economy

Shorting the US dollar

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A Canadian friend told me that he was thinking about taking a long position in GE.  It was at an all time low and evidently oversold at the time (under $7).  I warned him that stocks held in US currency were risky for Canadians because they would have to buy US currency at a high price but that, with the Obama government overspending and all, the US dollar was going to lose its value quickly.

GE hit its low in early March, and let’s say that my friend bought at $6.66, its closing price on March 6.  On that day, he would have paid about CDN $1.27 for every US $1.  So 100 shares would have cost him $6679.99 (which is inclusive of the $19.99 commission), or CDN $8483.59.  GE today is selling at $16.52 today.  If you add the three quarterly dividends (ex dividend date 17 Sept, 17 June, 17 March), he would be looking at a total of $16.82 per share or a phenomenal 152% rate of return.  But what is that today in Canadian funds?  $16820 = $17755 (1.056)  That is today in Canada, his investment has 109% rate of return, which is still wonderful, but as a result of the diminished power of the US dollar, much less than 152%.  But in the likely event that the US dollar continues to plummet, his return on investment will continue suffer in Canadian value.

I’ve taken short positions against the dollar by borrowing US funds to buy Canadian oil and gold companies (erf, abx: NY) .  Also, I will convert every penny of US funds that come in into Canadian until the currencies reach par.

Yesterday I learned that many investors are beginning to use the US dollar as the new “carry trade currency”.  I didn’t know what that meant so I looked it up.  It is a reference to borrowing currency that has a low interest rate, changing into a foreign currency and making investments in that currency (such as GICs or buying stocks).  Well, I guess my investment strategy is a trend rather than idiosyncratic.  I was basing this strategy on the fundamental conviction that US dollar, despite the current deflationary tendency, would suffer because of the Obama budget deficit.

Links:

Dollar is the ‘New Peso’

Is the Dollar Set to Become the new yen?

Do Contracts Mean Anything in Africa?

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I have been musing about what keeps sub-Saharan Africa in poverty.  One thing that I’ve observed is that contracts, whether written or oral, don’t seem to mean very much.  I know of an African who signed a contract that he would return to Africa after his training but apparently never intended to do so and remains here in North America.  Oral contracts also have little worth because bait and switch tactics are not uncommon:  for example, a friend who grew up in South African and now lives in Canada once sent a large sum of money to youth minister back in Capetown with the belief that it would be used to purchase a automobile to be used for ministry.  Instead, the youth minister used it to pay a bride price so he could marry.  My friend said that he broke all communication with the youth minister when this happened.

We can be critical of Western individualism, and Africans are very good at putting people first.  But many Africans envy the West without of knowledge of how it actually works.  Every aspect of Western economy depends on the sanctity of contracts.  The vast majority of the time, these contracts work.  For example, if I go down to my local Staples and buy an item, I know that I can return it within 30 days for a full refund.  That is a contract.  And it works, and I’ve exercised my 30-day option many times.  As a result, I am a loyal patron of Staples; I will gladly pay more for item knowing that I have the option to return it if it is unsuitable for me.  In everyday life, we live according to many such contracts:  with our employers, with the phone company, with the gas company, with our bank, with our investment advisors, with Mastercard and Visa; when we buy house, or when we buy a furnace, a new kitchen, or windows for the house.  Without valid contracts, life in North America would cease to function and chaos would ensue.  And yet, in dealings with Africans, keeping a contract seems to be optional.  Is this not one reason for the chaos that exists in much of Africa today?

Contracts that don’t function in North America are reason why we have courts to deal with disputes.  In the final analysis, here in Canada I have made hundreds of contracts that work well, but I’ve only had a few that didn’t, such as with my sports club, the Pavilion in Thornhill, where it took over 4 months to get them to honor an oral contract.  Yet when it comes to Africa, I’ve come to think that the exception is the rule; I have had a much higher percentage of contracts with Africans that did not work than I’ve had here in North America, and I’ve come to believe that the lack of priority given to the honoring of contracts is one of the main reasons Africa does not have a well-functioning economy.

Yet we talk a lot about the growth of Christianity in Africa.  Christians however should be willing to honor contracts.  So one would think that the more Christian Africa becomes, the more contracts would be worth something.  Admittedly, cultural transformation takes time.

Sino-US Relations (Updated)

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Obama has slapped a 35% tariff on Chinese tires. They are retaliating with other small measures. Obama better be careful. If he angers the Chinese too much they may decide to stop buying US debt: the Chinese are one of the major financiers of the US government’s 1.8 trillion dollar deficit this year. The one who depends on another’s money is not ultimately in control of the relationship.

Update:
The following video is available from Techticker:
Vodpod videos no longer available.

more about “Obama Playing with Fire U.S. Will Los…“, posted with vodpod

Pento says that we need China’s contribution to our debt, and if they don’t buy it, we will be in trouble. This is exactly my point here, where I say that if we don’t borrow the money for the US budget deficit, we will be looking at hyper-inflation.

I have personally taken positions against the dollar by borrowing US currency to invest in a Canadian Oil Company (ERF) and a Caribbean utility company in Grand Caymen (CUP.U, Toronto).

China is worried

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In my post, “Obama and Inflation in Zimbawe“, I predicted that at the rate the Obama is spending Federal funds, we would soon face inflation.  Of course, that was before Obama unveiled his budjet with a projected $1.75 trillion deficit.  The Chinese, one of the USA’s major lenders, is now worried.  John Hindraker in the New York Post writes:

Of course, Beijing’s not worried that the United States government will default on its bonds. Rather, the concern, now being expressed openly for the first time, is that the United States will adopt the time-honored debtor’s remedy of inflating its currency and paying back its debts in shrunken dollars.

Hindraker’s article was first posted at Powerline.

One-hundred US dollars per gallon ? (updated)

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The current average price of gas in the US is $1.91.  The Obama administration together with a Democrat-controlled Congress plans to increase government spending to unprecedented levels which has many, including Warren Buffet, predicting inflation.  The assumption is that the US will charge taxpayers for part of the budget, borrow as much as it can from China and other countries, and create fiat money for the rest (fiat money is printed or otherwise created out of thin air).

President Obama’s popularity is still very high.  I’ve lived through a period of inflation.  What happens first is that the dollar will drop in buying power because there is too much money chasing too few goods.  The price of gas will go up.  Then the government in panic will try to control the price of gas instead of addressing the real problem of too much government spending.  The result of price controls will be a severe shortage of gasoline.  When these things happen, President Obama’s popularity will plummet.

Readers beware.  Do you think the economy is bad now and that the stock market is as low as it can go?  Forget it.  The business environment has become hostile and our president is either a calculating meglomaniac, who is creating this crisis on purpose, or a economic ignoramus, who hasn’t a clue what he is doing.

Update, External Links:

Something wicked this way comes, J. C. Smith (Is Obama creating the crisis to attempt a takeover?)

Natural Gas Rigs Shutting Means Prices May Double, bloomberg.com.  This article is about natural gas; oil and natural gas production are often intertwined; companies will also reduce crude production (e.g., Company Cheif:  Oil project suspension to dent supply) and hence crude prices will go higher.  Now a possible scenario is that rising prices due to low supply and inflation could converge and create a sudden spike in price; then the government will try price controls and that will lower production even more.  Then there will be actual shortages.