Shorting the US dollar

[TStoneMBD]

All this talk about the dollar falling I'm starting to believe it. I hear that Buffet and Gates are shorting the dollar so why shouldn't I? From my understanding, any dollar you invest in the forex market allows you to control $100 worth of currency. Wouldn't it be a sound investment to short the US dollar with 100x leverage? If i diversify in foreign exchanges the only fear I have to worry about it is if the dollar somehow rises. Of course if it does I risk getting wiped clean. If it maintains its position for a long time I lose nothing, but if it collapses I would make a fortune once I buy back into the economy.

I'm a novice with these things so please fill me in on anything I am missing. It appears to me that the upside of shorting the US dollar is so great while the downside is so minimal. Because of this, I'm skeptical on its potential.

On another note, is there a way for me to setup my neteller account directly to the forex market so that I can enter and exit easily? Do I need to withdraw everything to my bank account and eft it into Forex?

What software would you recommend I use to short the Forex market and how could I get setup easily with minimal costs. I understand that 4xmadeeasy is a good program but I also understand that it costs far more than I'm willing to invest.

[MMMMMM]

You do realize that if you work with 100x leverage, a 1% move against you will wipe out your entire margin thus closing out your position at a loss, right?

You should take a look at some past charts of the dollar's movement--hour charts, day charts, monthly charts, and yearly charts--just to see what kind of fluctuations are involved.

It is not that hard to call the direction right overall, yet still have your position wiped out in the shorter term if you are highly leveraged.

[TStoneMBD]

yah i entirely understand that, which is why i wouldnt invest everything with 100x leverage. also, 4xmadeeasy apparently has a stop/loss feature where you can tell the software once you lose x amount of money it immediately sells your position so you only lose that amount. you can still leverage 100x but you can at least keep half your roll if the us dollar rises. clearly though its not uncommon for a .5% influx on the dollar so leveraging in this sense is highly volatile. despite risk, it seems the ROI of this investment would on average be gigantic. do you not agree?

[Sniper]

Trading in the forex market is a high risk venture, especially for a newbie... make sure you read up on position sizing and risk management before stepping up to the plate!

Some brokers that will allow you to setup (usually 30 day) demo accounts, where you can actually trade play $...

Capital Market Services - http://www.cms-forex.com/
Forex Capital Markets - http://www.fxcm.com/
Advanced Currency Markets - http://www.ac-markets.com/
Gain Capital - http://www.gaincapital.com/

The software and services are slightly different for each, so I would recommend you do some testing of each platform and see which YOU find the most comfortable.

Also, remember that currencies basically trade around the clock /images/graemlins/wink.gif

[Dan Mezick]

TStone,

I see this post and I see your other post over there, on real estate.

You sense more inflation coming-- HERE, now-- and dont want your wealth's purchasing power to disappear. You seem to sense an opportunity in all this danger and are looking for specific action steps.

All you have to do is remember the lessons of 76-81 to do well in an big-inflation scenario. Study that period to be OK in your decisions regarding positioning.

The main thing to do is borrow cheap today-dollars at low FIXED rates, and make sure your cash (existing savings and debt) are positioned to benefit from monetary inflation. (An increase in the total dollars in circulation.)

This usually means real stuff: real estate, gold, gold stocks etc.

Lots of people will put homes on the market in the spring because of the expected real estate crisis and current attractive selling prices.

For example in my own home town this time last year there were 75 homes on the market; right now there are 175 homes available. Spring will bring even more supply; price must drop as a result to compensate. That may be an opportunity.

If you are so inclined consider buying gold (see symbol GLD).

The Fed says they are fighting inflation and that is PR and total BS. The reality is inflation is running away and these rate increases dont even come close to what is needed to stop it. They know exactly what they are doing. The cost of stopping the acceleration of the inflation trend with rate increases is huge: recession, a huge impact on balance of trade, etc. Just look at 1980-81 for an idea of how fun this will be.

At current real rates of interest (cost of money, minus inflation rate) they are literally paying you to borrow todays dollars and pay them off in inflated cheap future dollars later. Governments will always print more money to get out of a crisis. War is inflationary. Perpetual war means (likely) perpetual inflation.

It is unlikely China's cheap imports will continue to provide sufficient deflationary pressure to counter what has already started in terms of monetary inflation in the USA.

Add to this the statements from new-Fed-Chair Bernanke about "inflation targeting", "printing presses", and "dropping dollars out of helicopters" and you have the ingredients of a once-in-a-generation, perfect (inflationary) storm.

