The Euro Bull: The New paradigm of FOREX
by Joe
Gelet, CTA
As the EUR/USD
breaks 1.50, investors should take another look
at foreign exchange. 100/barrel
oil, $1,000 gold, and $10/bushel wheat are not
anomalies, nor is there a ‘bull’ market
in commodities. The US dollar is losing its
value and its relevance as a world reserve currency.
What determines
the value of a dollar? The
common belief is that purchasing power determines
the value of money, which is partially correct,
but that is not the entire story. In a
world of floating currencies, money is also valued
in terms of other money. Simply opening a
bank account in Europe, and gaining a few % per
annum interest, would have returned a US based
investor over a 50% return in 5 years. There
are a few ways to look at that, but they all point
to the same conclusion: the value of the
dollar is declining. The other logical observation
is that by NOT investing in the Euro, an investor
is actually LOSING 50%. This is a difficult
mental leap for many to make as they don’t
see losses in their bank account, but as we see
$4/gallon gas, $3/gallon milk and skyrocketing
commodity prices, many are noticing. They
only have to realize the simple fact: prices
are not increasing the value of US Dollars is declining.
Who is not affected
by a declining dollar? The
poor, debtors, manual laborers, and tradesmen (because
you can continue to perform your trade for dollars,
pesos, or bananas if need be regardless of the
continuing slide of the dollar – tomorrow
you may charge twice as much but so what?) But
if you have any wealth; a house or a stock portfolio,
denominated in dollars, the declining US Dollar
should be the most important issue to you because
that portfolio is losing value as the dollar does. In
the worst case scenario, the Fed can default making
US Dollars worthless overnight.
Best case, although
unlikely it should be mentioned, the Fed could
raise rates to 10%, Bush could declare a flat
tax, open the borders to foreign investors by
deregulation and providing tax incentives, pull
out US Military from all foreign engagements, and
be the banker of the world. This would catapult
the US economy and the US Dollar to currently unimaginable
success, but this is a farfetched fantasy. In
reality, we are increasing our Military presence
around the world, cutting interest rates, and regulating
US markets, forcing even homegrown companies to
look abroad.
Let’s examine
why the dollar is declining and what can potentially
stop the decline.
The largest player
in the US Dollar is clearly the Fed, the sole
issuer of the US Dollar. Investment
Banks and Hedge Funds, at the end of the day, rely
on the Fed for regulation, clearing, liquidity,
and currency controls; they are distributors and
traders of US Dollars not the manufacturer. It
clearly states on the Fed’s website that
the Fed conducts foreign currency operations in
the open market, and maintains US holdings of foreign
currency and swaps.[i] This
would indicate the Fed has the ability to intervene
in currency markets in order to protect the strength
of the dollar, and although the Fed may have that
ability, it states in the same article that:
- US
monetary policy actions influence exchange
rates. The dollar’s exchange value
in terms of other currencies is therefore one
of the channels through which U.S. monetary
policy affects the U.S. economy. If Federal
Reserve actions raised U.S. interest rates,
for instance, the foreign exchange value
of the dollar generally would rise. An increase
in the foreign exchange value of the dollar,
in turn, would raise the price in foreign currency
of U.S. goods traded on world markets and lower
the dollar price of goods imported into the
United States. By restraining exports and boosting
imports, these developments could lower output
and price levels in the economy. In contrast,
an increase in interest rates in a foreign
country could raise worldwide demand for
assets denominated in that country’s
currency and thereby reduce the dollar’s
value in terms of that currency. Other things
being equal, U.S. output and price levels would
tend to increase—just the opposite of
what happens when U.S. interest rates rise.
The Fed therefore
officially controls exchange rates of the US
Dollar through Monetary Policy. The
Fed, in response to a weakening US economy and
a Subprime crisis, has taken an aggressive policy
of cutting interest rates, thus dropping the dollar.
 So
we cannot expect the Fed to solve the weak dollar
issue, because they are the creators of it! The
Fed could start aggressively raising interest rates
and we could see the dollar soar to new highs. But
there is a low chance of that happening, as they
have indicated the contrary. As the credit
crisis unravels, we can expect the Fed to continue
cutting rates. With a weak stock market,
a weak real estate market, and a weak economy,
we can expect more doom and gloom before we see
the light at the end of the tunnel, and in the
meantime the US Dollar can sink another 80% or
more, as the Great British Pound did when it lost
its status as reserve currency.
Technically, once
a downward spiral starts in currency, it is very
difficult to stop. In
stocks, an issuer can buy back shares in order
to dry up liquidity and stabilize the price; a
common practice among penny stocks listed on pink
sheets. However if the US Dollar declines,
the Fed would need Euros in order to ‘buy
back’ US Dollars, and since the Fed is not
an issuer of Euros, it would take a near act of
God to convince the ECB to loan the trillions necessary
to support the dollar in the event of a default
or run on the banks. While the Fed does have
some mechanisms in place to stabilize the markets,
the act of supporting your own currency is like
pulling yourself out of a sinkhole by your own
hair. Once the selling starts, it could feed
on itself and create a downward spiral – as
the value goes down more large holders, worried
about further losses, may panic and sell, thus
adding fuel to the fire.
