The Wall Street Journal asks Should You Bet Against the Dollar? (the answer is yes)
(emphasis mine) [my comment]
JULY 9, 2009, 6:26 A.M. ET
Should You Bet Against the Dollar? [Yes]
Foreign currency funds
can protect you [will not protect you] from a dollar decline, but they might not be necessary.
By BRETT ARENDS
This week's G-8 meeting in Italy has kicked off with the traditional warm-up event -- yet another debate about whether the dollar will, or should, lose its place as the world's reserve currency.
This time the governments of China, Russia and Brazil all plan to raise the issue. In keeping with recent tradition, any demands that the dollar be toppled will, of course, be accompanied by soothing remarks that they are demanding no such thing.
Wall Street Journal columnist Brett Arends explains whether investors should be worried about the possibility of the dollar's decline.
For the rest of us, this debate raises three simple questions.
Is the dollar doomed? [Hell yes]
Does it matter? [is this a dumb question or what?]
And what can you do about it? [Buy physical gold]
Expectations of dollar decline are long established. The U.S. has been running massive federal budget and current account deficits for years. The government is now flooding the system with trillions of extra dollars — through deficits and purchases of Treasurys — in response to the crisis. Once, Uncle Sam would hardly have cared what China, Russia and Brazil said about the dollar. Today, those nations own more than $1 trillion worth of Treasurys.
So far, so bearish for the greenback. But currencies are like political parties -- they look awful until you consider the alternatives [Gold is an alternative to the dollar, and I see nothing "awful" about gold]. Europe, say many analysts, may face even deeper financial crises and banking problems than the U.S. will.
The European Central Bank, furthermore, still lacks the structure and flexibility necessary to
function [print money] as easily as the Federal Reserve does. [The ECB's inability to print money makes the euro ATTRACTIVE compared to the dollar]
Meanwhile Asian currencies are, mostly, politically managed. They also lack liquidity. Right now they can't function as reserve currencies either. [If the China allowed the yuan to float freely (ie: made it liquid), the dollar would get destroyed by the competition. For some reason, this Wall Street Journal article assumes this won't happen despite all evidence to the contrary.]
The bear case for the dollar, if it materializes, may take generations. [THIS COMMENT IS UNBELIEVABLY IDIOTIC. An economy whose main product is toxic debt cannot go on functioning for "generations"]
And even if that happens, does it matter? A falling dollar should drive up the cost of overseas goods and services here -- from Japanese-made Priuses to European vacations. But it should also make U.S.-based businesses more competitive internationally by making their goods or services cheaper overseas [A falling dollar would help US-based businesses...IF WE HAD A MANUFACTURING SECTOR LEFT]. More competitive businesses stateside should, in due course, create more jobs. If anything, for most of Main Street, a weaker dollar ought to be a net gain. [Let's be perfectly clear. A weak dollar helps exporters (what is left of our manufacturing sector) and hurts importers (the US service sector). Since the US service sector makes up 75% of the US economy, a weak dollar would not make life better on Main Street]
What can you do about it?
You can open foreign bank accounts [could be a good idea] or buy foreign currency exchange-traded funds [NOT a good idea] — like the CurrencyShares Japanese Yen Trust (FXY) or Euro Trust (FXE). Or you can invest in a managed currency fund such as the Franklin Templeton Hard Currrency Fund (ICPHX) or the Merk Hard Currency (MERKX) and Asian Currency (MEAFX) Funds. Axel Merk, the fund manager of the last two, says he is taking long-term positions against the dollar. The first fund has 24% of its money in the euro, 17% in the Norwegian krone, nearly 35% in the commodity-related currencies of Australia, New Zealand and Canada, and 14% in gold. Mr. Merk particularly likes the krone, thanks to Norway's buoyant oil revenues. As for the Asian currency fund: It is largely a bet on a revaluation of the Chinese yuan in due course. About two-thirds of the fund tracks the Chinese currency.