Inflation is a legal form of robbery. Anyone with savings in an account is being literally robbed blind by the inflators. The victims typically have no idea.

Ben Bernanke Background and Links (http://en.wikipedia.org/wiki/Ben_Bernanke)

Lessons from 1976-1981 (http://moneycentral.msn.com/content/Savinganddebt/Savemoney/P133222.asp)

Investing in an Inflationary Scenario (http://www.moneycentral.msn.com/content/Investing/Simplestrategies/P128329.asp)

Largest Producer Price Index Increase in 31 Years (since 1974) (http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x1857830)

Good source of info on current USA inflation situation. (http://moneycentral.msn.com/money.search?q=inflation)

[mcb]

the dollar has been on a rampage in recent months. buffet has been getting crushed on his short position, though he likes to buy and hold. the 100:1 leverage sounds large but you need to remember that in forex you are dealing in pips. reduce the lot size and each pip can be brought to $1.

the dollar is likely to increase in the coming months as it has in the past few months. bernanke, once in charge, could cause it to fall depending on what he decides to do regarding inflation.

the upside to shorting the dollar is that when if finally comes down you will make money. it would be best to wait for the initial decline and then hop on the train, this way you wont get stopped out when your margin runs out.

if you are new to trading currencies use something simple like forex.com. the spreads on the majors are at most 5 pips (i think, i dont use this company).

[TStoneMBD]

when deflation occurs, how will this affect leasing rates and property prices? Inflation naturally raises prices but say the USD gets drops by 25%, would that mean that housing prices and rental rates are going to raise 25% to match the rate of inflation? i understand the theory that if i borrow money now and pay it back later i am paying it back with weaker dollars, but if borrowing now doesnt make me money through the process of inflation then what good is that?

if a deflation occurs, i have been told that the economy would collapse and real estate prices would drop. that makes sense to me but with deflation shouldnt the price of property stablilize to meet the rate of the us dollar? as a result, would real estate would initially plummet but rebound shortly after to make a gigantic profit for those who enter the market when it first crashes?

[TStoneMBD]

how is the initial decline likely to happen? will deflation immediately occur in 1 quick motion before im able to buy in or will it occur in a trend like pattern where i can buy in as soon as i see it start to drop?

[KaneKungFu123]

[ QUOTE ]
TStone,

I see this post and I see your other post over there, on real estate.

You sense more inflation coming-- HERE, now-- and dont want your wealth's purchasing power to disappear. You seem to sense an opportunity in all this danger and are looking for specific action steps.

All you have to do is remember the lessons of 76-81 to do well in an big-inflation scenario. Study that period to be OK in your decisions regarding positioning.

The main thing to do is borrow cheap today-dollars at low FIXED rates, and make sure your cash (existing savings and debt) are positioned to benefit from monetary inflation. (An increase in the total dollars in circulation.)

This usually means real stuff: real estate, gold, gold stocks etc.

Lots of people will put homes on the market in the spring because of the expected real estate crisis and current attractive selling prices.

For example in my own home town this time last year there were 75 homes on the market; right now there are 175 homes available. Spring will bring even more supply; price must drop as a result to compensate. That may be an opportunity.

If you are so inclined consider buying gold (see symbol GLD).

The Fed says they are fighting inflation and that is PR and total BS. The reality is inflation is running away and these rate increases dont even come close to what is needed to stop it. They know exactly what they are doing. The cost of stopping the acceleration of the inflation trend with rate increases is huge: recession, a huge impact on balance of trade, etc. Just look at 1980-81 for an idea of how fun this will be.

At current real rates of interest (cost of money, minus inflation rate) they are literally paying you to borrow todays dollars and pay them off in inflated cheap future dollars later. Governments will always print more money to get out of a crisis. War is inflationary. Perpetual war means (likely) perpetual inflation.

It is unlikely China's cheap imports will continue to provide sufficient deflationary pressure to counter what has already started in terms of monetary inflation in the USA.

Add to this the statements from new-Fed-Chair Bernanke about "inflation targeting", "printing presses", and "dropping dollars out of helicopters" and you have the ingredients of a once-in-a-generation, perfect (inflationary) storm.

Inflation is a legal form of robbery. Anyone with savings in an account is being literally robbed blind by the inflators. The victims typically have no idea.

