Monday, November 02, 2009

Watch the bouncing dollar

I've been a believer that much of the global surge in asset prices this year has been tied to the decline in the US dollar. When coupled with Fed Reserve actions to eliminate volatility in the markets you get a perfect storm that starts reflating asset bubbles around the globe. Today, Nouriel Roubini gets on board with that thesis in the Financial Times....

"Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius – even if they are just riding a huge bubble financed by a large negative cost of borrowing – as the total returns have been in the 50-70 per cent range since March."

In layman's terms, traders are shorting the US dollar (selling dollars today at x, with the intention of buying them back at x-10%) and taking the proceeds from the short sale to buy very risky assets: stocks, gold, oil, etc. This has been wildly profitable this year.

However, if and when this unwinds, it may lead to a massive panic to get out of the door at once. Assets will be sold violently to buy dollars and cover short positions.

We have created the "mother of all highly leveraged global asset bubbles." Leverage and asset bubbles are what got us in trouble in 2008 but here we are again just 13 months later.

The timing of when this trade goes bad is always uncertain (clearly the markets are having a good day today-however, these large swings -- 175 pts up, 280 pts down, 200 pts up, 120 pts down -- are not healthy signs), but when if the dollar starts to rise quickly the swing in asset prices could be swift and violent.

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I've always found the holiday party to be an enormous waste of resources, but it is so ingrained in the culture of some firms that it's hard to cut it from the budget. According to Crain's...

"Just 62% of companies nationwide are planning holiday parties this year, down from 77% last year and 90% in 2007, according to a survey by outplacement firm Challenger Gray & Christmas. And like the law firm that is scaling back, 57% of businesses are holding their parties during the workday, according to the survey."

Cheers!

PS: A huge thanks to everyone that added the Alexa Toolbar. I was hopeful that maybe I'd crack the top 1 million sites globally if a few readers added the toolbar, but now I'm in the top 750,000 sites globally and the top 150,000 sites in the US. We've come a long way baby!

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