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Monday, February 28, 2005

Jane Has a Little Talk With Her Broker

Bob?...Are you still there?...Bob?

I hate to sound like Chicken Little, but this whole Asia/dollar thing has me spooked. In the recent past I have written about both China and Malaysia growing wary of the rapidly falling dollar, which is suffering under the burden of oppressive US debt. Last week the stock market plunged when they got a mere whiff that South Korea might stop buying US dollars.

This may sound dull on the surface, but it's actually pretty interesting if you take a minute to understand what's going on. Consider Korea's position (from a recent article in the Korea Times):
The local currency market is turning into one of the most popular playgrounds for hedge funds, with the won (Korean currency) becoming the main target by the international speculative funds aimed at short-term gains, analysts said.

Hedge funds are viewed as the main force behind the won's steep gains recently, they said. It is concerned that they will continue to bet on a stronger won, a major negative for the country's economic recovery.

Hedge funds were one of the main forces behind the 1997-1998 financial crisis. They usually grow on volatile currency markets.
Shorting of local currencies by hedge funds was one of the main factors driving the 97-98 crisis. Only now, they are shorting the dollar and buying the Korean won, saying in effect that the won is stronger than the dollar. This is freaking out the Koreans, because they, like so many Asian countries, are heavily invested in the dollar. And they of course want to keep their currency weak while they sell their dollar holdings.

And Korea is just one of the countries suffering because of this dilemma. For those Asian central banks who have large dollar holdings based on loans to the US, the problem is pretty acute, because the value of those holdings have plummeted recently. Two years ago a euro was worth 88 cents. Today, it's valued at $1.36. Get the picture?

So it's turned into a game of international Old Maid. Sell off your dollars, start a panic, drive the value of the dollar down and the value of your holdings with it. But hold on to them too long and you may be the one stuck. So when do you start to diversify? How much of a loss can you afford to take before you feel like you have to get out of the game?

The country that worries me most is China, as I've mentioned before. China is sitting on a fat load of US debt, and they've got the US by the short and curlies. Now, China doesn't de facto want to drive the value of the dollar down, because they'd be cutting their own throat and devaluing their own holdings in the process. The only way they would be willing to play that ace is over something they really want -- say, Taiwan or oil to fuel its growing industrial sector. Can the US afford to stand up to China, given its current literal indebtedness at the moment? The US is dealing from an awfully weak hand. I could imagine a scenario where China flexes its muscle just to show the US who's boss and the stock market goes into the tank. Among the many things our Preznit has forgotten is what an interconnected world we now live in.

So I spoke to my broker, and I told him I only wanted to be looking at stocks that could stand up to further erosion of the dollar. He's now recommending companies that have large sources of European revenues. I mention this so everyone will know that I seriously believe this, and I'm putting my money where my mouth its. I'm not just railing at George Bush for the pure mean-spirited hell of it (to quote the late good Doctor).

And I'm not the only one thinking these dark thoughts, according to Bob. Although you won't hear anything about this in the mainstream financial news (CNBC, CNN, Faux, etc.), two of the big companies who stand to do well if the dollar keeps falling -- Caterpillar and John Deere -- are at their all-time highs.

Wall Street may be publicly cheering for Bush, but when it comes to their pocketbooks they're privately betting against him.

(Via philinmaine at DKos)

(Photo courtesy stock.xchng)