Ben Bernanke Background and Links (http://en.wikipedia.org/wiki/Ben_Bernanke)

Lessons from 1976-1981 (http://moneycentral.msn.com/content/Savinganddebt/Savemoney/P133222.asp)

Investing in an Inflationary Scenario (http://www.moneycentral.msn.com/content/Investing/Simplestrategies/P128329.asp)

Largest Producer Price Index Increase in 31 Years (since 1974) (http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102x1857830)

Good source of info on current USA inflation situation. (http://moneycentral.msn.com/money.search?q=inflation)

[/ QUOTE ]

im not in a position to borrow money.

whats the best way to protect my money?

how can i buy Euro's? is this what forex is for? what EFT's I can buy to offset inflation?

[Ed Miller]

[ QUOTE ]
im not in a position to borrow money.

whats the best way to protect my money?

how can i buy Euro's? is this what forex is for? what EFT's I can buy to offset inflation?

[/ QUOTE ]

http://www.publicdebt.treas.gov/sec/seciis.htm

While this isn't a perfect option, it's an easy way to protect yourself somewhat from inflation.

[MMMMMM]

[ QUOTE ]
yah i entirely understand that, which is why i wouldnt invest everything with 100x leverage. also, 4xmadeeasy apparently has a stop/loss feature where you can tell the software once you lose x amount of money it immediately sells your position so you only lose that amount. you can still leverage 100x but you can at least keep half your roll if the us dollar rises. clearly though its not uncommon for a .5% influx on the dollar so leveraging in this sense is highly volatile.

[/ QUOTE ]

It's not just "highly volatile", but the chance you get stopped out at a loss is very high if you only have one-half of one percent allowable wiggle room. That's likely to happen even if you call the overall direction correctly, meaning you'll be right but you'll lose money.

[ QUOTE ]
despite risk, it seems the ROI of this investment would on average be gigantic. do you not agree?


[/ QUOTE ]

I don't agree amd here's why: it MIGHT turn out that way, but it's a lot more gamble than I suspect you may be thinking it is. Also, you can't divorce risk from ROI, because your EV must include weighted risk as well as weighted return.

Also, just calling the direction correctly is a lot harder than it might seem. Calling the direction correctly AND at about the right time AND being so right that your position never even moves against your entry level by a tiny 0.5% due to fluctuation is way harder yet still. And don;t forget you are fighting the spread as well.

Basically with that kind of leverage you have just about no wiggle room at all and you have to be immediately right and stay right or you will get stopped out very soon at a loss.

By the way, many good experienced forex traders generally recommend that you risk no more than 1%-2% of your bankroll on any one trade. And they'e typically using a lot less leverage than you are contemplating.

[TStoneMBD]

Ok I understand the risk of leveraging so significantly and see that is clearly wrong unless Im doing it with a portion of my bankroll that I dont mind losing. however, this has nothing do with ROI. if its certain that the USD is going to drop in the future by a good percentage then shorting the USD is +EV assuming you can ride out the short term swings. I certainly see that my original post in this thread was naive on certain levels now, but I still feel strongly that if it's likely that the USD is going to drop a good amount in the upcoming months/years and is unlikely to rise that the ROI of leveraging against the dollar is very significant, but very risky and volatile.

Unfortunately I don't know nearly enough about economics to come to my own conclusions about the future of the dollar, all I know how to do is to react to the thoughts of others and it seems that intelligent investors are expecting a great inflation in the near future and as a result are investing in foreign currencies and assets to hedge themselves against catastrophe. Of course, they are investing conservatively while my plan would be extemely nonconservative.

[disjunction]

Does anybody know what's going on with Inflation Protected bonds? A year ago or so ago I listened to the inflation hype and diverted some of my 401K to TIPS. But I also left some money in a regular "Bond Oriented" fund.

I check my fund balances every day because I'm a gambler and I have to know the score. On a good day for bonds), the Bond Oriented fund does really well (there were a lot of good days for bonds this year) and the TIPS fund goes up by about a half or a third of what the regular fund did. In October, every day that a bad inflation number would come out, the regular bond fund got hammered but the TIPS fund would also get hammered, about a third or a half as much. I would think the TIPS would break even or something. Why did TIPS do so bad in October?

I guess my question is kind of vague, since I don't have the exact numbers. But looking at these things day-to-day, I'm wondering why anybody would own TIPS. Worse case its a supply-and-demand thing, and TIPS just aren't worth what they cost.

[Evan]

Investing in gold (either directly or through assets with a high correllation to gold) is a good way to hedge against a weakening dollar through a method you may be more familiar with. NEM is the ticker of a company you may be interested in.

