USD Crazy Train

Mental wounds not healing
Lifes a bitter shame
I'm going off the rails on a crazy train

One of the great unexplained mysteries of our current crisis is the surprising performance of the USD.

You might think that with Helicopter Ben at the helm and the Fed hell bent for leather to print as many greenbacks as they possibly can that this would be ideal conditions for a rally in Gold (which we have seen a little, but not enough to please the gold bugs) and for a precipitous drop in the USD.

This would be logical, but it would also be dead WRONG. You would be surprised instead to find that the almighty dollar (which has been much mocked and abused of late) has been flexing its mighty muscles in a BIG way.

Put simply US Dollars have outperformed virtually every other asset class in this crisis. Cash is King and USD cash is the King of Kings. (Okay second maybe to the Yen JPY, but that's another story)

How can this be? The gold bugs (not to mention the rest of the world's currencies) would desperately like to know.

How is it that the US, which precipitated this crisis and deserves much of the blame for it, is seeing a strong boost to its currency at the rest of the world's expense?

There are 3 primary explanations for the Dollar's surprising strength:

1) The Japanese Yen Carry trade has finally crashed and burned, exposing huge distortions in many of the world's currencies

2) The hedge funds facing a cash crunch, margin calls and a spate of redemptions are repatriating US dollars as fast as they can (while selling off ALL other assets)

3) For better or for worse the USD remains the world's reserve currency and perceived safe haven in times of trouble. So despite negative real returns, the world's investors have piled into US treasuries in a flight to safety aimed at stemming loses if not capital preservation.

Why Are Investors Returning to the Dollar ? - Seeking Alpha

All Eyes on the U.S. Dollar - Seeking Alpha

Three Possible Explanations for the Dollar's Strength

We can argue about the causes and whether this makes sense at all, but you cannot argue with the results, which are that the USD has been kicking BUTT.

Dollar and Gold Rise Simultaneously? Bring On the Flying Pigs ...

Still, content as I might be that my US assets have received a welcome currency boost, even as the rest of the world has been taken to the cleaners, I have to admit that this situation is 1)unfair and 2) unsustainable.

The US by most accounts will need to raise (i.e. PRINT) a couple Trillion dollars to dig us out of this DEP/recession. So the future course of the US dollar is in little doubt, it is only a question of WHEN, not IF it will fall.

And WHEN the tides turn, it MAY BE WISE for those with USD assets to jump off this crazy train and onto more solid ground before it slides too far...

WHEN will this momentous shift occur?

My best guess is sometime between Q1 and Q2 of next year.

The carry trade may be mostly unwound at this point, but Hedge Fund redemptions are just picking up steam. Most hedge funds require their holders to give notice by mid November to make year-end withdrawals... of which you can safely assume there will be MANY...

So I see no relief in sight for most assets held by hedge funds (i.e. virtually everything, except it seems, USD) between now and early next year.

From then, the timing will depend on when or whether some measure of confidence (sanity?) returns to world markets and people start to invest in something other the US treasuries. And even then we can expect many investors will feel more comfortable initially bottom fishing in beaten down US bluechips (a la Warren Buffet), rather than venturing farther afield in emerging markets.

So the TOP in USD may roughly coincide with the BOTTOM in US and world equities.

Gold meanwhile is being weighed down by selling pressure from hedge funds and other investors that were long gold and now need to raise cash. It is also impacted by the general commodities sell off (which is driven both by the hedge fund implosion and the expectation of demand destruction due to the coming DEP/recession).

So like it or not, USD may be your best bet for the next few months until Gold finds its feet and the markets put in a bottom at which point we may see the USD start to give up some of its gains. Of course this will depend on whether inflation or deflation gets the upper hand, but longer term I have to bet on Helicopter Ben and the power of the (Printing) Press.

Sing it Ozzy:

Heirs of a cold war
That's what we've become
Inheriting troubles I'm mentally numb
Crazy, I just cannot bear
I'm living with something that just isn't fair

Mental wounds not healing
Who and whats to blame
I'm going off the rails on a crazy train