China has been manipulating its currency for years to keep it artificially cheap. That can only go on for so long. [Agreed]
One quirk worth noting: The Asian Currency fund doesn't actually own any yuan. It can't. The yuan is a closed currency. Instead the fund invests in something called "non-deliverable forward contracts." In essence, it makes bets with big investment banks on the direction of the yuan exchange rate. That will probably [NOT] work out fine, although Mr. Merk concedes there is "counterparty risk"
if [when] one of those banks ever gets into trouble. This is not exactly the same as owning actual currency. [Do not use derivatives or foreign currency exchange-traded funds to bet against the dollar.]
The bigger question is whether these funds are the best use of your investment dollars [buy gold or agricultural land]. Currency funds typically invest their money in short-term government paper in the relevant countries. The interest rates usually are very low. You are basically holding cash, while paying a fund-management fee.
Even if you bet the right way on currencies,
you may have to wait a long time to get your rewards -- if at all [The dollar is doomed. This is nonsense]. From 2002 through 2007, dollar bears warned that the U.S. faced a looming credit crisis and a housing crash. They were right. But when the storm hit, the dollar went up instead.
Why using derivatives to bet against the dollar is NOT a good idea
Openmarket.org reports that EverBank Can Multiply Your Financial Woes.
EverBank Can Multiply Your Financial Woes
by Hans Bader
October 07, 2008 @ 11:04 am
Is any of our readers an expert on banking laws and customs? The reason I ask is that recently, EverBank World Markets, after agreeing to renew a CD denominated in Icelandic Krona, suddenly closed it, purportedly because the "currency stopped trading." [Something of this nature will happen to everyone who bets against the dollar using derivatives]
The bank then "converted" my CD from Icelandic Krona into dollars at an eye-popping rate of 171.98 per dollar on October 6, cutting the value of my CD from $5691.11 to $3744.68 — a loss of two thousand dollars — by assigning the krona an extraordinarily low value.
What is extremely odd about this is that the exchange rate that EverBank recorded — 171.98 per dollar — is strikingly different from the rate of 112 Krona per dollar cited on EverBank's own web site yesterday, and the rates cited by other financial information sources, like exchange-rates.org. (Even those rates were themselves a huge drop for the Krona, which traded at around 60 per dollar at the beginning of 2008). The net result of EverBank's using this bizarre currency exchange rate was to reduce the value of my CD by nearly $2,000. Icelandic currency traded at much higher rates on October 6 than the rate that Everbank used.
The rate EverBank used also finds no support at Bloomberg, the nation's leading source of financial information, which shows the Icelandic Krona ranging from 96.68 per dollar to 128.17 per dollar in the period of October 3 through October 7.
Can any of our readers explain why EverBank did this? [Ever bank was using derivatives instead of actually purchasing CDs denominated in Icelandic Krona. See comments below] And what remedies may exist under banking or contract law for what it did?
ADDENDUM, NOVEMBER 11: To all the folks who have emailed me about this: I apologize for this, but I am so busy now that I can't respond to all your emails. I believe that one avenue for you to pursue is to file a complaint with the Office of Thrift Supervision. Another option would be to file a class action lawsuit in court. I received an email a long time ago from an attorney, Mike Millen of 119 Calle Marguerita #100, Los Gatos, California 95032, expressing interest in learning more about this situation (MikeMillen-at-aol.com). Mr. Millen might be able to provide you with some advice or assistance if you write to him.
SECOND ADDENDUM, DECEMBER 12: Attorney Mike Millen asks if anyone who suffered at the hands of EverBank lives in California. Please let me him, or me, know if you are. You can reach him at MikeMillen-at-aol.com, or me at hbader-at-cei.org. Thanks.
October 14, 2008 at 10:12 am
I just found out that Everbank wants to liquidate my ISKs. I wrote to them the following:
"The Islandic Krona is still in existence. Everbank's account disclosures doc states and has stated that the "account will be used to HOLD funds denominated in a currency other than U.S. dollars". I will not accept a forced liquidation/conversion. If you choose to close my accounts, I demand you send me the actual physical ISKs.