[Ed Miller]

[ QUOTE ]
I guess my question is kind of vague, since I don't have the exact numbers. But looking at these things day-to-day, I'm wondering why anybody would own TIPS. Worse case its a supply-and-demand thing, and TIPS just aren't worth what they cost.

[/ QUOTE ]

A TIPS principle follows the CPI. If the CPI goes up 3%, your principle goes up 3%, and the interest you are paid is off the new, higher principle. At maturity, you are paid either the inflation-adjusted principle or your original principle (whichever is greater). It's an investment backed by the US Government.

So my question to you is, how are TIPS "not worth what they cost?" They are perhaps the safest investment available anywhere. They are guaranteed to beat inflation by a solid margin.

I think you are getting way too caught up in the after-market value of your securities. When interest rates go up, long-term bonds go down. But at maturity, your bond is worth face value, whether interest rates went to the sky and back or not.

You buy a 30-year TIPS for your 401k. In 2035, you are guaranteed to be paid a principle with equivalent buying power to the one you put up today (and pay no tax on the appreciation), and in the meantime, you've gotten 60 interest payments. That's a great option for a retirement account.

[laserboy]

TStoneMBD,

It helps to conceptualize inflation/deflation in terms of money supply.

Debt is highly inflationary. When people borrow billions of dollars in mortgage loans, billions of dollars in "money" is created and introduced into the money supply. This lessens the value of the dollar and inflates the value of assets like real estate. Furthermore there is somewhat of a multiplier effect, as people can then borrow money against the inflated value of their homes, pumping even more money into the economy. This cycle of debt, in a nutshell, is what drives the US economy.

Deflation occurs when debt is paid down or defaulted on, that money leaves the economy. This results in an increase in the value of the dollar and a decline in asset values as billions of dollars in fake money is sucked out of the markets. In a severe enough deflationary cycle, financial institutions will fail, destroying billions of dollars in assets and bringing additional lending to a screeching halt. This is what happened in Japan in the 1990s and the US in the 1930s. Note that this is actually bullish for the dollar, though the dollar may still decline relative to other currencies due to other macroeconomic factors such as trade deficits, reserve allocations of foreign central banks, interest rates, etc.

In the long run, price to rent ratios will likely revert toward their historical mean through a combination of declining real estate values and incrasing rents. Here is a graph of historical price/rent ratios in the US for the past twenty years:

OFHEO House Price to Rent (http://macroblog.typepad.com/macroblog/images/ofheo_3.gif)

The way to profit from this trend would be to invest in apartment rental REITs. It would be important to invest in well managed REITs that make sense from a cashflow perspective, that are not highly leveraged, and that had the discipline not to invest in new properties during the boom.

[Dan Mezick]

The simplest way to hedge against a dollar decline is to buy real stuff. This usually means gold-related. Two securities backed by gold are GLD and CEF. Do your own due diligence.

[AceHigh]

[ QUOTE ]
Lots of people will put homes on the market in the spring because of the expected real estate crisis and current attractive selling prices.

For example in my own home town this time last year there were 75 homes on the market; right now there are 175 homes available. Spring will bring even more supply; price must drop as a result to compensate. That may be an opportunity.

[/ QUOTE ]

Aren't you afraid that with the Fed continuing to raise interest rates that home prices drop in the short term because loands will cost more? That may drive home prices down for the next few years.

[PLOlover]

[ QUOTE ]
A TIPS principle follows the CPI. If the CPI goes up 3%, your principle goes up 3%

[/ QUOTE ]

True but I think everyone agrees that CPI is less than the true inflation rate and over a long term period this would be noticable.

[Ed Miller]

[ QUOTE ]
[ QUOTE ]
A TIPS principle follows the CPI. If the CPI goes up 3%, your principle goes up 3%

[/ QUOTE ]

True but I think everyone agrees that CPI is less than the true inflation rate and over a long term period this would be noticable.

[/ QUOTE ]

That may well be the case. I just wanted to point out an option that is, IMO, very well worth considering compared to, say, buying gold (which seems to be everyone's kneejerk advice).

[imported_bingobazza]

dont buy Euros - the constitution has just failed in its bid to be ratified by teh member states - Euros will probably suffer a similar fate to the dollar.

As for trading currencies, the pros wait until the trend has started. If you are buying on large leverage, that might be a good idea. But the US is enjoying an interest rate differentail that is likely to get wider in the coming months against many currencies. Dont forget that you have to pick another currency to trade the dollar against. Who is to say that they wont all go down as people realise that fiat currencies ARE worth the paper they are printed on?

