The Preeminent Asset For Investment 2011: As we have commented for months, we believe that the U.S. dollar may be the preeminent asset to invest in over the coming months for a number of reasons. Comparatively tight U.S. monetary policy combined with relatively strong U.S. fundamentals will lead the dollar to finally begin a sustained bull market.
Posted below are two charts showing the relative size of the U.S. Fed balance sheet in white, the ECB balance sheet in orange and the Bank of Japan balance sheet in green. The charts are normalized for percentage, but differ in that the first chart begins from June 30th, 2011 (the end of QE2), while the second chart shows the same data from the beginning of 2008 to present.
As can be seen, the two charts tell a divergent story. When viewing the longer-term chart of the Fed's balance sheet, aggressive expansion is obvious. The vast majority of this was due to the TARP, QE1 and QE2. In the same period, as the Fed's balance sheet expanded more than 200%, the BOJ balance sheet expanded only 33% and the ECB only 61%. When viewed from this angle, it is not surprising that the yen has risen 43% against the dollar. While the euro is down 7% in that time span, one would think this is mainly reflecting the vast increase in sovereign debt risk, along with the uncertainties of the monetary union being exposed.
In contrast to the longer-term trend, since QE2 ended, U.S. monetary policy has actually been tighter compared to other developed economies. Since June 30th, the ECB balance sheet has expanded 6.6% and the BOJ balance sheet has expanded by 9.2% while the Fed balance sheet has actually contracted by .4%.
We believe this week's strong U.S. dollar action is indicative of the market finally realizing the U.S. dollar's superior position as compared to the rest of the developed economies. In addition to balance sheet size, U.S. economic and growth fundamentals appear relatively attractive compared to Japan and the eurozone. Austerity measures across Europe have caused GDP growth rates to go negative across Europe, and even in France and Germany, they are about the same rate as the U.S. Japanese growth rates continue to be negative as the recovery from the Japanese earthquake has not had the stimulative effect previously forecast. We believe that in the case of a global recession or even of a renewed recovery, the U.S. dollar remains highly attractive compared to the other developed markets.
Trade Recommendation
We recommend shorting euro futures at a price of 1.3650 or better and shorting yen futures at a price of .012727 or better. While such a trade entails a good deal of risk as it is an outright short position, we continue to expect U.S. dollar fundamentals to remain strong as long as the Fed does not engage in aggressive balance sheet expansion.
The eventual need of Europe to bail out its banking system, weaker peripheral countries, or both will cause the size of the ECB balance sheet to expand aggressively as compared to the Fed. Furthermore, efforts by Japan to devalue the yen will continue to entail BOJ balance sheet expansion, direct intervention in the currency markets and other devaluation efforts. source http://seekingalpha.com/article/293615-u-s-dollar-the-preeminent-asset-for-investment
Posted below are two charts showing the relative size of the U.S. Fed balance sheet in white, the ECB balance sheet in orange and the Bank of Japan balance sheet in green. The charts are normalized for percentage, but differ in that the first chart begins from June 30th, 2011 (the end of QE2), while the second chart shows the same data from the beginning of 2008 to present.
As can be seen, the two charts tell a divergent story. When viewing the longer-term chart of the Fed's balance sheet, aggressive expansion is obvious. The vast majority of this was due to the TARP, QE1 and QE2. In the same period, as the Fed's balance sheet expanded more than 200%, the BOJ balance sheet expanded only 33% and the ECB only 61%. When viewed from this angle, it is not surprising that the yen has risen 43% against the dollar. While the euro is down 7% in that time span, one would think this is mainly reflecting the vast increase in sovereign debt risk, along with the uncertainties of the monetary union being exposed.
In contrast to the longer-term trend, since QE2 ended, U.S. monetary policy has actually been tighter compared to other developed economies. Since June 30th, the ECB balance sheet has expanded 6.6% and the BOJ balance sheet has expanded by 9.2% while the Fed balance sheet has actually contracted by .4%.
We believe this week's strong U.S. dollar action is indicative of the market finally realizing the U.S. dollar's superior position as compared to the rest of the developed economies. In addition to balance sheet size, U.S. economic and growth fundamentals appear relatively attractive compared to Japan and the eurozone. Austerity measures across Europe have caused GDP growth rates to go negative across Europe, and even in France and Germany, they are about the same rate as the U.S. Japanese growth rates continue to be negative as the recovery from the Japanese earthquake has not had the stimulative effect previously forecast. We believe that in the case of a global recession or even of a renewed recovery, the U.S. dollar remains highly attractive compared to the other developed markets.
Trade Recommendation
We recommend shorting euro futures at a price of 1.3650 or better and shorting yen futures at a price of .012727 or better. While such a trade entails a good deal of risk as it is an outright short position, we continue to expect U.S. dollar fundamentals to remain strong as long as the Fed does not engage in aggressive balance sheet expansion.
The eventual need of Europe to bail out its banking system, weaker peripheral countries, or both will cause the size of the ECB balance sheet to expand aggressively as compared to the Fed. Furthermore, efforts by Japan to devalue the yen will continue to entail BOJ balance sheet expansion, direct intervention in the currency markets and other devaluation efforts. source http://seekingalpha.com/article/293615-u-s-dollar-the-preeminent-asset-for-investment
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