Furthermore, it is absolutely incredible you have not notified me of your intentions, as I had to find out by reading some online-blog. I am ready to consult an attorney and sue Everbank should the need be.
Lastly, I will make this a very public matter, as I'm sure most people aren't aware of how Everbank negates its relationship to its customers and open contracts as soon as the wind blows another way."
October 15, 2008 at 1:47 am
Hi, I am in the same boat...let me know if there is something can be done about it.
Charles P. Jackson says:
October 17, 2008 at 4:35 pm
Everbank also liquidated my ISK Cds without permission. I am a retired attorney, but unfortunately, my specialty was not banking or securities. I do think Everbank is at least in breach of contract in that the CDs were supposed to roll until we told them otherwise. I have sent them a demand letter and threatened to make a claim with the FDIC. I believe the stopping of interest payments (when Iceland interest rates had actually gone up) was an act of default and the unilateral liquidation a second default.
I believe the first action we can take must be to make claims with appropriate regulators (the FDIC i think) and exhaust all administrative remedies or a court will not even hear the case. Please stay in touch, and network to find out who else has been victimized.I think a lot of claims will get more attention than just a few.
October 19, 2008 at 10:18 am
My $50,000 went to $18,000 and is now being valued at $12,000. I am disgusted. The "official" exchange rate is 110. We should also note that Everbank began to reduce the interest rate on this investment in early summer citing market volatility. This was as the principle was being shaved away.
Truly disgusting that this was advertised and promoted in their very own newsletters.
Charles P. Jackson says:
October 26, 2008 at 4:25 am
In response to John's comment: Your point is only valid if you presume a current liquidation and current damages. I have a long horizon and it was my intention to ride out the current crisis. Iceland was not hit by an asteroid and has not disappeared into the North Atlantic. My biggest issue with Everbank is that they closed out my position without even consulting me. Since they have breached the contract and the future value of Iceland currency is unknowable, a more appropriate current measure of damages is the value of principal (my principal) they were entrusted with.
They are more than just a contract party and have fiduciary duties to the depositors. I can only hope the bank regulators see it the same way.
Remarkably, I just received the same (unless we receive instructions from you) automatic rollover notice about another ISK CD 3 days ago.
I also read and printed out the fine print we all accepted when we bought the CDs. The bad news is that they reserved the right to change interest rates at their discretion. The good news is that there is no language giving them the power to close out CDs at will or shifting the risk of a market meltdown to the CD holders.
[Here is the comment explaining what happened.]
November 3, 2008 at 7:22 am
CgmT and other non-shill posters here: I received a Fedex letter back from Everbank's General Counsel 2 days after the liquidated my 1st CD (I don't have the name in front of me ATM). Essentially, it boils down to this:
1. Everbank bought a forward contract at the time of CD opening with a non-disclosed financial intermediary, which in turn opened another forward contract with Iceland's central bank, SedlaBanki;
2. At maturity, they converted allegedly at the "auction" rate from Sedlabanki.
At the core:
* Everbank ISK CD customers did NOT buy a forward contract; we bought an FDIC insured Certificate of Deposit. We paid a SPOT conversion fee;
* Everbank forcefully liquidated our deposits at non-published rates (256:1) on a day (2008-10-29) the average quote from several sources were at 117:1;
* Everbank made no effort to inform its customers of what their intentions were, and went so far as to indicate rollovers up until they liquidated.
Now then, what's the best course of action? I provided links above to initiate complaints via regular channels. We should all do so promptly. I am in contact with a corporate attorney at this time looking into a attorney reference that can best handle a personal lawsuit. And last but not least, we need to get a good lawyer for a class-action lawsuit, this last situation in which I have no experience.
November 3, 2008 at 7:40 am
Oh, sorry Hans for taking so much space here, but I need to point out, there's not a single reference in any of their prospectus or account agreements mentioning "Forward Contracts". It is important to save your EXISTING documents, because Everbank will no doubt attempt to plop it in there during litigation...
