It's not that the dollar suddenly smells like a rose. Rather, now the euro is stinking up the house.
Sometimes even just thinking about currencies can make your head catch fire. Still, it is a necessary evil if one wishes to find a way clear from the unholy mess we are in.
Over the past few days, we have seen several headlines in the major media touting what seem to be completely contradictory facts:
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U.S. inflation is at a 17-year high
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The dollar is up
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And gold is down
As my Taipan Daily co-editor likes to say when faced with the outrageous, “What in the wide, wide world of sports is goin’ on here!”
What’s going on is simple enough (now come on, don’t laugh when I say that!)... It’s the U.S. contagion.
Printing Our Way to Oblivion
For the past few years, the U.S. has been profligate in its attempts to print its way out of various troubles. Markets crashing? Print some dollars. Heck, even if they’re just running flat -- print some more.
Got a war or two to pay for? Borrow a half-trillion from your most dire international rivals, and then print more money to pay them back.
Real estate market rolling over? Mortgage market sputtering? Banks failing? “Lend” them dollars below cost. Folks across the country defaulting on their house notes? Buy up their bad paper with even more digital dollars.
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“Will Write for Food”
Ever hear the motto “There ain’t no such thing as a free lunch”?
Well there may very well be such thing as a free dollar... but in the long run, you won’t be able to use it for much more than blowing your nose.
Currencies are, among other things, dynamic equations. A “free” currency is by definition worth only what you paid for it. Nothing! Thus, years of overprinting greenbacks has engendered record-breaking inflation and destroyed public confidence in both the U.S. economy and the U.S. currency.
A recent survey from the Pew Research Center notes the following:
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The percentage of folks who put inflation at the top of their terrors list doubled between February and August to 47%,
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Two-thirds of the respondents told pollsters that their incomes were falling behind living costs,
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72% believe the country is in a recession,
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73% said that good jobs were rarer than hen’s teeth (up from 55% a year ago),
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68% are robbing Peter to pay Paul for gasoline to get to work,
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And 38% said they were having problems just scraping up enough cash to buy food.
When Up Isn’t Up
But wait: Didn’t the guy with the blow-dried hair on cable TV just tell us that the dollar was up big this week? What’s more, aren’t gold and oil down?
Sorta-kinda… But not really.
Yes, the dollar is up a bit more than 6% since mid-July, but only in comparison to the euro. This is not because Washington has done anything particularly witty lately. Rather, it is because the diseases that have been afflicting the dollar, the U.S. markets and U.S. economy have finally spread to Europe.
Uber-euro banker Jean-Claude Trichet has bemoaned that the Eurozone is now stuck on the horns of the same familiar dilemma: His peculiar amalgam of an economy is grinding to a halt. Real estate sales are stalling and prices are falling; and if anything, his constituents are more exposed to this looming disaster then we were.
What’s more, the European financial outfits are not at all prepared to take this hit, suffering as they already are from the fallout from their ill-fated ventures in U.S. vintage mortgage-backed securities.
The Euro (Finally) Tumbles!
The thing is, America’s trouble is now Europe’s trouble, too. And that’s why the euro is tumbling from its precarious perch.
It’s also why internationally fungible items (such as gold and oil) appear cheaper these days when examined through the narrow view finder of the rallying U.S. dollar.
And while this doesn’t open any sort of buying window for U.S. stocks, it does create an intriguing opportunity for a bit of arbitrage...
Make 180% Playing Bad Against Worse
At the recent Taipan Global Opportunities Summit in San Francisco, I urged attendees to purchase at-the-money Rydex Euro Fund put option contracts.
Those puts are up some 180% as I sit to write to you (and probably ought to be sold now, simply out of principle).
But the trick can and should be performed repeatedly over the next few months. In essence, these contracts pit “already sick” dollars against “about to get mighty sick” euros.
And while I don’t much cotton to either currency, 180% over five trading days is a rate of return that ought to compensate for even the dollar’s crumbling value.
Heck, you can always use some of your gains to purchase gold...
Sincerely yours,
Adam Lass
