Bill Gross: QE II may mean 20 percent dollar drop

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Locked
User avatar
Houston101
Posts: 102
Joined: Fri Feb 26, 2010 3:15 pm

Bill Gross: QE II may mean 20 percent dollar drop

Post by Houston101 » Tue Nov 02, 2010 9:08 am

Nothing new here

http://www.reuters.com/article/idUSTRE6A055R20101102
The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said
But I don't understand this part:
"Pension funds and Americans, in general, have a problem because their liabilities are dollar-denominated. It's probably worth the risk of getting out of dollars and getting into emerging countries and going where the growth is.
If your liabilities are in dollars and the dollar's value falls, that is a good thing isn't it?

FredPeterson
Posts: 1025
Joined: Fri Jul 10, 2009 8:41 pm
Location: Madison, WI

Re: Bill Gross: QE II may mean 20 percent dollar drop

Post by FredPeterson » Tue Nov 02, 2010 9:14 am

Houston101 wrote:But I don't understand this part:
"Pension funds and Americans, in general, have a problem because their liabilities are dollar-denominated. It's probably worth the risk of getting out of dollars and getting into emerging countries and going where the growth is.
If your liabilities are in dollars and the dollar's value falls, that is a good thing isn't it?
In that simple context, yes. But you better hope that the reverse is true for your revenue since the cost of goods has gone up also - if you can't keep pace on an income basis you lose out. The fear is that that won't happen for many, and the promises of pension funds need a certain level of return for the promises to actually be filled.

User avatar
fishnskiguy
Posts: 2596
Joined: Tue Feb 27, 2007 1:27 pm
Location: Sedona, AZ

Re: Bill Gross: QE II may mean 20 percent dollar drop

Post by fishnskiguy » Tue Nov 02, 2010 9:24 am

Houston101 wrote:Nothing new here

http://www.reuters.com/article/idUSTRE6A055R20101102
The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said
But I don't understand this part:
"Pension funds and Americans, in general, have a problem because their liabilities are dollar-denominated. It's probably worth the risk of getting out of dollars and getting into emerging countries and going where the growth is.
If your liabilities are in dollars and the dollar's value falls, that is a good thing isn't it?
No it is not. If the dollar drops 20%, the dollar buys 20% fewer euros, yen, pounds and yuan. Anything you buy that is made in those countries will cost you 20% more dollars.

But your car loan and mortgage did not change, nor did your salary. Bottom line: you can buy less stuff with your salary.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."

User avatar
Random Musings
Posts: 5224
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Post by Random Musings » Tue Nov 02, 2010 3:22 pm

You would thunk that the markets have already priced in QE2 into the markets - that is, what is expected to occur.

So, is Bill Gross implying that QE2 will be far higher than originally thought?

RM

FredPeterson
Posts: 1025
Joined: Fri Jul 10, 2009 8:41 pm
Location: Madison, WI

Post by FredPeterson » Tue Nov 02, 2010 3:32 pm

Random Musings wrote:You would thunk that the markets have already priced in QE2 into the markets - that is, what is expected to occur.

So, is Bill Gross implying that QE2 will be far higher than originally thought?

RM
How could it be though? QE2 might be 500B or 2T - no one knows what "Helicopter Ben" has planned and if people do, talk about the ultimate insider trading. "The markets" may have priced something in, but is it 500B or 1T? What happens if the baked in value is greater then what is announced? Vice versa?

User avatar
nisiprius
Advisory Board
Posts: 36868
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius » Tue Nov 02, 2010 6:52 pm

The U. S. Dollar index dropped 33% from 2001 to 2005 and I don't remember the financial writers saying much about it. Take it out to 2008 and the total drop was 40% from 2001 to 2008.

It dropped over 50% between 1985 and 1988 and I don't recall that being a great big hairy deal--certainly I heard quite a bit more about the 22% drop in the stock market in 1987!

Why is everyone suddenly hyperventilating about this now?

Image
If the dollar drops 20%, the dollar buys 20% fewer euros, yen, pounds and yuan. Anything you buy that is made in those countries will cost you 20% more dollars.

