Make Way For The Coming of King Dollar

My favorite long idea currently is going long the $ (not in terms of return to risk expectation, but as far as likelihood is concerned) for the next 12-24 months. This isn’t to say there can’t/won’t be counter-trends along the way. If/when there are, I recommend buying the dip. Here are the reasons I believe we go higher for the dollar within the next 12-24 months, surpassing the highs in 2008:

  • Capital has been fleeing, is fleeing, and has good reason to continue fleeing Europe, China, and the rest of the world. The economies outside of US are not doing well, and their central banks face pressure to ease…all clearly good for the $.
  • The US economy has seen better days (especially as far as employment, median/average wages, etc go), but it is by far the best house in a bad neighborhood. US economic growth and the drivers for economic growth remain far superior relative to the rest of the world. Even as other countries’ central banks/governments face pressures to ease, The US Federal Reserve faces pressure to tighten (and for good reason). Higher rates and/or the expectation of higher rates is clearly attractive to the inflow of capital.
  • US banks are far stabler than their counterparts in Europe and China. Interest rate and yield curve expectations/trends in the US are also favorable as far as forward expectations on bank profitability/safety are concerned.
  •   The US remains far politically/socially stabler compared to Europe, China, and the rest. Greater safety and growth prospects seem very positive for the $.

The implications of a strong dollar within the next 12-24 months on the real economy, commodities, US equities, and other asset classes are probably a lot more interesting, but will leave that for you to figure out. Also, I would recommend studying correlations, but to the extent it helps you think about causation. Correlations can and do change, and money is often made when discounting the obvious correlation, and betting on an unexpected ‘regime change’.

Going forward, you should assume I will write far more about macro, sector, and/or theme related investment/trade ideas, and far less about single-name ideas.

3 Responses to Make Way For The Coming of King Dollar

  1. It will be interesting to see whether the huge trade surplus in Germany will derail the obvious long thesis of $.

    (Long $, short AUD)

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