Hedge funds may have been to blame for the flash crash in May, and perhaps there is an even darker hidden danger lurking. I think that global macro funds are trading against the dollar and it is worrisome to imagine the avalanche that could happen.How plausible is it that hedge fund stress could trigger a straight up USD collapse? For these four reasons, our currency may be hanging in a more delicate balance than we realise.
- Ballooning trillions of national debt will be cheaper to pay by switching on the printing press and manufacturing money from air. It’s likely that our national government will contemplate this approach when it comes time to pay the piper. Attempting to mend systematic problems in our economy would be useless at this point. Devaluation would certainly be an easier solution although living in the 2010 version of Weimar Germany may be a lifestyle change for all of us.
- The shine of the USD, formerly the most popular currency in the world, is dulling. China has become disoriented and already tried to replace our dollar with an international reserve currency. They’ve already started dumping our Treasuries and buying gold. On the other hand, it is not feasible that the world powers would want to demolish a key trading partner. Further, no new kid on the block has stepped up despite the world’s disenchantment with the greenback’s lost glimmer.
- If I were not an investment advisor, I would sell options on the VIX ETF. In today’s momentum market, fear prevails and emotion dominates trading behaviour. It is not inconceivable to imagine panic selling happening in mass. I do not know of a single global macro fund that is long the USD. China, Japan, and a few big macro funds dumping our currency could be enough to do us in.
- It seems that since the advent of high frequency trading funds in recent years, the market has shifted to a momentum rather than fundamental orientation. Perhaps this is another invisible hand operating in the darkness.
- It is useful to examine the paradigm of the Paulson fund’s short of the housing market. While this trade was by no means the only source of America’s turmoil, the confluence of factors intensifying the collapse of the housing market certainly did not improve life for Americans. History unfortunately repeats itself and if we lacked the vision to detect the first time, why wouldn’t we again be oblivious to another large macro bet against a staple instrument of our economy?
Although it is reasonable to imagine that hedge funds may be responsible for some macroeconomic whipsawing, it’s not clear exactly what that is. It is unlikely the seemingly rational world would move to bankrupt the dollar; however it is not unforeseeable to imagine a currency crisis on the brink.
What may this mean for investors? An alternative to the more simplistic approach of hiding the gold bullion under your mattress would be to find a good global macro fund and fill out the subscription forms fast.
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