But your car loan and mortgage did not change, nor did your salary. Bottom line: you can buy less stuff with your salary.
You'd certainly think so. Yet during 2001 and 2008, the dollar dropped 40%, yet
http://data.bls.gov/cgi-bin/cpicalc.pl tells me that
Image
and I seem to see just as many "Made in China" stickers as ever.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

neverknow
Posts: 2392
Joined: Fri Jun 05, 2009 4:45 am

Post by neverknow » Tue Nov 02, 2010 7:07 pm

nisiprius wrote:It dropped over 50% between 1985 and 1988 and I don't recall that being a great big hairy deal--certainly I heard quite a bit more about the 22% drop in the stock market in 1987!

Why is everyone suddenly hyperventilating about this now?
1985 - Plaza Accord
http://en.wikipedia.org/wiki/Plaza_Accord
it was in my consciousness, at that time, that imports were expensive (as I went and bought my brand new Toyota pickup)

I was buying dollars today (etf UUP) I am not ready to believe, now - is when the US Dollar is going down as the world's reserve currency - not yet (if ever).

The "technical number" on the chart Bill Gross is chattering about is 76.76 - supposedly if it breaks below this -- I've seen as much as a further 50% drop. But it is also the number to bounce up from -- which is why it has been so sturdy, leading up into the FOMC meeting. Today, it closed at 76.75.

Last I remember, Bill Gross declared the US debt market bond bubble over - and rates would only climb from there ... and they did nothing but go down, there after. (like last April or something)

noise - more noise, from Bill Gross.
neverknow

Call_Me_Op
Posts: 7044
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Post by Call_Me_Op » Tue Nov 02, 2010 7:34 pm

Is there an implication (by Gross) that the dollar losing 20% of its value will not be reflected in the CPI?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
alec
Posts: 2951
Joined: Fri Mar 02, 2007 2:15 pm

Re: Bill Gross: QE II may mean 20 percent dollar drop

Post by alec » Tue Nov 02, 2010 7:54 pm

Houston101 wrote:Nothing new here

http://www.reuters.com/article/idUSTRE6A055R20101102
The dollar is in danger of losing 20 percent of its value over the next few years if the Federal Reserve continues unconventional monetary easing, Bill Gross, the manager of the world's largest mutual fund, said
Would QE II cause the value of the dollar to fall relative to other currencies if countries/places like the UK, Eurozone, Japan, etc. did more or less the same thing as QE II? Devaluing the dollar would make the exports from the UK, Eurozone, Japan, etc. more expensive to us in the U.S. and hurt the exporting industries in UK, Eurozone, Japan, etc.

btw - why is devaluing the dollar vs. other currencies bad exactly? It would help boost our exports, assuming of course that people in other countries would be more of our stuff even though those countries are also in recessions and people have cut back on spending.
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

User avatar
nisiprius
Advisory Board
Posts: 36868
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius » Tue Nov 02, 2010 8:26 pm

neverknow wrote:The "technical number" on the chart Bill Gross is chattering about is 76.76 - supposedly if it breaks below this -- I've seen as much as a further 50% drop. But it is also the number to bounce up from -- which is why it has been so sturdy, leading up into the FOMC meeting. Today, it closed at 76.75.
???? I don't see any reference to 76.76 or any "technical number" in the quoted article..

So, why is it fine to drop from 120 to 76.76 but terrible if it drops 0.01 further? Is this like "support levels" and "resistance" "head-and-shoulders formations" and "Fibonacci retraces," only with currency instead of stock prices?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Re: Bill Gross: QE II may mean 20 percent dollar drop

Post by richard » Tue Nov 02, 2010 8:40 pm

alec wrote:Would QE II cause the value of the dollar to fall relative to other currencies if countries/places like the UK, Eurozone, Japan, etc. did more or less the same thing as QE II? Devaluing the dollar would make the exports from the UK, Eurozone, Japan, etc. more expensive to us in the U.S. and hurt the exporting industries in UK, Eurozone, Japan, etc.
Hard to say. Depends on the magnitude of the moves and other factors. At this point, just about everyone wants to devalue their currency to boost exports, but obviously everyone can't devalue relative to everyone else.
alec wrote:btw - why is devaluing the dollar vs. other currencies bad exactly? It would help boost our exports, assuming of course that people in other countries would be more of our stuff even though those countries are also in recessions and people have cut back on spending.
It's not bad. There's a global recession and one simple way to boost your economy is to devalue in order to grow exports. It may increase some prices, but increased income should make up for it for the country as a whole. There can be distributional issues - there are some who are hurt more than average and some helped more than average, but it should be helpful to a country as a whole.

