US Dollar Mirage in the Desert
Currencies / Financial Crash Nov 16, 2007 - 10:21 AM
Jack Crooks writes: I'm in Las Vegas for the Traders' Expo right now, where I'm going to teach a group of investors how to cash in on currencies. Today, I want to share with you what I'm going to tell them here in Sin City ...
It's Five O'Clock in the Morning and the Markets Are Drunk on House Money
By now you must be wondering how financial markets have continued on such a torrid pace throughout the year. After all, the world is aware of our Federal Reserve's credit market house of cards, right?
Maybe. But plenty of financial institutions are still losing their assets after making bad bets with this imaginary money!
Just look: Bank of America, Citigroup, Morgan Stanley, Merrill Lynch, Bear Sterns ... they're all feeling the pain of reckless investing.
Yet despite many of our "elite" banks coming clean on credit market losses, Main Street investors aren't heeding the warnings. Then again, why should they? So far, they've just been stacking up chips by making risky bets.
Heck, all we've gotten so far are a few stock market hiccups!
As far as I'm concerned, over-confident investors are throwing good money after bad. And our central bank is merely postponing the inevitable.
The real pain will arrive when the house closes the chip window. In short, we're at an important stage in the game. Sure ...
The Gamblers Could Keep The Party Going for Now
Like I just said, a lot of investors are content with ignoring the warning shots until their portfolios come directly under fire.
They're just following the lead set by the Federal Reserve, and playing high stakes poker. Unfortunately, Bernanke doesn't have an ace in the hole.
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| It's a high stakes game, and all Bernanke can do is bluff! |
The Fed knows hiking interest rates will crush the housing market and the economy. And it knows cutting interest rates will further inflate the world's asset bubbles.
In other words, the Fed is damned if they hold and damned if they fold! So they do the best they can and try to bluff their way out.
They're trying to stimulate economic growth rather than worry about asset bubbles.
In the process, they're pushing the dollar lower. Mind you, I think the Fed WANTS the greenback to fade. They want the stock market to stay juiced. And they certainly want Mr. and Mrs. Consumer to keep buying into the game.
Investors figure there's no reason to stop gambling if the house is going to keep fronting the money.
However, there will come a turning point, and a whole lot of unaware people will lose their shirts ...
Watch for Signs that the Market Is Sobering Up and Leaving the Table
At the saturation point, money will become less and less stimulative ... and the party just won't go on any longer. This is the apex of the boom/bust cycle. It's the turning point we have to watch out for.
A classic example: Japan, 1989.
The Bank of Japan fought hard to escape a deflationary stranglehold. However, all the easy money in the world — even a zero interest rate — did nothing to help. The Japanese economy suffered 14 years in the grips of a deflation bear.
The Fed is running the same risk today, and it needs to be careful of digging an inescapable hole out in the middle of the desert. It's not easy to orchestrate an orderly fall in the dollar AND avoid a panic collapse.
After all, the lowly greenback is still the world's money. Any panic run from the world's money has major implications for every market around the globe.
We're not there yet, but the day of reckoning is getting closer. The grand finale will most likely come in spectacular fashion; what I like to call "climax selling."
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| When the deck is stacked, it's time to act ... |
I'm watching the action very closely. And while the house money keeps flowing to the global economy, I think the best approach is to ...
Limit Your Risk by Stacking The Deck in Your Favor
If you've ever been to Las Vegas, you know as well as anyone how easy it is to give away your money. That's why I keep most of my chips off the poker tables and in the currency markets, where I can wait for the odds to turn in my favor.
The search for higher yields has drawn capital out of some currencies and into others. For example, the British pound, the Australian dollar and the euro have climbed to historic highs. It's like the whole world is betting on black!
Meanwhile, currencies like the yen have been cast by the wayside. You can imagine what's going to happen when these extreme bets reverse course. A lot of investors will lose their shirts, and a select few who were prepared will hit the jackpot!
Best wishes,
Jack
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