02:14 PM   #10
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Re: Volcker Sees More Decline in Dollar Ahead

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Also, short term, things are more correlated than we think, and a weak US stock market or dollar can be tough for other markets, too, but a falling dollar by definition makes *non-dollar assets *worth more in dollar terms, which is a nice (and rare) instance of reliable negative correlation. *(foreign bonds would seem to be good for this)
ESR Bob, I agree with your point here. There could be short term losses, due to the dollar being a page one item at present.

Quote:
One thing you said, though, made me puzzled: *I thought I remembered from school that if interest rates went up, then foreigners would plow into the dollar and it would be strong for the dollar? *Yet you seemed to be suggesting the opposite, either causally or associatively. *Could you go into your logic a little more? *Maybe there are secondary effects that swamp the primary effect?
I'll try. It gets hard because there are so many different time courses of the different effects, some going the same way, others contra. Your statement about higher dollar interest rates normally leading to higher dollar exchange rate I suppose would be generally true. Although I can think off the top of my head of times that it wasnt. For example the weak dollar of the 70s went with high nominal US interest rates.

Consequently, one would want to focus on real rates.

Most germaine to the present in my mind is that our $ has been strong and our long term rates low mostly for the same reason. China and Japan have been sending us TVs and Toyotas for dollars, which they mostly use to buy our treasury debt and in some cases equity securities. If they decide to stop financing our twin deficits (current account and federal budget) it will at once remove support from the bond market and the $ exchange rate. There would be nothing to prevent China from buying Euros with surplus US$, and holding EuroLand bonds. Or even gold, or Chilean mines or Argentine ranches.

I believe until recently China was in buyout talks with the Canadian mining company Noranda, which operates all over the world.

Overall it seems to me that Emporer Bush and his lacky Federal Reserve Chairman are wearing no clothes. A lot of bad things could happen. The only good thing I at least can imagine is that we continue to squeak by. It is obvious that the world's largest debtor nation which is up to it's eyeballs in a disastrous war is not in a very strong strategic situation.

When all this shakes out, if the US has reasonable real interest rates, that could attract investment flows on its merits. And by then, maybe our manufacturing sector will have accomplished some import substitution and possibly some exports too. We have a long way to go. I read recently that for the first time ever, more cars were produced in Ontario than in Michigan.

Mikey
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agreRe: Volcker Sees More Decline in Dollar Ahead
Old 12-06-2004, 02:40 PM   #11
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agreRe: Volcker Sees More Decline in Dollar Ahead

I agree with buying international funds that are not hedged to the dollar. For now at least.

I recently purchased Pimco Foreign Bond fund (Unhedged). Has been doing well in its short existence.

Any recomendations for other specific unhedged international funds?


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Re: Volcker Sees More Decline in Dollar Ahead
Old 12-06-2004, 04:58 PM   #12
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Re: Volcker Sees More Decline in Dollar Ahead

GTM,
These are the foreign bond funds I am in, but the Pimco Foreign Bond and DFGFX are my biggest (both unfortunately are hedged!)

Fidel NewMkts (FNMIX)- not sure
DFGFX - hedged
PFORX - now hedged *(I think I was confused about this -- in April this year they launched PFUIX which is unhedged; it is possible there was a change in hedging policy at that time, and that I may switch from PFORX to PFUIX as a result.)
RPIBX - not hedged
BEGBX - partially hedged


Mikey,
thx for the explanation -- I agree that only Real rates should matter, (and relative to other countries' real rates at that) *and that other issues like deficits, underlying securities mkts and changes in foreigners expectations about your economy (or expectations about your inflation) can run currencies counter to what the relative real rate would indicate.

I've always been intrigued by this global central bank currency stabilization/ intervention thing: *it seems like a free ride for the debtor, but I can't quite get my brain wrapped around it... if you run up huge deficits so your currency gets weak, then the people who export to you (and withwhom you've been running a deficit) worry about their own economy's strength/jobs lost if they lose their ability to export to you, so they recycle all those dollars you've been shipping them by basically giving them *up for future IOUs from you, to keep your currency higher. *It almost seems like a free ride, though they don't just give you back the dollars, they do in fact ask for an IOU which your kids get to pay, so I guess that's what they get for all their hard work exporting to us. *Now it makes sense. *

(Disturbing thought: *Isn't that something like slavery... you sell your kids future labor to foreigners?)

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