Sunday, August 30, 2009
The US Dollar. That famous piece of paper the world over. So much of the world's trade is done in USDs, and even more of its debt is held in these government-decreed "stores of wealth".
Although here at Investophoria we do anticipate the death of the US Dollar some day, we think it's like a zombie - it takes a lot of bullets to kill.
It looks like the last swath of gun-squad action wasn't nearly enough, the Federal Reserve throwing as many paper and electronic money bullets as possible without completely discrediting itself. Despite the barrage we seem to possibly have formed a bottom and are meeting in a triangle convergence.
What is so important about a triangle you ask? Triangles are the harbinger of death to many unwary investors. Those who can't see the giant red flashing lights because they have a blindfold on. This, dear readers, is a triangle:
Triangles can be both Bullish or Bearish (signal increases or decreases, respectively). It is the ultimate clash of sentiment and ideas, the perception duel. The triangle tells a story - the fight is vicious on both sides, and either both are equally vehement in their cause, or one is just a little more vicious than the other.
But there is one thing that a triangle has in common no matter WHICH direction it points to. When the battle comes to a head, no matter who wins, the victor will STEAMROLL on in their sworn direction - the move that follows a triangle is often breathtakingly violent - people can be made and broken after a triangle formation completes.
The USD triangle pattern forming on the chart is a very strong one that spans over 12 months. Many folks would call this a hard-to-pick triangle directionally because both sides are converging.
Triangles aren't an exact science, but they are certainly one bullet to add to your clip. Remember, trading is first and foremost about psychology, second about money management, and third about method. Many traders have the brains to make it easy, but they get clouded out by the emotions of having their money out there and make bad calls. These bad calls lead to burn-outs, as in it probably would have been less stressful if you'd just taken a match to your cash.
So if you are going to trade, DO IT RIGHT. Learn to be disciplined. Pick a few indicators that work well for the types of trades you are making. If you are investing, as opposed to trading, these tools are still useful because you can pick great entry points and get your companies cheaper than the average sucker hitting the buy key on a whim.
Anyway, back to the USD. Fundamentally it is a terrible, terrible currency. I've touched on this before and I probably will again because thinking of the long-long-term prospects for this currency (barring a surprise Ron Paul election in 2012!!) are somewhere between abysmal and hell-borne.
However, it is also the most widely over-inflated currency on earth - this is quite simply because there is just SO SO MUCH bad, rotten debt (and when I mean SO MUCH I could write that ten times and still not encompass the scope of it) all over the earth denominated in US Dollars. Trillions of this bad debt have yet to be written-down (the losses on loan portfolios realized - remember back in the spring when the government let banks change they way they valued these loans?). When these losses are realized that previous value (denominated in dollars) is gone. Poof.
This is short-term deflation of the money supply, and it will be violent. Will it outweigh the massive inflation of the government in the long term? Certainly not (Governments have proven their inflationary stupidity for over 2000 years of documented history!). However, in the short term, there is so much existing money (in the form of issued credit) to be vaporized that deflation is almost a 100% certainty.
This means the overall supply of dollars will decrease (this is the definition of deflation) relative to the overall supply of goods and services. This includes things like stocks, bonds, real estate, bread, milk. Actually let's keep that one short and sweet - everything.
The dollar looks to be forming (actually looks like it already has formed) its bottom. Based on the previous chart I am willing to put out there that we will see at least 12 months of solid dollar index incline. And real dollar value growth (what you can buy with it). This will probably start the decrease in stocks and a violent turn in psychology will carry it the rest of the way down, down, down to some new low somewhere between HERE and ZERO (and closer to the latter, methinks!).
My trades will benefit from both the price declines themselves due to deflation (put options go up when prices go down), and also from the increased value of the currency compared to other currencies - when I roll back my earnings into my Canadian Dollar account I might just see another 10% - 20% appreciation compared to when I opened my investments strictly on a currency basis.
To the reader who asked me to elaborate on my thoughts on the USD, you are very welcome! Any other questions please feel free to ask away!
Happy Investing all.