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Abaco

Just a little comment I made

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There is a recent article in Market Watch about flat home prices. I made the following comment in an early-morning, pre-caffeine haze, and it got many positive comments from the readership:

"Prices STILL have not come down to where they should be. Things will not improve until they do. Those of us who've stayed right-side-up and actually spent the past decade putting money in the bank, instead of debt on a card, will be key in turning this thing around. This is because WE are the proper tool of the recovery. Only through realistic banking practices and Federal policies will this key element to the recovery be activated. For now, we're just sitting on the sidelines, cash in pocket, shaking our heads in amazement as the Maoists fumble and stumble, trying to mitigate this disaster. Note to the Maoists: step aside. Let the cards fall. We'll be here to pick up the pieces. the longer you wait, the worse it gets. Unless, of course, you're opposed to personal ownership of real estate. In that case - nevermind. Signed - John Galt"

It actually made me laugh after I read it.

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Actually, that's not entirely accurate. Those who have accumulated debts over the past 10 years will see it inflated away :D

So provided they used the debt wisely (aka investing), they will have done better on a relative (and in many cases absolute, since some will have bought hard assets with less volatile prices) than somebody who has just stashed $ in the bank (or whatever securities you call "money"). The guy who will have done best will be that whose portfolio had strong inflation hedges. Amusingly, this tactic of expecting higher than expected inflation was used by my parents to fund my brothers' and my education using complex financial instruments the retail bankers didn't understand :D

Recent conversation with a NYC trader:

"So, how are you holding your assets?"

"Gold. Half in Zurich, half in London."

Nuf said :D

But of course your point is otherwise absolutely correct.

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Yes, I hear ya. It seems that many Americans accumulated debt for things like big, flat-screen TVs. Lots of stuff made in China, etc. I accumulated a little real estate; before the big surge in prices. So, now prices are back to where they were when I bought....about 16 years ago. :D Current targets - gold, and foreign currencies. Any of these have done much better than American-made SUVs and Chinese-built HD TVs.

I still expect the dollar to tumble. I was looking at currencies last night and saw something that had me perplexed. Graphs over the past 6 months or so comparing the Chinese Yuan to other currencies showed a gain in the Yuan vs all others except....the American Dollar. We've had a steady, flat relationship. It must be tied to their generosity towards us in accepting our debt, but I'm really not sure. More to learn...

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Yes, it's more complex than the standard libertarian line of "they'll hyperinflate the debt away".

Here's what underpins the USD:

1. on a PPP basis it's (somewhat) undervalued compared to almost any other currency (this is probably the FX market's way of saying it's scared of hyperinflation).

2. It's pegged to the renminbi which itself is massively, massively undervalued (a few hundred %). Being short the USD is equivalent to being short the renminbi. I'll let you think through what being short a currency hundreds of percent undervalued means in terms of what you are saying with that position. If you don't understand how this works, I recommend not trying your hand at FX markets.

3. Hyperinflation potential is the reason you'd be short. But if the US hyperinflates, or even so much as hints towards it, its credit rating will tumble. When it does so, debt suddenly becomes a lot more expensive. I don't need to tell you about future liabilities of Uncle Sam to its hungry and unproductive citizens (but http://www.usdebtclock.org/ will happily do so for you). I think the Commander in Chief would like this force feeding to be done cheaply. He doesn't want debt servicing costs to double overnight (not to mention he can't afford it).

Some huge names are long USD.

Short trades are very dangerous, even if your thesis and timing are right, you have just so many risks in terms of margin calls, the leverage you have to take on etc. - to quote Mr Socialist, "the market can remain irrational longer than you can remain solvent".

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I appreciate your input. Being pegged to the renminbi would explain the flat line. This is the first place I've seen this mentioned.

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It's a bit more complex than a peg (which came off a while back). There are very good reasons for them to move in lockstep. Can't get into it, sorry. Could change in the future, and I bet Obama is getting cold sweats just thinking about it.

See: http://en.wikipedia.org/wiki/Renminbi#Value

Wow, learn something every day. If the two currencies are in a managed exchange rate I would assume that a consensus would need to be maintained between the two countries. Hence...the cold sweats. I see we've gone from a 0.3% to 0.5% change-per-day agreement. That's still about 100% possible in a year. Very interesting. The image of a dam that's straining to hold back a swelling sea comes to mind here... I imagine that Geinter's last trip to China was one that included lots of bowing, kissing of hands, and gestures of gratitude. :D Thanks for the info rtg24.

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