In a surprise move by Lazard Asset Management’s “The World Trust Fund” as dumped the USD as its primary currency in favor of the Sterling. Typically these funds trade in the USD, but the fund’s board apparently felt pressure from shareholders and investors to change its primary currency from the USD to the Sterling, one can imagine it is because of the recent slide of the USD from 89 to 75 in recent months impact the real return of the fund’s performance.
In the filing the fund stated that; “In response to comments from a number of shareholders and potential investors in the Fund about the liquidity of the Fund’s shares, the Board, having consulted with the Fund’s brokers, Arbuthnot Securities, believes that having a larger number of shares in issue with a lower share price than at present and changing the currency in which the shares are traded from US dollars to Sterling, should assist in improving the marketability and liquidity of the Fund’s shares and support the attraction and retention of a diverse shareholder base.”
That is a stunning statement to read and is a possible sign of the times as the USD is under pressure from every direction and in jeopardy of losing its reserve currency status. Lazard Asset Management is a rather prestigious firm and to make such a drastic move is shocking to say the least. Will other asset managers follow suit? More than likely, but only time will tell. However, if they do this will cause unneeded selling in the USD that could cause further declines given the large holdings of international mutual funds within the US.
This is something that I am keeping a close eye on and I suggest you do the same. As I have state before, much of your real return in the markets has been phantom returns because of the decline in the dollar and the same can be said about international returns as your assets are priced in the USD. If your international assets were priced in foreign currencies you would have had substantial returns this year, i.e. Brazil’s Real appreciated 32% against the USD, so if you invested in the BOVESPA in the Real you would have had an outstanding year. Of course, if the currency went the other way the opposite would be true, but given the fiscal largesse the US is under it is unlikely the USD will have any meaningful lang-term strength, apparently Lazard feels the same way.
Who says the commoditization of the equity markets isn’t a good thing? This morning the dollar started out fairly strong which led to lower equity prices, rightfully so given the over extension of the equity markets, but that turned in the late morning. The dollar began to sell off, perhaps because of Buffet’s op-ed piece published this morning.
Regardless, it is clear that the markets are merely responding to a lower value for the dollar versus any real economic or other data points. Of course, this is not being talked about by the media or others who merely trumpet this as a continuation of the ‘new bull market’, with bull being the operative word. While the dollar is weaker by about .50% today I expect that there will continue to be strength in the near future as the markets realize that things are not as rosy as they think.
However, the crude inventory report is being perceived as bullish with rather large draw downs, but I believe those draw downs need to be put into perspective. Demand has been so weak in the US that the import of oil has trailed down recently and without that replenishment of more oil it was inevitable that the draw down was going to happen eventually. Because I believe it is relatively weaker demand and imports have been reduced I am not seeing this as a long-term bull more in crude.
With the report being framed as bullish it caused the dollar to lose strength which has the trickledown effect of higher equity and commodity prices. Outside of this resilient rally most trends do not go in a straight line which is why I expected the dollar to fluctuate. Because of this volatility I have not added to my gold or silver holdings as I believe we will get lower prices in the near future.
While I am a short-term bull on the dollar that does not mean I think it is a long-term trend. In fact, I believe the PIMCO report and Buffet’s concerns are very valid and why I am a long-term bear on the dollar. Regardless of my view on the dollar it is still the place to run in the event of catastrophe which I expect to see in the near future by some ‘black swan’ event.
As I have said many times, enjoy the rally, but the buying power of the dollar has not really increased as it is a mere tradeoff between the currency and the equity markets. In a nutshell, it is more of an inflationary event, minus the actual inflation as of right now, instead of a real economic event. This does not change my prediction of a sharp, painful decline in the near future, September to December area, where we could see spectacular movements in the indices.
Please review the 1 minute chart below comparing the S&P 500 to the DXY. There is a clear connection between the dollar’s decline and higher equity price movements, but most people will ignore it and continue on with framing everything as a recovery or green shoots. As I have said before, this much liquidity, printed by the Fed, in the market can make spectacular things happen. Either way, I am very happy with being out of equities as we are still heading lower.
As many of you know I have been pointing out the correlation between the weak dollar and higher equity prices. This has caught on and ZeroHedge has even made the connection between the two. Simply put, we are seeing the devaluation of the dollar which leads to higher equity prices and commodity prices, or inflation.
For full disclosure I am short the dollar against most major currencies, i.e. Euro, New Zealand Dollar, Canadian Dollar, and the Pound.
Here is the DXY, dollar index, versus the S&P 500 over the last year.
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