Making sense of the strong US dollar

It makes no sense. US markets are down, housing prices have halved, large well known and supposedly well capitalised banks have to be rescued, US total deficit exceeded the US$10 trillion mark which the Singapore Straits Times wrote is qual to a debt of more than half a million per family in the USA and yet the US dollar is high? To make sense of this currency movement, let us take the currency as the equivalent of shares in a company. If a company is doing well, its shares will go up because each share is supposedly equal to a portion of the value or assets of the company. We should table all the assets in the USA, add up all the shares in all the US companies, add up all the properties and land cost, add up all the gold the Federal reserves have and divide them by the total amount of US dollars in the world. This in essence is what each US dollar should be worth

The constant Federal and Trade deficits for the past decades implies that
the US is spending more , much more than it is earning. Thus the US dollar should have a lower value compared to other currencies such as the Euro which cumulatively have a positive budget deficit . So why is the US dollar strengthening? I believed it has more to do with liquidity than with the actual fundamentals. US banks are not lending money which means there is a shortage of US dollars. And when there is a shortage, the price of that commodity goes up. In this case, that commodity is the US dollars. Secondly US investors and fund managers are liquidating overseas stocks and commodities and converting them into US dollars. There is therefore a demand for the US dollars needed to pay the investors who have sold their overseas stocks and commodities. If a fund manager sold $1 million Singapore dollar worth of Singapore shares, he will want to sell that $1 million dollar of Singapore dollars to buy US dollars and bring that US dollar back into the USA.

This will eventually create a humongous pool of US dollars in the USA but this pool is counterbalance by the fact that banks are not willing to lend . Think what happens when the lending starts again? For each dollar in its account, a bank can lend out $10 dollars. Where will these trillions of dollars find a home? I believed many US investors will be fed up with their own stock market and property investment which will mean they will look overseas to park their surplus dollars. I forsee a huge boom for overseas shares and properties once the economic picture clears and it can be seen that Asia and some emerging countries like Poland are relatively unscathed by the financial turmoil.

When I hear the news report on CNN and CNBC, I often hear commentators comment on the GLOBAL Financial Crisis. Yet Asia is definitely not in the same position as USA and Europe and even with Europe some countries fare better than others. Poland for example is booming even now. Once the picture settles and we know that Asia and some countries are not that badly affected., investors will chase after assets in these countries. I predict that shares in these countries will be selling for PE ratios far in excess of 20. Property and gold prices will soar as investors seek safety in assets that does not depreciate. Gold prices can be expected to exceed US$1,000 per ounce.

What is happening is not so much an appreciation of assets but a depreciation in paper money especially the US dollar. With so much money chasing after limited assets, these assets have to increase in price.The paper money in banks all over the world is like a crouching tiger, waiting for the coast to be safe and clear, before it pounce. Asian stocks, Asian properties, Asian anything will soon be the flavour of the month. There will be a huge plethora of unit trusts touting all sorts of Asian investment opportunities. Investment is controlled by two emotions: fear and greed. Today it is fear that predominates and so the tiger waits. But a time will come when greed will prevail and the tiger pounces.

This is a time to reap a massive harvest for those with the courage to be contrarians.