It would be anything
but capitalism if we didn’t
profit from this once in a lifetime opportunity
of a declining dollar. On one hand, wealth
will be wiped out en masse – on the other,
it will be created. A transfer of paper wealth
from USD to Euro and other currencies is inevitable;
why be on the wrong side of the fence? Germans,
Argentineans, Japanese, French, British, Italians,
Turks, and many others, can attest to the events
surrounding currency collapse and hyper inflation. They
say it cannot happen to USA because of the TBTF
Too Big to Fail Policy, a fallacious reasoning
that came out of a Senate hearing on banking regulation.[ii]
All the facts
and economic data point to massive dollar sell-off – look
at a USD/CHF chart and you can plainly see it
has already started.
FX as an asset class
There are many
ways to invest in FX as an asset, but this should
be done only with the help of a qualified professional
or someone with experience in FX. Everbank offers foreign currency CD’s
and foreign currency deposit accounts: https://www.everbank.com/ This
will not excite most investors but at least you
can have non-dollar denominated deposits insured
by the FDIC.
For a more versatile
approach, CTA’s offer
FOREX Managed Accounts, usually with minimums starting
at $10,000. These accounts are pure FX trading
strategies, some are extremely conservative and
others are extremely aggressive. Various
strategies can be implemented on these accounts
which vary from simple news and economic analysis
by traders with 20 years experience, to fully automated
quant systems.
Funds such as
the MERK hard currency fund offer FX specific
returns as a mutual fund. From
their website: http://www.merkfund.com/
The Merk Hard Currency Fund (MERKX)
is a no-load mutual fund that invests in a basket
of hard currencies from countries with strong
monetary policies assembled to protect against
the depreciation of the U.S. dollar relative
to other currencies. Many consumers are aware
of the falling dollar but don't know how to protect
their capital against its decline. Others are
uncomfortable choosing specific foreign currencies
to invest in or investing in currency derivatives.
The Fund may serve as a valuable diversification
component as it seeks to protect against a decline
in the dollar while potentially mitigating stock
market, credit and interest risks-with the ease
of investing in a mutual fund. The Fund may be
appropriate for you if you are pursuing a long-term
goal with a hard currency component to your portfolio;
are willing to tolerate the risks associated
with investments in foreign currencies; or are
looking for a way to potentially mitigate downside
risk in or profit from a secular bear market.
Hedge Funds are another venue for FX investing,
but they typically have a $1 Million minimum and
employ risky strategies.
FX Overlay
If a business
or portfolio has exposure to multiple currencies,
a hedging program can be implemented that combines
multiple strategies to deal with currency risk. Large
corporations such as Intel may have their own
treasury desks, but smaller companies or financial
firms may not have the resources or knowledge
in place to justify such programs, however there
are many companies who offer this service, or
it could be built using proven models from the
ground up.[iii]
FX as an industry
Explosive growth
opportunities exist in the FX industry as US
based investors take notice. The
real opportunity in FX is in marketing, because
of the widespread lack of knowledge about FX. Sadly,
you don’t need to know much to make a fortune
in this field, and it’s the marketers that
will ultimately make the most, as they introduce
an uneducated and unenlightened public into the
most significant market of our age. What
will out of work real-estate developers do as the
market continues to weaken?
Beware FX Scams!
Because FX is
completely deregulated, FX attracts many criminals. The allure of a secretive
market only traded by large banks makes a good
pitch to unsuspecting suckers. However
there are a few easy ways to determine scams from
the real thing, such as the NFA, CFTC, SEC, or
by dealing with only companies and individuals
who associate themselves with large FX firms who
are registered with the NFA. The fact that
FX attracts criminals doesn’t diminish the
opportunities in FX any more than the movie “Boiler
Room” proves that all stock brokers are cocaine
snorting crooks. [iv]
This article is
by no means exhaustive nor is it intended to
be. Regarding bias on the
topic, considering we are in this business, the
fact that these opportunities exist, and the fact
that dollar is declining, is why we ARE in this
business and not in stocks or bonds. A day
may come where FX is the only significant market
left in the world, as domestic exchanges are ravaged
by reckless monetary policies and rogue political
administrations. In the meantime, protect
yourself against calamity and position yourself
to capitalize on the opportunity of a lifetime.
If you aren’t familiar with Elite E Services,
we recommended buying Gold at 279 and investing
in New Zealand Dollars in 2002 when the NZD/USD
was .39. George Soros made his fortune trading
currencies, not selling stocks. In the mid-1990’s,
Intel made more money in FX than selling processors.
February 26th,
2008 - This day will be remembered by many as
the last day of the Dollar’s reserve
status. May we remember the US Dollar well,
in the good times.
For more information please visit Elite E Services: www.startelite.com or
sign up for our Fore Group: www.forexcoding.com
Joe Gelet, CTA
2620 Regatta
Dr. Suite 102
Las Vegas, NV 89128
info@eliteeservices.net
http://www.eliteeservices.net
Let your plans be dark
and as impenetrable as night, and when you
move, fall like a thunderbolt.
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