It's fun to watch some people complain that China is manipulating its currency (that is, keeping its currency artificially low compared to the dollar) and then complain if the dollar falls (which would be a result of China stopping its currency manipulation).

The market knows all this, so it's not very useful for investing, but being aware of the situation might have a calming effect.

neverknow
Posts: 2392
Joined: Fri Jun 05, 2009 4:45 am

Post by neverknow » Wed Nov 03, 2010 5:14 am

nisiprius wrote:Is this like "support levels" and "resistance" "head-and-shoulders formations" and "Fibonacci retraces," only with currency instead of stock prices?
Yes.
Look, nisiprius - I don't necessarily believe these "technical number" folks - as they seem to have to do with patterns on charts, and I would like to think the world has more substance to it then that. But it doesn't seem to matter whether I believe or not -- all that has to happen is enough big money believe.

Back in April, or whenever it was that both Gross and Greenspan were declaring the great bond bull market over -- they were both responding to these widely known "technical numbers" (recall, they were wrong). And here it is again - for the US Dollar this time, and it is Bill Gross out trumpeting.

I don't understand these "technical" things - or I would describe it better to you. I recently, just found a way of seeing what these numbers were for the US Dollar. Try the symbol $USD at
http://stockcharts.com/

So a close today above 77.30 after the FOMC would be a good thing for the US Dollar.

I thought of posting the chart, at the time I first found it, but instead just downloaded the graphic to my desk top - so I don't know how I can post it for you all. But it at least explained for me why so many folks seem to believe the US Dollar is done for ... it is one of those head and shoulders things - the head being that early 2000's high. But this technical stuff is not absolute, so there is a possibility of a reverse head and shoulders. But for now - it's between 76.76 and 88.71 (the last high of this range) - an ever narrowing range, and it is the breakout from this range that means something (so some of the number people say).

No, I don't think these numbers are your tenth or hundredth precise. They say the market likes to fool the most people possible?

When I saw this thread - I wondered what Bill Gross's agenda was? He may be right or he may be wrong, but it is striking he is out speaking about the dollar just now, just as he was out speaking about bond yields.

I don't know the future. But right now, today -- I am not ready to believe the US Dollar dies as the worlds reserve currency, today. Maybe someday. Maybe never. But not today.
neverknow

User avatar
nisiprius
Advisory Board
Posts: 36868
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius » Wed Nov 03, 2010 5:54 am

neverknow wrote:I don't understand these "technical" things - or I would describe it better to you. I recently, just found a way of seeing what these numbers were for the US Dollar. Try the symbol $USD at
http://stockcharts.com/
Yeah, that's the U. S. Dollar Index, same thingy on my chart, above. I actually found the stockcharts website but couldn't figure out how to make it go back more than three years.

By the way, I think it speaks volumes that there are so many financial chart websites that show you about a week by default, and can't be made to show you more than a year or two.

I just realized another "thing to watch out for" when reading experts. Gross does something here that's very common. He throws out a whole bunch of numbers and projected changes. The whole tenor of the interview is that these changes are terribly important. But you notice that he never actually says that they are important or says why they are important. It's rather like the Jeremy-Siegel-Jeremy-Schwartz bond bubble piece. "If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield."

The importance is all implied, not stated.

Here's the tricky part. When the expert does not say why it is important, is natural for the non-expert reader to assume from context that there must be general consensus among experts that it is important--that a 20% drop in the U. S. dollar or a 7% drop in the market value of 10-year Treasury bonds is a great big hairy deal. Often that assumption--that there's general consensus--is dead wrong.

Whether someone like Gross is just so imbued with his subject that he feels it is unnecessary to elucidate--it's not clear to me who his audience was--or whether he is actually engaging in a persuasion trick, I don't know.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

neverknow
Posts: 2392
Joined: Fri Jun 05, 2009 4:45 am

Post by neverknow » Wed Nov 03, 2010 6:53 am

nisiprius wrote:The whole tenor of the interview is that these changes are terribly important. But you notice that he never actually says that they are important or says why they are important.
This "sensationalism" in media has been a trend that seems to only have been getting ever more intense. Sort of like what they teach in "stress management classes" - we can do nothing about the stressor, the best of anything we can do, is change our re action to it.

"We" (all of us) are being "played". My husband identified it as Fiver in Watership Down ("I just know it. A very bad thing is going to happen").
http://en.wikipedia.org/wiki/Watership_Down

I wasn't familiar with the story, but in summary - the world is a very scary place if you are a rabbit (and Fiver is a scared bunny).

