2009 - the year of USD?

Monday, December 29, 2008 | posted by RedApple
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I have been exchanging emails with one of our reader about 2009 investment.

The conversation started with how the market has punished Russia. The Russia Rubble has depreciated back to its 2004 /2005 level.

We talked about how powerful the open market is in punishing Russia. I then compared the situation with China. I argued that China has a comparatively closed economy and fixed currencies since State controlled a lot of the money flow and definitely where currency is pegged.
My friend argues that both countries had export and reserve, now exports are suffering in global recession, reserves are slowing down and both equity markets are down 62-72% this year - how can China be immuned?

Then this is how the rest of email exchange went:

BigApple- It is a poker game. Russia was bluffing his bets since the flop was showing a straight draw (oil, oil, more oil). Now, some body called the bluff and went all in. Russia unfortunately was playing the game with borrowed money. The same thing goes with China. The flop was "export, FDI, Olympics", now the turn is "consumer/ domestic stimulus". No one has a better hand at the moment, so no one has called bluff. the problem is the river maybe a "doom" card. ... Put it this way, when you are called at the poker table, you will need to show your card and give up/win the money. When you lose, you will need to pay. But if you are on borrowed cash, you will need to sell something. it was a one way bet for Russia with oil. But for china, can you pin point a easy asset which they can sell. ie something that you can push down and force their hand? I cannot for now. whereas if you spike up commodity, they will be in more of a trouble.... they are importers of "needs"

Friend - We are dealing with GLOBALIZATION and now competitive FX devaluation where EVERYONE owns USD. Whether it be Russia, OPEC, US,China: everyone is in the same boat. There is no more "credit" and the consumption driven economic model is in taters. I would venture to guess that there will be deals between CHINA and OPEC and LATAM and ASIA to get things "righted". Since OIL backed OPEC FX, its easy to seehow it could come together. We are entering a reflation trade notbuilt upon growth, but built upon RE-rating of FX values. This is the real NEEDs over WANTs trade. OPEC and the rest of these regimes NEED higher CRB. China and ROW has too many USDs that need to bespent without "rocking the boat".

BigApple - ok. so you are suggesting weakening USD will hurt China... i agree

Friend - USD is going to be a 2009 story...UST is going to be a problem. CRB is going to spike. For the first time I feel like I need to invest USD outside.

We then talked about investment ideas:

  1. short USD
  2. long Commodity - especially Agricultural goods, oil.
  3. long Gold
  4. short Treasury
All pretty much in line with our earlier assessment of 2009 investment landscape.

Related Posts:

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  3. James Grant Questions Dollar Validity - 22 Dec 2008
  4. SafeHaven - Obama's Spending Spree Won't Rescue the US Economy from Recession - 28 Dec 2008
  5. Marc Faber reiterates Buying Gold and Gold Stocks - 21 Dec 2008
  6. Marc Faber sees bankruptcy for US - 6 Nov 2008