Green Light

"I think its safe to say that this party is about to become a historical fact."
--Duncan (Some Kind of Wonderful)

Here's a first. Yesterday I bought the dollar via the DB US Dollar Index Up (UUP). Given my uber grizzly long term view of the USD, what gives?

It's because, between here and dollar dust time, I'm assigning significant probability to another round of deflation. The massive amount of dollar-denominated debt essentially constitutes a synthetic short against the dollar. By definition, deflation constitutes debt destruction. Folks will need to buy dollars in order to cover their dollar-denominated debt projects. All else equal, increased dollar demand translates into higher USD price.


Note that the lift in the USD last yr during last year's deflationary phase, which amounted to approximately a 25% move. In my view, we could be setting up for some vuja de.

What could be the catalyst for another deflationary phase? Wish I knew. There's so much debt in the system that it could just sink under its own weight. What's different now compared to two yrs ago is that social mood has shifted. Collective appetite for risk is down. People don't want to hold debt if they're risk averse. I think darker social moods puts a leash on credit expansion for some time to come.

An individual doesn't have to buy a special asset like the UUP to position for deflation. High levels of cash, low debt, and minimal risky assets are prudent choices for withstanding deflationary times. That so few people are positioned in this manner suggests a pretty uncrowded trade.

Make no mistake, I view the dollar as flawed and believe that over time it'll turn into so much confetti. In the near term, however, an imploding mountain of debt could squeeze the dollar higher.

position in UUP