I am not a rabbit, and this perpetual drum beat of fear eventually has to fall apart. It is the story of "the little boy that cried wolf". If someone is always crying wolf about everything - you eventually quit listening.

When the US Dollar goes down - commodity prices, which are priced in US Dollars, go up (food and energy). If prices could be passed on, imported goods prices would go up. This is the entire story to the falling US Dollar (at least to regular folks, who are not central bankers).

Other then that -- these are very odd markets, all marching inversely to the US Dollar. I don't think this is anything close to the way I thought the world actually was. It "smells" to me like the notion of houses, that will only go up in price ... the US Dollar will only go down. The world is more nuanced then this.
neverknow

User avatar
Random Musings
Posts: 5224
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Post by Random Musings » Wed Nov 03, 2010 8:32 am

Wasn't ol Grossy bearish on equities right before the 15-20% run-up until the election?

I wouldn't use him as a market timer.

RM

User avatar
BlueEars
Posts: 3634
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Wed Nov 03, 2010 9:33 am

Gross says in the Reuters quote:
"I think a 20 percent decline in the dollar is possible," Gross said, adding the pace of the currency's decline was also an important consideration for investors.
Note he used the word "possible" here.

Then further down there is:
... In that regard, Americans should be investing a lot more overseas than they are to find growth as the U.S. remains in a slowish-growth environment, he said
Nothing that new here, most Bogleheads have considered diversification into international. Also note Larry Swedroe's recent article on international equities. But Gross is diversifying in the bond space.

In Gross's recent Outlook he said:
You may not be strutting around the barnyard as briskly as you used to – those near 10% annualized yields in stocks and bonds are a thing of the past – but you’re gonna be around next year, and then the next, and the next. Interest rates may be rock bottom, but there are other ways – what we call “safe spread” ways –to beat the axe without taking a lot of risk: developing/emerging market debt with higher yields and non-dollar denominations is one way; high quality global corporate bonds are another. Even U.S. Agency mortgages yielding 200 basis points more than those 1% Treasuries, qualify as “safe spreads.” While our “safe spread” terminology offers no guarantees, it is designed to let you sleep at night with less interest rate volatility. The Fed wants to buy, so come on, Ben Bernanke, show us your best and perhaps last moves on Wednesday next.
The Wednesday he's referring to is today.

In the Pimco Total Return report for 3/31/2010 the show:

Code: Select all

Allocation Breakdown:
Short-Term Instruments                  41.7%
Corporate Bonds & Notes                 23.8%
U.S. Government Agencies                14.0%
U.S. Treasury Obligations                7.3%
Foreign Currency-Denominated Issues      5.2%
Other                                    8.0%
So Gross may be increasing the foreign component. But it was small in March. His long term bond track record is superb. From what I've seen the macro comments are Pimco guesses which are quite changeable. But I really don't think he's trying to manipulate people. Certainly he wants to get to the right investment space before his competitors.

User avatar
BlueEars
Posts: 3634
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Wed Nov 03, 2010 9:41 am

Regarding China/US exchange rates, here's an interesting Fed chart. Looks very manipulated to me, particularly that flatness in the recent recession (grey band):

Image

neverknow
Posts: 2392
Joined: Fri Jun 05, 2009 4:45 am

Post by neverknow » Wed Nov 03, 2010 9:44 am

Les wrote:But I really don't think he's trying to manipulate people.
I agree, Les. I don't imagine most of the folks that make such proclamations are trying to manipulate anyone. But it doesn't change the fact - no one was saying anything about the US Dollars strength in June 2010, but right on the mark - where it either breaks lower, or bounces higher (and back and forth again) -- out comes the proclamation. Typically it is called "dragging the last buyers in". Course, he could be right - or not.
neverknow

kyounge1956
Posts: 333
Joined: Mon May 31, 2010 5:39 pm

Post by kyounge1956 » Wed Nov 03, 2010 9:56 am

neverknow wrote:
nisiprius wrote:The whole tenor of the interview is that these changes are terribly important. But you notice that he never actually says that they are important or says why they are important.
This "sensationalism" in media has been a trend that seems to only have been getting ever more intense. Sort of like what they teach in "stress management classes" - we can do nothing about the stressor, the best of anything we can do, is change our re action to it.