November 3, 2008 at 7:55 am
Jeez, I forgot another important detail:
Forward contracts don't have a interest rate yield: Everbank was advertising, and providing at least initially, APYs within 2-3% of currency interest rates, which naturally increased the illusion we had deposits in ISK.
November 3, 2008 at 3:10 pm
We too just received our conversion statement and were outraged at the 256 conversion rate. Like others, we expected our CD to be rolled forward as we did not give them other instructions. Also, we have been monitoring the conversion rate and the Icelandic Central Bank has been quoted around 120 of late.
I agree, it is deceitful that we thought we were buying CDs but Everbank was actually buying forward contracts. That might also explain why they couldn't get the 12+% interest rate that the Central Bank has been offering in recent months.
I tried to have it out on the phone with the Everbank representatives, but they defer any difficulty and blame to the "non-disclosed financial intermediary." I would really like to know who this intermediary is, as I suspect is is a subsidiary of Everbank, and thus Everbank is benefiting from our misfortune much more than we are aware of.
Please inform us of the action being taken in regards to class-action or other effective outlets to voice our displeasure.
November 12, 2008 at 9:07 am
Did you notice that Everbank is finally quoting ISK this morning at 182!! The Central Bank of Iceland is quoting 137 today.
November 30, 2008 at 10:46 pm
Everbank committed fraud when they sent out statements showing accounts denominated in ISK. In fact, they purchased currency forward contracts with our money, made up an interest rate, and skimmed huge margins each and every time we rolled the "CD" over. File complaints with the OTS but don't stop there. Contact your state's attorney general office. And then file a lawsuit. Everbank doesn't have a leg to stand on.
December 4, 2008 at 11:00 am
Just sent my complaint to the OTS. They forcibly sold me out yesterday. I lost $38,000, folks. From $50 to $12. They also charged me commission on the way out!
I had started hoping that given the Icelandic Bank raised rates to 18 percent and announced they would float the currency, there would be some chance to recoup losses over time. Just today, Krona appreciated 10%.
I have a regular savings account with Everbank and I am transferring everything to Citi and JP Morgan ASAP.
I hate Everbank.
December 5, 2008 at 9:12 am
USDISK now being quoted at 121, whereas Everbank sold us out at 256! We had CDs, an investment vehicle of the most SAFE kind! Yet because Everbank gambled with our funds, UNBEKNOWN to us, we have taken the fall!
Yes, I have filed complaints with the Attorney Generals in 3 states (MO, FL and mine), still waiting to hear from them! No response from OTS yet either! I looks like I'm going to have to sue independently...
December 5, 2008 at 8:33 pm
256? You got lucky. I was sold out at 263 and the Krona has appreciated 20% in the subsequent 2 days. Plus Ever-fraud charged commission on the way out just to piss on me while I was down.
I've already gotten an attorney for this. I'm looking to recoup 100% on this now based on Everbank's abdication of their fiduciary duty and false advertising of the product.
John Hutchins says:
December 11, 2008 at 4:42 pm
I too have been riped off by EVERBANK Today EVERBANK closed my CD and exchanged my ISK to USD at the rate of 217.1162 to 1 where other sites on the WWW showed an average of 116 ISK to 1 USD!
Looking for a SheepSkin for hire.
My reaction: Using derivatives to bet against the dollar is NOT a good idea.
global derivatives markets need stable dollar to operate
You must understand that global derivatives markets operate on the assumption of the stable value of the dollar and short term US debt. These derivatives markets cannot function without the collateral backing provided by short term US debt. If the value of dollar and short term US debt collapse, these markets will cease trading and contracts will be made worthless.
What this means
When you buy a gold call option, you are making two bets:
1) That the value of gold will appreciate
2) That the value of collateral backing the option (the dollar and short term US debt) will maintain its value.
I would like to point out that these two bets are mutually exclusive.
Conclusion: If you want to bet against the dollar, do it in a safe way. Avoid derivatives and invest in hard assets and unhedged commodity producers. Otherwise you will end up like the holders of Everbank's Krona denominated Icelandic CDs.