Shorting the US dollar

[MMMMMM]

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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.

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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.

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


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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]

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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.

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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

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]

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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.

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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]

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

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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]

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

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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.

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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).