To add fuel to the fire ...
This is an old article and I want to find out how true this statement is :
According to Percival, back in late 1998, the big hedge funds had a combined bet against the yen in the neighborhood of $70 billion - a massive figure, to be sure. But that massive bet is downright tiny in comparison to today's Giga-Bubble.
John Percival says the speculation in the dollar Giga-Bubble is now in excess of $1.2 trillion. Yes, right now, the speculative bet against the dollar is in excess of a trillion dollars!
The thing is, all the speculative bets will be taken off someday… The money will move on to another trade. In order to take those bets off, one thing certainly has to happen: Those speculators must buy $1.2 trillion worth of dollars.
Dollar vs Euro: More Collapse or a Rise on the Way?
The Investment U e-Letter: Issue # 428
Thursday, April 14, 2005
Dollar vs Euro: More Collapse or a Rise on the Way?
(The Dollar Giga-Bubble)
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U
I want to share the best ideas I can with you. The very best idea I can share with you right now is what I told subscribers to my newsletter earlier this week: Contrary to virtually everything you read, the collapse in the dollar versus the euro appears to be over. And a rise in the dollar, which could be very profitable, is likely underway.
The euro started the year at around 1.35. This morning, it's around 1.29. So contrary to everything you hear, the dollar has actually strengthened versus the euro in 2005, not crashed.
What's going on? It could be the liquidation of the Dollar Giga-Bubble, as currency commentator John Percival called it this week. Percival thinks that there is now an unprecedented speculative bet on against the dollar right now… to the tune of $1.2 trillion dollars. And the way that bet is liquidated is by buying dollars, pushing the value of the dollar higher.
I explained it in this letter to my subscribers earlier this week. I thought I'd share a slightly edited version with you today (as I can't give away the specific investment advice here for free that they're paying for).
A brief "heads-up" here, as I want to be sensitive to your time: This essay is a little longer than a usual Investment U e-Letter, and the simple conclusion up front here is: Don't buy euros now.
The Dollar: Why a Recovery and Rise Is More Likely Than a Collapse
We once had a massive currency-trading "bubble" in the yen… The Japanese yen lost about half its value from mid-1995 to mid-1998. And there was a sure-thing bet built in there… as the hedge fund superstars saw it…
The financial "engineering" is a little complicated. But it was wildly profitable….
You see, deposits in Japan paid no interest, and the Japanese yen was falling. So the big hedge funds borrowed money in yen, paying next to nothing in interest, and invested it in U.S. assets, paying 5%-plus in the late 1990s. They earned the interest in the U.S., and the gain in the U.S. dollar versus the yen. And they did it with enormous leverage, ultimately bringing home returns in the neighborhood of 60% in a year.
It was free money in the late 1990s… And then, it wasn't. For some reason, then yen just started strengthening… To the surprise of the big hedge funds, which had so far made a killing, the trade went against them.
Oh, no… this just threw everything off… The hedge fund big boys were heavily leveraged (even more so than the real estate hotshots on my island in Florida now!), and the rise in the yen was going to kill them. The money they borrowed in yen was going to cost them more dollars to pay back than they ever expected.
Even worse, defying the skeptics, the yen just kept rising. It was up nearly 30% from its 1998 lows by the end of 2000. As the yen rose, the hedge funds actually became their own worst enemies… In order to cut their losses, they had to close out their loans in yen. And to pay off those yen loans, they needed to BUY YEN.
Uh-oh.
The crushing losses became a vicious circle. Their own actions of closing out their positions were killing them.
"The Yen Bubble Pales In Comparison to Today's Dollar Bubble"
Currency Bulletin writer John Percival is now calling today's dollar bubble the "Giga-Bubble."
According to Percival, back in late 1998, the big hedge funds had a combined bet against the yen in the neighborhood of $70 billion - a massive figure, to be sure. But that massive bet is downright tiny in comparison to today's Giga-Bubble.
John Percival says the speculation in the dollar Giga-Bubble is now in excess of $1.2 trillion. Yes, right now, the speculative bet against the dollar is in excess of a trillion dollars!
The thing is, all the speculative bets will be taken off someday… The money will move on to another trade. In order to take those bets off, one thing certainly has to happen: Those speculators must buy $1.2 trillion worth of dollars.
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This week, I'll be traveling to Switzerland. We'll be staying in the world's most expensive city, Zurich. Somehow, wages in Zurich are the highest in the world, by far… Wages in Zurich are some 60% higher than in Miami, for example (based on the UBS study, "Prices and Earnings Around the Globe").
We'll be at the Baur au Lac Hotel, at a steep 640 Swiss francs a night. In 2001, 640 Swiss francs would have meant $350 dollars a night. Not cheap, but we are talking a nice hotel near our meetings in the world's most expensive city. For comparison, a night at the Marriott in Midtown New York will run you $300 these days.
But it's not 2001. In U.S. dollars the Baur au Lac is no longer $350. Since the euro has soared (and along with it, the Swiss franc), that room at the Baur au Lac now costs us over $500 a night!
Everyone is talking about a coming dollar collapse. My take is… the dollar has already crashed. I can't wait to see what I get for $500-plus a night in Switzerland… And I'll definitely let you know.
The Dollar Collapse Is a Sure Thing: The Crash Has Already Happened
Just like we saw with the Japanese yen in 1998, when everyone thought the trade was a "sure thing," it did exactly the opposite.
Right now, everyone thinks the dollar crashing is a sure thing. Meanwhile, the dollar is super cheap (Europe is super expensive), and you earn more interest on your money in the U.S. than you do in Europe.
The euro hasn't completely started its breakdown yet. But my gut tells me that the highs in the euro we saw at the end of 2004, at around 1.36, may be the highs for a while.
And if John Percival is right, and there is $1.2 trillion in speculative money right now betting against the dollar, the smart play is to buy the dollar before that $1.2 trillion comes in. The dollar could soar versus the euro, just like the yen in 1998, when it's all said and done.
The euro hasn't fully broken down yet. When/if it does, some real bleeding could begin. But we're mostly watching for now, playing it safe, as I like to do.
Sizing it up on my investment criteria, we're almost there.
* The dollar is hated.
* The dollar is cheap relative to the euro (plus it pays a high rate of interest in relation to the euro).
* So the one thing we're missing is the true beginning of an uptrend. We're close…
At the very least, don't buy euros now.
Good investing,
Steve
