Jan 08. Been thinking about the Bernanke put and I have come up with a new but risky strategy. At the current rate I believe the US has negative rates (or very close to it)…basically what this means is that the FED for some unknown reason wants to penalise savers and reward borrowers (despite the fact the US consumers just had a record credit binge). At the current rate inflation is higher than the Fed rates so it means you are better off borrowing the dollar than saving it. My suggestion is borrow dollars and invest in anything that provides a better rate of return. My choice is the EUR (some might argue that its over valued but the fact that the ECB is targeting inflation is positive). So borrow dollars and invest in Euros. I do not believe the US (which is a predominately consumer market) has a fundamentally stronger economy than the Euro zone which is a strong exporter - so the case for US appreciation looks dim. But like I said this is a risky strategy and depends on whether the US can bluff its way out of the current mess…what I mean is that it will put forward the case that the FED is "targeting growth". Causing inflation does not cause growth but it does make your current liabilities smaller as inflation wipes them out. For the Fed strategy to work the US consumer would need to cut back spending, the dollar would need to depreciate(and exports increase), companies would need to use the credit to invest in Capital goods and the budget deficit would most probably have to shrink. This would be dollar positive in the long run. This will not happen with the current rates or the current budget. I therefore recommend shorting the dollar.
Why the dollar should depreciate vs the Euro. Firstly the European economy is running smaller deficits or in some cases surpluses. Also the long run potential of the European economy is larger than the US - a controversial statement but let me explain. Although the US has a faster population growth rate - the level of achievement in education of the population is lower. As is the welfare of its population ie the effectiveness of its medical system. Add the US increasingly hostile attitude to immigration and its competitive advantage is quickly being wiped out. When is the time to exit the above strategy - if the US raises rates, shrinks its deficit substantially or if Europe does something really stupid... Like I said the above is a risky strategy - but the current environment is not friendly to holding to dollars in cash or treasuries!