If you want safety and security, the inflation linked bonds might be a good idea, but then again, the Fed sets the inflation rate through their manipulation of the CPI. You could actually get delation of a point or two a year
without realising it.

All that glitters is commodities in my book, and the loss of faith in fiat currencies around the world may just set of huge bull run in gold...some argue we are past the first leg already.



Bingo

[Bet_to_Nguyen]

Seems like a good time to buy gold would have been around 2000 when it was trading at a very low price relative to its historical trading value. Considering where gold is at now, what is the likelihood of it continuing to increase much more? From what I understand it is one of the first moves investors make when inflation is on the horizon, so hasn't it done about all it's gonna do if everyone's already made this move?

[imported_bingobazza]

If you had thought than in the 1970s, you would have missed a 1000% move. Gold is still cheap historically....really cheap. Its about 7 times cheaper than stocks compared to the late 70s. A 60% move in a gold bull market, or most other bull markets, is nothing....just the beginning.

Bingo

[Bet_to_Nguyen]

Gold wasn't in the middle of a huge upwards price swing in the 70s until about 1978. So when the huge upward swing started then it only lasted about 3 years. Morever, the only gold bull markets that I can find appear to be approximately 3 year periods of significant increase followed by it falling at nearly the same pace. Gold has been steadily increasing since 2001. What factors will continue to drive it higher? Maybe this will be a good lesson for me on why historical trends aren't always reliable for making investment decisions.

[imported_bingobazza]

I dont really want to hijack this thread, as I think there will be some interesting discussions from it...and inflation and the dollar are very good topics to talk about right now, but it is hard to talk about them without talking about gold as well.

[ QUOTE ]
Gold wasn't in the middle of a huge upwards price swing in the 70s until about 1978. So when the huge upward swing started then it only lasted about 3 years.

[/ QUOTE ]

Im not sure I see your point here....but gold was up about 60% from its '76 lows by Jan 1978. Are you saying that if a bull market happens fast that thats a bad thing? Are you saying that if it collapses fast that thats a bad thing? Think of traders who were long on the way up and short on the way down.

[ QUOTE ]
Gold has been steadily increasing since 2001. What factors will continue to drive it higher?

[/ QUOTE ]

Consumer Price inflation
Oil price instability
Global political instability
Global recession brough on by bird flu, wars, oil, infaltion or deflation etc.
Loss of faith in dollars and other major currencies
Gold Supply and demand imbalances
Rising global savings rates
Defaltion in asset prices
Slowing central bank gold sales
Continuing consumption increases in Emerging markets like China, Russia and India.
Foreign central banks conversions of declining dollar reserves to hard assets like gold.
Growing popularity of gold ETFs and investor demand for the yellow metal.

Maybe a better question is what can stop gold? Central banks are already selling gold, some argue in an effort to stop its rise...if this is true, it doesnt seem to be working too well right now.

There isnt too much bad news out there for gold right now that I can see...but my ears are always open to hear any that you may have.

Bingo

[Bet_to_Nguyen]

"Im not sure I see your point here....but gold was up about 60% from its '76 lows by Jan 1978. Are you saying that if a bull market happens fast that thats a bad thing? Are you saying that if it collapses fast that thats a bad thing? Think of traders who were long on the way up and short on the way down."

I don't think that gold going up or down fast is necessarily a good or bad thing, what I stated was more or less an observation of the yearly average prices. From the data I have gathered the gold market in the 70s started shooting up rapidly beginning in 1977 and peaking around mid 1980.

I've been meaning to delve deeper into the statistics I've gathered so that I can get a clearer picture. Right now I'm only looking at the yearly averages. (I've been meaning to get into the monthly changes over the past couple of decades but I've been really busy doing engineering work) Either way, from the data I've gathered so far it seems that when the gold starts to take off it can only sustain the huge upswing for about 3-5 years and then falls back down over about the same time period.

As of now, we haven't seen the +100% upswing it had back in the day. Do you think it hasn't really taken off yet and we could see the price hit 700 by 2008?

[imported_bingobazza]

I do think we could see a big price spike...when and how far are anyones guess, but Im in gold...ya know...just in case. To catch up with its REAL upper and lower trading range in the 80s after the last bull run, where it was stuck for almost 20 years, it would need to move to $900 and $580 respectively in inflation adjusted dollars.

I think 20 years of base building is pretty solid.

Bingo