Shorting America: $ Swoon Chronicles, 2011 Edn

♠ Posted by Emmanuel in , at 4/21/2011 08:29:00 PM
[NOTE: It's time for rubbish collection again, and today's point of collection is familiar to all.] I am rather incredulous about others' fixation on the minimal movement on Treasury yields since S&P dropped its credit warning on the unsuspecting American public. First, it's early days--other agencies have yet to follow. Second, it's only a warning, not an actual downgrade. So, there's plenty to, well, look forward to if your interested in obtaining a (marginally) more honest picture of American fiscal decrepitude, moral turpitude towards the global economy, and overall bad attitude. Then again, Americans famously have no idea of long-term outlook, so you shouldn't expect any better from its commentariat class.

In the meantime, fear not for general sentiment towards the US dollar is falling hard pretty much across the board: against currencies of developing countries and developed countries; commodities; and what else have you. Let's just say that, alike the credit warning, there are plentiful signs of folks losing faith in America. As you can see in the chart above, the dollar index spot (DXY) has hit a three-year low, while all-time lows are not far away last plumbed in 2008.

It's during these times--when dollar weakness threatens to turn into an outright dollar rout--when the Treasury Secretary usually starts taking about "strong dollar" policy. In reality, of course, he's more interested in seeing it devalue--but not become a runaway situation which dents whatever confidence remains in holding greenbacks--AKA American junk. From Reuters:
The dollar fell broadly for a third straight day on Thursday as record low interest rates and the crushing weight of the U.S. budget deficit pushed it closer to an all-time trough against major currencies. The dollar's slide accelerated days after Standard & Poor's slapped a negative outlook on the United States' top AAA credit rating. The agency said a downgrade was possible if authorities can't slash the massive U.S. budget deficit within two years. That prompted investors, from fund managers to foreign central banks that hold trillions of dollars in assets, to opt for anything but the U.S. currency.

"The combination of loose monetary policy and chaos on the fiscal front has people very worried," said Boris Schlossberg, head of research at GFT Forex in New York. "That fear is being reflected in the dollar." Mohamed El-Erian, co-chief investment officer of PIMCO, with $1.2 trillion in assets under management, said, "Absent problems elsewhere in the world, history and economics suggest that America's current fiscal and monetary policy stance will put continued pressures on the dollar."

The dollar index, a gauge of the greenback against six advanced country currencies, fell to 73.735 .DXY, its lowest level since August 2008. Analysts said that sets up a possible run toward its record low of 70.698 touched in March 2008.
People are losing faith in the common currency? You must be reading blogs populated with USA#1-style cheerleaders and other reality-challenged folks:
The euro soared to a 16-month high above $1.46 before easing to $1.4550 EUR=, while the dollar fell 0.8 percent to 81.82 yen JPY=. The Australian dollar rose above $1.07, its highest in nearly three decades, as Australia's 4.75 percent interest rate and its role as a supplier of raw materials to booming Asian markets attracted investors.

Some investors fear a fragile U.S. economic recovery could sputter if the White House and Congress agree to cut the deficit with significant spending cuts or tax hikes. That would likely force the Federal Reserve to hold interest rates at record lows even as other central banks raise them. "There is no clear sign that the U.S. is going to raise interest rates, and that is causing the dollar to depreciate by the day," said Jonathan Xiong, who helps manage about $30 billion at Mellon Capital Management in San Francisco...

Analysts said the euro was on course for a move toward $1.50 if the current momentum continues, despite the possibility of a Greek debt restructuring. Talk that China may invest in Spain had investors shrugging off worries for now about euro zone debt.
So the market is guessing America's woes are far worse than those of the Eurozone--and I use a non-fallacious indicator via their currencies. Factor in endless bouts of depreciation and extraordinarily low rates and investing in America is as raw a deal as you can get. If you're dumb enough to do so, well, you'll have no one to blame but yourself for the worst is yet to come--and few will argue about that.