I have read rumors from the standard rumor-mongers (Economist, WSJ) that the dollar is undervalued based on purchasing power parity.

The only fact is that the market price at the moment is correct, since the market is always right.

Depends how they calculate it. I don't believe the CPI. Inflation is 5-6%. And it is only that low because half our inflation is being exported to foriegners.

disjunction, my claims exactly and the american standard of living has peaked and over time will erode towards the waters level. it will take a long time i hope but needs to be prepared for.

there has to be many ups and downs as capital flows to the best buy. so right now tons of money is coming in from europe and others to purchase the great american products and services. this holds a so called bottom on the dollar and the economy.

the next hit could be a transition away from u.s. dollar based oil and world goods.

the final hit if it ever comes is when the u.s. is no longer needed for world protection. that is the main thing that keeps our dollar up and respect for our wishes.

I agree with everything in there that says there has been stealth inflation. But I don't understand it when they refer to "the government" like it is one person. Who specifically, is it a power-mad Bernanke trying to overstep his authority? This is all an elaborate ruse to cut Social Security? Because the dude counting the price of hamburgers has no interest in the rest of the government, nor does his supervisor.

There is an alternate hypothesis here -- the government is dumb. I think I agree with "geometric weighting" more than the old system. The drawback is it ruins our ability to compare to the past.

The reason I asked this is because I have 5% of my savings in TIPS. I had been assuming the stealth inflation would find its way into the real numbers at some point.

I'm not a conspiracy nut myself. Rather, I think random players acting on thier own self interest can create these situations. There is no smoke filled room where people decided to issue $480 trillion in credit derivatives, or create the subprime market, or print money like crazy. Individual actors just kept pouring it on out of percieved self interest.

If you want a real inflation hedge I recommend commodities.

inflation is a global phenomenon. the best inflation hedge you can get is an unhedged global inflation linked bond allocation. commodities help but i don't think can be expected to hedge your overall inflation exposure as well as a global IL bond allcoation.

however, commodities are easy to get while IL bonds are tough to get.

Barron

Yea, but the problem with the dollar are inherent to the dollar itself not the economy in which it is used as an exchange.

In essence (it is of course more complex than this) the dollar is cheap because there is an over supply of dollars.

If foreign governments decide to release their reserves of dollars this supply will increase thus driving the price down even further.

TIPS and such would be great if they weren't lying about CPI, which TIPS are based off of.

so then you're implying that every government in the world that issues IL bonds lies about its inflation index?

because a global IL bond index would be not dependent on any one country.

Barron

I always find it interesting when everyone is short the dollar. I have been short for nearly a year now and I am not looking to build my position or anything. Very seldomly has every bit of the media been clamoring the same thing and it to happen as said. I highly doubt that any "crash" or "recession" will live up to current expectations. Eveyone thinks the sup-prime crisis is such a huge issue, but in reality it is only a small part of the housing market.

Although in the last couple of years over 10% of mortagages were subprice, out of all US mortgages, approximately 2% are subprime. Out of these, only approx. 13% have defaulted. So the total mortgage defaults in the US is well under 0.5%. Yes this does hurt some and the issues the banks are having with CDO's and MBS's hurts more, but this in not some catastrophic financial event.

To be honest, I am not buying back dollars or unwinding my other trades in foreign markets or commodities, but I begin to reevaluate when every market pundit is saying to make these exact trades. I recently saw a Jay-Z video where he throws Euro's in the air instead of dollars. Typically when this type of thing hits mainstream culture (e.g. the Grandma buying tech stocks) it probably is not as attractive as everyone is convinced it is.

You just have too look at the fundamentals. When everyone was buying tech there was no fundamental basis for it. The US dollar has huge fundamental problems that aren't going away.

LOL.

people are only pricing a small fraction of the problems. to think the problems only exist in sub-prime is part of the problem.

the problem extends through the entire loans market. credit cards, prime mortgages, equity financing, etc.

The real problem is housing itself. You're right that subprime is a small part of the housing market, which just means that it is a small part of the problem. If you think housing as a whole is fine, you should be buying every housing-related stock, since the market certainly doesn't agree with you by a wide margin.

Bingo. Credit in every facet exploded.

Wait till all those junk bonds go belly up.

$480 TRILLION in credit derivatives are out there. So muhc of it issued in the last two years.

Subprime is not the only problem, merely the catalyst for declining home prices (along with oversupply) which is the problem.

Take your average Joe with good credit who either recently bought a home, or took out a loan against his equity to buy a car or something. In 2006 his place was worth $300k, so he took out loans for $295k. Now in the current market he can only sell his place for $270k, a 10% decline which is common in a lot of western markets like CA, AZ, and NV. He has a choice since his house is $25,000 under water. He can eat the loss himself and pay off the full amount of the loan or dump his credit rating and his $25k loss on the bank.

Now most people I think are forced to dump their properties on the bank through a job loss or other unforeseen expense. Some however will realize that their credit rating isn't worth $25,000 and just walk away.

Many don't rationalize it all. They just see that they can buy the house they want for less than it was. So they move in. Now they are faced with the reality of having two mortgages since they can't sell the old place for what they thought it should go for, forcing themselves into foreclosure.

In scenarios like this, the housing market is impacted by a much larger group than just subprime.

Maybe one can prove that the problem is going to get worse. You're gonna have to read a lot of the same research and data and do a lot of thinking though.

Cal me crazy but why "must" he sell his home? It is only a paper loss at this point, everyday people don't sit down every evening after dinner and say "WOW, I just read the newspaper and it said we lost $30,000 dollars today honey, no more steak and eggs".

Jimbo

That's the great thing about real estate. It's huuuuuge leverage but with essentially no margin calls and much more stable beta if that's the right term. Imagine buying a stock with 90% margin - lol. yes it hurts when prices drop, but you don't have to sell.
Peter Lynch said that real estate has never, ever, ever dropped in a year in this country as a whole since it's been tracked. Of course, this was said a few years ago. I think this year may be a first for the country as a whole.

Anyone know if there is an overall US housing price index? and if it's down for the year. (I'm not talking pockets like Boston or Orlando.)

Well I think one big difference between housing and equities is the time frame. When housing first starts to decline it will take ages before it goes back up.

This is ******ed. As long as they pay off the loan, the price of the house is irrelevant for the sake of a foreclosure.

And I think people don't think about the fact that he can then turn around a buy the same type of house for $270k. Sure he's out the 25k from before but he can basically move from one town to another without increasing the size of his loan (once you account for buying/selling fees, etc. I think the only people that are in trouble are those that can't afford the loans they have and they were in trouble no matter what.

Yea its just house prices falling by 5% and some poor sub prime people defaulting and a few greedy banks having to make some write downs.

OH WAIT:

I guess the ramifications of financial institutions packaging and selling on sub prime debt in byzantine and value ambiguous vehicles that were all over valued massively by rating agencies are a bit more far reaching than a slight downturn in the US housing market.

Credit is crunching.

I guess my last post was slightly OT, but I think it helped us to see the interrelation of crises that are effecting the global financial system at the moment.

Anyway, a bit of browsing from that link above lead me to this excellent article which talks about the dollar specifically.

bet your bottom dollar.

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