More info in the Triffin's Dilemma mentioned by Jim Rickards click, here.
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Showing posts with label US dollar. Show all posts
Showing posts with label US dollar. Show all posts
Tuesday, September 29, 2009
Triffin's Dilemma
Jim Rickards, director of market intelligence for scientific consulting firm Omnis, shares his outlook for the dollar.
More info in the Triffin's Dilemma mentioned by Jim Rickards click, here.
More info in the Triffin's Dilemma mentioned by Jim Rickards click, here.
Monday, September 7, 2009
China Dismayed By U.S. Money Printing
According to Ambrose Evans-Pritchard of the UK Telegraph:
Read whole article here. This may help explain why China is now a net seller of U.S. government bonds. Even Alan Greenspan is now even warning about the potential for double-diget inflation due to U.S. monetary expansion.
The U.S. is addicted to borrowing, credit, and money expansion; if these trends continue the dollar will be worth significantly less. These trends can be reversed. I don't want to see the dollar one day worth the same as toilet paper.
Cheng Siwei, former vice-chairman of the Standing Committee and now head of China's green energy drive, said Beijing was dismayed by the Fed's recourse to "credit easing".
...
"If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies," he said.
China's reserves are more than – $2 trillion, the world's largest.
"Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets," he added.
The comments suggest that China has become the driving force in the gold market and can be counted on to
buy whenever there is a price dip, putting a floor under any correction.
Read whole article here. This may help explain why China is now a net seller of U.S. government bonds. Even Alan Greenspan is now even warning about the potential for double-diget inflation due to U.S. monetary expansion.
The U.S. is addicted to borrowing, credit, and money expansion; if these trends continue the dollar will be worth significantly less. These trends can be reversed. I don't want to see the dollar one day worth the same as toilet paper.
Tuesday, August 4, 2009
U.S. Stock Market Gains Since March Lows Are Not As Big As They Seem
On March 9th the S&P 500 stock index bottomed; the closing price of the S&P 500 on that day was 676.53 and the US Dollar Index was at 89.19. Today the S&P 500 is at 1002.63, a nominal gain of 48.2% since March 9th, but the US Dollar index has fallen to 77.59. This means that about 40% of the gains in the S&P 500 since March 9th are due to the dollar depreciation and thus not real. Let me explain…
The US Dollar Index is a measure of the value of the US dollar relative to a basket of foreign currencies. The higher the index the more the US dollar is worth compared to other currencies and the cheaper it is for people in the US to buy foreign goods. The lower the US dollar index the less the US dollar is worth compared to other currencies and the more expensive foreign goods becomes.
The value of the US dollar is very important to foreign investors looking to invest in the United States. Let’s say for example an investor from Britain, Nigel, wants to invest in US stocks. For the sake of this example, let’s say one British Pound will buy one US Dollar. Nigel wants to buy 100 shares of a US stock at $10 per share for a total investment of $1000. He decides this is a wise investment so he converts 1000 British Pounds into dollars and then purchases 100 shares of the US company.
One year later the price of the shares doubles to $20 per share; 100 shares at $20 apiece means his shares are now worth $2000. Nigel thinks this is great because has just made $1000 dollars on his investment. He then sells his shares for $2000. However, he cannot buy anything in England with US dollars so he has to convert his dollars into pounds. Let’s also say the dollar lost half of its value relative to the pound. Thus it now takes $2 to buy a British pound. Nigel then convents the $2000 he received from the sale of his shares into 1000 British pounds. Nigel has now discovered he has not actually made any money in British pounds because it took 1000 pounds to buy the shares a year ago.
All the perceived gains his stock in US dollars were due to the fact the US dollar lost value relative to the pound. There were no real gains in British pounds for him. This risk of an investment's value changing due to changes in currency exchange rates is known as foreign exchange risk.
Way does this matter? Well since the March 9th lows in the S&P 500, the S&P 500 has gained about 48% in value in dollar terms. It went from a March 9th close of 676.53 to a 1002.63 close on August 3rd. However, the US dollar has lost a good deal of value relative to other currencies. The US dollar index was at 89.19 on March 9th and on August 3rd it was at 77.59. This means that the value of the dollar has declined by about 13.5% relative to foreign currencies since March 9th.
So to get real returns one has to adjust for the fall in the dollar which I have done in the graph below. Nominal gain is the percentage gain in the S&P 500 not adjusted for the depreciation in the dollar and the dollar index adjusted gains are the gains adjusted for the fall in the value of the dollar relative to other currencies. The real dollar index adjusted gain since March 9th is only about 29% this compares to a nominal gain of about 48% (see Graph below).
**A technical note for people who want to know how I did the calculations for the graph:**
Example: On Aug. 3rd the S&P closed at 1002.63 and 676.53 on March 9th. The dollar index was 77.59 on Aug. 3rd and 89.19 on Mar. 9th. To make the adjustment take 77.59/89.19 = .87. Then multiply 1002.63 by .87 to get real value of S&P 500 in a constant US dollar index adjusted value: 1002.63 * .87 = 872.23.
