Value of a Dollar ?

Majority always loses. Here is another example, when market go in worst depressions, it start with credit crunch, people lose faith in banking system, in stock market investment and keep their cash with themselves. This is effectively, they are long on CASH and short on every other asset.
At this particular time CASH loses its value. In worst depression, you will loose less if you invest in stock market, rather than bonds or cash. When majority runs for safety in bonds and cash, they lose value. How much value can cash loose ? See the image below



1923 Weimar Republic inflation: A German woman feeding a stove with Papiermarks, which burned longer than the amount of firewood people could buy with them.


What happens when dollar gets devalued ? In all currency devaluations in the past, we have seen high inflation in the countries. This is called Hyperinflation. Go through the link to read more about it. This is not a particularly uncommon episode in human history. It has occurred in the following countries, in the last 150 years. Weimar Republic of Germany 1920 – 23 (1/466 billionth of starting value), Zimbabwe 2003 - Now (6 quadrillionth of the starting value and continuing to fall), Former Soviet Union 1993 – 2002 (1/14th of starting value), Argentina 1975 – 1983 (1/1,000th of starting value), Austria 1921 – 23 (about ¼ of starting value), Bolivia 1984 - 86 (1/1,000 of starting value); Bosnia-Herzegovina 1992 – 93 (1/100,000th of starting value), Brazil 1960 – 94 (1 trillionth of starting value), Chile 1971 – 73 (1/3rd of starting value), China 1947 – 55 (1/10,000th of starting value), Greece 1943 – 53 (1/50 trillionth of starting value), Hungary 1945 – 46 (100 quintillionth of the starting value), Hungary 1922 – 23 (1/4 of starting value), Israel 1976 – 86 (1/16th of starting value), Japan 1934 – 51 (1/362nd of starting value), Poland 1990 – 94 (1/10,000th of starting value), U.S.A. (Confederate States of America) 1861 – 65 (1/90th of starting value, and then, by the end of the Civil War, the Confederate Dollar depreciated to zero).

Imagine this, you go buy some tomatoes from your sabjiWala and he says that will be 50 billion rupees. This is what happened with a lot of countries in the past. Look at the Yugoslavia, 50 billion currency note, this was printed and used for real by the people of Yugoslavia in 1994.




So the rule is, if currency of a nation is devalued, it experienced Hyperinflation. So, if dollar goes down, all commodities should go up. This is right, since it will make commodities cheaper for other nations. This was the reason why a commodity run up also started, when dollar started losing value in 2002. Crude oil for example, increased from 10$ to a peak of 147$ in July'08.

But, i fortunately saw a big flaw with the statement above. I made a concept during Physics preparations for IIT JEE. The concept was, always start approaching the problem from the most fundamental law, never approach it with a formula. Consider this problem,

So, what is the fundamental law of the market ? Price is dependent on Supply and Demand.

Earlier, whenever currency devaluation lead to hyperinflation, or continued rise of commodity prices, were for economies which were too small to effect the Supply and Demand equation of the rest of the world. If the greatest and the biggest economy, faces currency devaluation, and it cannot afford those commodities, then nobody else can. US falls into recession, it will take half of the world along with it. Prices of commodites have to come down for world's supply-demand to match.

Fairly convinced with my idea, i started looking at the rise of crude oil. I went short on crude oil at 120$ in May'08, thinking crude is reasonably expensive at 120$, it will peak around 130$ and go down below 100$.
But when crude prices rised to 130$, some stupid hedge fund manager, pension fund manager, and other assholes of the world, looked at rising inflation. So as a hedge against inflation, they started buying a basket of commodities. Which in turn increases the price of commodities, and also the inflation, which leads to more stupid fund manager, jumping into buying commodities for hedge against inflation. This is clearly a boom, if price of a asset is a reason for its further price rise, it is a feedback spiral. I went more short at 135$. Bloody crude reached 140$. I faced severe margin pressure and thought about cutting my positions because every newspaper was shouting that crude will reach 200$, but then the basic rule came to my mind, always go short on newspaper investment ideas. So, i decided that instead i will stop picking my brokers phone when he asks for further margin on my short positions. I forgot the law, that market will far overreach equilibrium, when it is in a trend, so i went short too early.
Crude peaked on July15'08, at a price of 147$, it crashed by 37% to below 100$, in just two months. I made money. Took my broker out for dinner, because he did not asked for margin from 140$ to 147$.

Last post, i talked about going short or staying away from US dollar, any stocks which gets their earnings from US (Indian IT and Pharma stocks). Here is another trade,
go short on crude oil. Once, US dollar loses its value, US will fall into deeper recession, there will not be an hyperinflation scenario, commodities are also going to lose value, because the biggest consumer is going down. I am betting on crude oil below 50$. I will keep my short positions open till 70$.

Another trade, when US falls into recession, lot of other economies are going to feel the heat, cash is going to lose value, banks will face pressure to remain solvent. At that time Gold glittlers and comes to rescue, go long on Gold.

But Gold will remain a volatile shit, because its a commodity, it has to follow path of a commodity by going down, but Gold is special, it is the only invesment people run to when economies go down, recessions looms in.

Best trade will be, Go long gold and go short on an equivalent amount of crude oil, at the same time. This saves you from a lot of risk, especially currency risk, volatility risk etc.

Crude around 100$, all other commodities also 20% below their peaks of July'15. By next mar-july, India will start to see negative inflation. So, RBI has to cut interest rates. I forsee, interest rates cuts starting from decemeber. When all commodities will reach significantly low levels. I will write about The Story Of India, in my next post.