"We" (all of us) are being "played". My husband identified it as Fiver in Watership Down ("I just know it. A very bad thing is going to happen").
http://en.wikipedia.org/wiki/Watership_Down

I wasn't familiar with the story, but in summary - the world is a very scary place if you are a rabbit (and Fiver is a scared bunny).

I am not a rabbit, and this perpetual drum beat of fear eventually has to fall apart. It is the story of "the little boy that cried wolf". If someone is always crying wolf about everything - you eventually quit listening.

When the US Dollar goes down - commodity prices, which are priced in US Dollars, go up (food and energy). If prices could be passed on, imported goods prices would go up. This is the entire story to the falling US Dollar (at least to regular folks, who are not central bankers).

Other then that -- these are very odd markets, all marching inversely to the US Dollar. I don't think this is anything close to the way I thought the world actually was. It "smells" to me like the notion of houses, that will only go up in price ... the US Dollar will only go down. The world is more nuanced then this.
neverknow
While I agree with you for the most part, Watership Down is perhaps not the best metaphor here, because in the book, Fiver was right, and something terrible did happen to the rabbits' old home. With only a few exceptions, the rabbits who did not believe Fiver's warning died a miserable death. The few who believed and followed him survived and in the end were better off for having done so.

neverknow
Posts: 2392
Joined: Fri Jun 05, 2009 4:45 am

Post by neverknow » Wed Nov 03, 2010 10:28 am

kyounge1956 wrote: While I agree with you for the most part, Watership Down is perhaps not the best metaphor here, because in the book, Fiver was right, and something terrible did happen to the rabbits' old home. With only a few exceptions, the rabbits who did not believe Fiver's warning died a miserable death. The few who believed and followed him survived and in the end were better off for having done so.
Well done! I tried reading the book, but the "English" was a bit odd to my ear. So my husband brought home the movie -- which was very frightening! And my only take away was that "life is very scary, if you are a rabbit". But I was probably thinking of our summer bunny, who was living in our wood pile. Sure enough ... the hawk showed up and was obviously watching for this bunny. After 3 days - we haven't seen the hawk again, or the bunny.

Perhaps not Fiver, specifically. But life is very scary if you are a rabbit. I am not a rabbit.
neverknow

Erwin
Posts: 1929
Joined: Fri Apr 27, 2007 11:16 pm

Post by Erwin » Wed Nov 03, 2010 11:03 am

QE2 is Irresponsible and cannot bring anything good. It is nothing more than another section of the Times magazine article a few week ago on "How to Restore the American Dream"
Erwin

User avatar
nisiprius
Advisory Board
Posts: 36868
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius » Wed Nov 03, 2010 11:22 am

Les wrote:Regarding China/US exchange rates, here's an interesting Fed chart. Looks very manipulated to me, particularly that flatness in the recent recession (grey band):
Exchange rates are frequently "manipulated." We only complain when it is some other country that is doing it to our disadvantage. IMHO that is exactly why currency risk is not to be treated lightly. Market-based phenomena are one thing. But currency is controlled, or at least very very very strongly influenced, by small numbers of government officials. You go to bed on Friday and a Netherlands Antilles florin is worth $0.59 just as it has been, mas o menos, for years. Every Antillean merchant will accept $20 bills from tourists. Over the weekend Nixon says "surprise!" and on Monday, the European currency markets are closed and the tourists cannot buy perfume and the bank looks at the dollar-denominated paycheck I got in the mail and declines to accept it for deposit, much less cash it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
DartThrower
Posts: 846
Joined: Wed Mar 11, 2009 4:10 pm
Location: Philadelphia

Post by DartThrower » Wed Nov 03, 2010 11:51 am

Random Musings wrote:Wasn't ol Grossy bearish on equities right before the 15-20% run-up until the election?

I wouldn't use him as a market timer.

RM
I haven't used him as a market timer since his disastrously bad call for a Dow around 4000 in the 2002-2003 time frame. He is a really bright guy who rode the long bull market in bonds. But nobody can really consistently time the markets. He is another example of that.
A Boglehead can stay the course longer than the market can stay irrational.

neverknow
Posts: 2392
Joined: Fri Jun 05, 2009 4:45 am

Post by neverknow » Wed Nov 03, 2010 12:36 pm

nisiprius wrote:Over the weekend Nixon says "surprise!" and on Monday, the European currency markets are closed and the tourists cannot buy perfume and the bank looks at the dollar-denominated paycheck I got in the mail and declines to accept it for deposit, much less cash it.
nisiprius - this first person, true account of what happened when Nixon went off the Gold standard ... I believe is the most instructive of all -- beyond what ever the exchange rate may happen to be today or tomorrow. What you encountered was no exchange rate at all. Your check was simply not "money".