Finally to get % real gain take (872.23 - 676.53) / (676.53) = 28.9%
% of gains due to dollar depreciation calculation:
Real gains since March 9th = 28.9%
Nominal gains since March 9th = 48.2%
To get % of gains due to dollar depreciation take 1 – (28.2% / 48.2%) = .400 or 40.0%
The US Dollar Index is a measure of the value of the US dollar relative to a basket of foreign currencies. The higher the index the more the US dollar is worth compared to other currencies and the cheaper it is for people in the US to buy foreign goods. The lower the US dollar index the less the US dollar is worth compared to other currencies and the more expensive foreign goods becomes.
The value of the US dollar is very important to foreign investors looking to invest in the United States. Let’s say for example an investor from Britain, Nigel, wants to invest in US stocks. For the sake of this example, let’s say one British Pound will buy one US Dollar. Nigel wants to buy 100 shares of a US stock at $10 per share for a total investment of $1000. He decides this is a wise investment so he converts 1000 British Pounds into dollars and then purchases 100 shares of the US company.
One year later the price of the shares doubles to $20 per share; 100 shares at $20 apiece means his shares are now worth $2000. Nigel thinks this is great because has just made $1000 dollars on his investment. He then sells his shares for $2000. However, he cannot buy anything in England with US dollars so he has to convert his dollars into pounds. Let’s also say the dollar lost half of its value relative to the pound. Thus it now takes $2 to buy a British pound. Nigel then convents the $2000 he received from the sale of his shares into 1000 British pounds. Nigel has now discovered he has not actually made any money in British pounds because it took 1000 pounds to buy the shares a year ago.
All the perceived gains his stock in US dollars were due to the fact the US dollar lost value relative to the pound. There were no real gains in British pounds for him. This risk of an investment's value changing due to changes in currency exchange rates is known as foreign exchange risk.
Way does this matter? Well since the March 9th lows in the S&P 500, the S&P 500 has gained about 48% in value in dollar terms. It went from a March 9th close of 676.53 to a 1002.63 close on August 3rd. However, the US dollar has lost a good deal of value relative to other currencies. The US dollar index was at 89.19 on March 9th and on August 3rd it was at 77.59. This means that the value of the dollar has declined by about 13.5% relative to foreign currencies since March 9th.
So to get real returns one has to adjust for the fall in the dollar which I have done in the graph below. Nominal gain is the percentage gain in the S&P 500 not adjusted for the depreciation in the dollar and the dollar index adjusted gains are the gains adjusted for the fall in the value of the dollar relative to other currencies. The real dollar index adjusted gain since March 9th is only about 29% this compares to a nominal gain of about 48% (see Graph below).
**A technical note for people who want to know how I did the calculations for the graph:**
Example: On Aug. 3rd the S&P closed at 1002.63 and 676.53 on March 9th. The dollar index was 77.59 on Aug. 3rd and 89.19 on Mar. 9th. To make the adjustment take 77.59/89.19 = .87. Then multiply 1002.63 by .87 to get real value of S&P 500 in a constant US dollar index adjusted value: 1002.63 * .87 = 872.23.
Finally to get % real gain take (872.23 - 676.53) / (676.53) = 28.9%
% of gains due to dollar depreciation calculation:
Real gains since March 9th = 28.9%
Nominal gains since March 9th = 48.2%
To get % of gains due to dollar depreciation take 1 – (28.2% / 48.2%) = .400 or 40.0%
Friday, July 31, 2009
Tuesday, July 7, 2009
Jim Rogers Plans to Short U.S. Treasuries
According to Bloomberg's Bob Chen:
Read the whole story here.
The dollar and U.S. Treasuries are both likely to slide as soaring government debt in the world’s biggest economy undermines confidence in its assets, according to Jim Rogers, chairman of Rogers Holdings.
“The government is printing lots of money and borrowing even more; that’s not the basis for a sound currency,” he said in a telephone interview today from Singapore. “The idea that anybody would lend money to the U.S. government for 30 years at 3 or 4 or 5 or 6 percent interest is mind-boggling to me.”
Rogers, the author of books including “Investment Biker” and “Adventure Capitalist”, said he holds fewer dollars than a year ago and plans to “short U.S. government bonds someday.” A short bet involves selling a security you don’t own with a view to buying it back after the price has fallen.
Read the whole story here.
Monday, July 6, 2009
U.S. lurching towards 'debt explosion'
According to Philip Aldrick of the Telegraph:
Read the whole article here.
The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank.
In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.
...
Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.
Read the whole article here.
Friday, June 26, 2009
Chinese Economic News
1) In an interesting article in Forbes today. Gordon Chang is skeptical about an economic recovery in China. If Gordon Chang is right this is not good news for the global economy.
According to Chang,
"So, as big as all of Beijing's spending programs are--they could end up being about 18% of GDP and the largest in the world on a percentage basis--they are not enough to stop the country's accelerating decline for more than a few quarters. China was once in a supercycle upward. Now it has turned a corner and is in a supercycle in the other direction. At some point, this will become evident, even to the World Bank. "
Yikes but I'm sure Jim Rogers would disagree with this analysis. It will be interesting to see who ends up being right.
2) China is buying record amounts of iron ore. Read about it here.
3) The US dollar falls as China calls for a global currency. Read about it here.
4) China is trying to hedge against its dollar holdings. Very smart move I say because there are budgets deficits in the United States as far as the eye can see. One way they are hedging is by buying gold.
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