My husband recalls a time in history, when you could not take UK Pounds out of the UK. Boy, if this repeated, it would mess us up in a big way - as 2/3's of our income is in UK Pounds, needing to be converted to US Dollars (and pay US taxes on it).

More so then Gross's 20% US Dollar decline prediction -- this is the scenario, perhaps we might consider. What happens if currencies are no good across borders? What happens if there is an international trade disruption? I certainly don't mean what happens in a global economic etc. sense, but rather -- how resilient is your household? What has been working -- may not continue to work. And the way they have whittled "just in time" supply lines ... well, that is fine for business, I suppose. But my household is supplied to be resilient, at least for a period of time.

There is nisiprius's - living memory, when what was money one day, was not money the next day. And my husbands living memory as well (he is an Englishman, who recalls post WW II Great Briton).
neverknow

nickbelane
Posts: 105
Joined: Thu Feb 18, 2010 11:01 am

Post by nickbelane » Wed Nov 03, 2010 1:05 pm

Les wrote:Regarding China/US exchange rates, here's an interesting Fed chart. Looks very manipulated to me, particularly that flatness in the recent recession (grey band):

Image
The Yuan is not "manipulated" - it's pegged. It has been pegged to the USD until 2005, then to a basket of different currencies, and during the financial crisis in 2008 was re-pegged to the USD - as you can see from the chart.

http://en.wikipedia.org/wiki/Renminbi_currency_value

Manipulation implies interference with the free market operation, but in the case of the Yuan, there is no free market. The Chinese government sets the value of the Yuan explicitly based on their economic and monetary policy, and enforces this value by severely restricting the exchange between Yuan and other currencies.

User avatar
BlueEars
Posts: 3634
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Wed Nov 03, 2010 2:41 pm

nickbelane wrote:...(snip)...
The Yuan is not "manipulated" - it's pegged. It has been pegged to the USD until 2005, then to a basket of different currencies, and during the financial crisis in 2008 was re-pegged to the USD - as you can see from the chart.

http://en.wikipedia.org/wiki/Renminbi_currency_value

Manipulation implies interference with the free market operation, but in the case of the Yuan, there is no free market. The Chinese government sets the value of the Yuan explicitly based on their economic and monetary policy, and enforces this value by severely restricting the exchange between Yuan and other currencies.
OK, we are just defining "manipulation" differently. But we agree that the Chinese don't allow a free market in their currency. The US Dollar vs the Euro chart looks a lot different (no flat zones) then the Dollar vs. Renminbi.

The currency chart shows what I call manipulation. It's true that governments try to maintain some control over their currencies but the currency markets are vast and currencies like the US Dollar and Euro are not easily directly controlled. IMO, indirect control through good economic policy (whatever that is as it's in the eye of the beholder) is probably the best way for western powers to manage currencies.

neverknow
Posts: 2392
Joined: Fri Jun 05, 2009 4:45 am

Post by neverknow » Wed Nov 03, 2010 2:57 pm

Roughly 3:45 PM EST - I'm getting a reading of 76.45 on the $USD -- this is a break lower (my opinion only). I sold my shares of UUP.

It's a time to be happy half our income is in UK Pounds (at least for this 15 minutes).

I love my country. The central bank most certainly didn't let me vote on their policy. If they had of ... well, no one asked me. I voted with my feet (mouse, in this case).
neverknow

User avatar
Quasimodo
Posts: 1357
Joined: Thu May 03, 2007 1:58 pm

Post by Quasimodo » Wed Nov 03, 2010 3:04 pm

Does anyone think this thread is an argument in favor of Vanguard offering an international bond fund? (First world sovereign bonds, say)

John
Many wealthy people are little more than janitors of their possessions. | | Frank Lloyd Wright, architect (1867-1959)

User avatar
TrustNoOne
Posts: 787
Joined: Thu Oct 30, 2008 7:09 am

Post by TrustNoOne » Wed Nov 03, 2010 3:13 pm

So, assuming all this is true, if you held international stocks, would your holdings increse or decrease in value by 20%? (I'm assuming its the latter, but I am just not sure.)

User avatar
BlueEars
Posts: 3634
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Post by BlueEars » Wed Nov 03, 2010 4:32 pm

TrustNoOne wrote:So, assuming all this is true, if you held international stocks, would your holdings increse or decrease in value by 20%? (I'm assuming its the latter, but I am just not sure.)
I'm guessing you mean that if the dollar decreased by 20% versus major trading partners, how would this effect international holdings? Assuming this component could be isolated international equities would go up by some goodly amount, maybe somewhat shy of 20% though. That is, the international equity portion of a given fund that experiences that 20% currency differential will move up about 20%. But no one is saying that for sure the dollar will fall that much and market differential changes not linked to currency moves have to be considered. For instance, maybe QE2 will be successful and the US growth rate will accelerate, then equity markets start to anticipate the reversal of QE2 and ...... let's just say the future is very cloudy. But that's always the case.

richard
Posts: 7961
Joined: Tue Feb 20, 2007 3:38 pm
Contact:

Post by richard » Wed Nov 03, 2010 4:39 pm

TrustNoOne wrote:So, assuming all this is true, if you held international stocks, would your holdings increse or decrease in value by 20%? (I'm assuming its the latter, but I am just not sure.)
First order effect of a drop in the dollar would be an increase in the value of non-US holdings.

Second order effect would be an increase in US equities and decrease in foreign equities as the US exported more and its economy improved, while foreign companies became less competitive (their products or services would be more expensive compared to those of US companies).

Third order effect would be a strengthening of the dollar against other currencies as the US economy improved.

The magnitude of the second and third order effects is rather hard to estimate at the moment.

All of which is a long way of saying the notion that foreign holdings would increase proportionally as a result of a drop in the dollar is a bit simplistic.

gabylon
Posts: 372
Joined: Thu Dec 31, 2009 1:54 pm

Post by gabylon » Wed Nov 03, 2010 6:38 pm

Does anyone know what's the correlation between the U. S. Dollar index and the CPI?

User avatar
nisiprius
Advisory Board
Posts: 36868
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius » Wed Nov 03, 2010 7:15 pm

neverknow wrote:My husband recalls a time in history, when you could not take UK Pounds out of the UK.
Utterly tangential, but that era is the backdrop and drives the plot for what in my opinion is Nevil Shute's best novel, The Trustee from the Toolroom. And I'm a big Nevil Shute fan.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

etienne1
Posts: 72
Joined: Wed Sep 08, 2010 8:18 am

Don't trust him.

Post by etienne1 » Wed Nov 03, 2010 7:56 pm

I don't trust Bill Gross. Here is one reason why... http://www.youtube.com/watch?v=w0_6hpTzE3Y

Austrian economic theory dictates when you increase the money supply, it adversely affects the dollar. However, it also postulates, one can not say with percision what % the dollar will go down given a particular amount of "quantitative easing." Mathematical equations do not apply to human action with that kind of percision.

I do believe however, creating money out of thin air harms the nations of the world. It is a "begger thy neighbor" approach to trade that hurts relationships and trust. Also, the most obvious harm imho, is that whoever gets the new money first buys at the old prices before they are sent higher. This in effect is an inflation tax on those of us who do not get the new money first.

I wish those who use this non free market tool would just stop. Then asset prices (maybe even wages) would drop to the level necessary to get the velocity of money up and get the economy going again. We would also have fewer bubbles and malinvestment.

As savers, I think all we can do is diversify, buy and hold, watch costs, and wait it out. As you may know from my other posts, I believe precious metals are an important hedge to protect us from these schenanagans. I remember one author, Michael Kosares, referring to how much it protected many mexican investors who held gold bullion during the 1994 peso crash.

cailuong
Posts: 33
Joined: Sat Sep 04, 2010 12:10 am

Post by cailuong » Wed Nov 03, 2010 8:02 pm

How does the average investor get their hands on some of the QE2 money, aside from paying for it at the inflation window?

User avatar
fishnskiguy
Posts: 2596
Joined: Tue Feb 27, 2007 1:27 pm
Location: Sedona, AZ

Post by fishnskiguy » Wed Nov 03, 2010 8:20 pm

Time to lock this thread.

Chris
Trident D-5 SLBM- "When you care enough to send the very best."

Locked