Ep.49 - Why You Should Consider Shorting the Dollar via UDN in 2019 (3 Minute Read)

Read Time: 3 Minutes.

Q1 2018 has been a time of high volatility in the stock market. I've witnessed my own portfolio's ups and downs, which drove me to think creatively about new investment strategies going forward. 

Here is part of my new strategy; I believe the dollar will continue to weaken, which I will explain in detail below. One way to take advantage of this macro-economic trend is to short dollars, which simply means selling dollars.

In my opinion, the easy low-cost way to do so is to buy this ETF, PowerShares DB US Dollar Index Bearish Fund (ticker UDN). 



UDN is the ticker for the ETF, PowerShares DB US Dollar Index Bearish Fund. This ETF has an inverse relationship with the strength of the dollar. In layman's terms, you make money when the dollar becomes weaker.  

Here is how you can picture what a weakened dollar looks like. Imagine you are traveling to France next month. A weakened dollar means, when you exchange your dollars for euros, you get less euros for your dollars. In other words, things are more expensive during your travel. But it's great for others who visit the U.S.

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The strength of the dollar is heavily dependent on how much is in the economy. When we have too much cash in the economy, without the proportional increase in goods/services, it drives prices up, basically causing inflation, ultimately causing the value of the dollar to go down. This is where we are headed as a nation.

In a nutshell, the dollar will continue to weaken because the United States government is perpetually in debt. In 2019, the government will bring in $3.5 trillion and spend $4.5 trillion, meaning we'll be $1 trillion in deficit. The deficit is funded by borrowing from anyone who wants to buy treasury bonds. The largest buyer group are foreign governments, which are led by China and Japan. They are followed by the Federal Reserve, which buys by printing new money. Basically, China, Japan and the Federal Reserve bankroll our government. Think about these three as your American Express, Visa and Mastercard.

Foreign investors are lending us less, which means the Federal Reserve will have to lend more, to keep funding our government. The total amount of treasury bond holding by foreign governments peaked in Q4 2017 at slightly over $6.3 trillion. The amount has come down since. When -- not if -- it continues to come down, while our government still needs to borrow, the Federal Reserve will have no choice but to absorb the extra treasuries, thus printing more money into circulation. This is why we will see more money in the economy, creating a weakened dollar.



Shorting the dollar won't make you rich overnight. It is a long term play on the macro-economic trend. It'd be smart to match your long term assets (401k, retirement funds, and savings you don't need to touch for the next 12 months) to this investment. Not your emergency fund, however.

How well this investment will pan out really depends on two major factors:

 1) U.S. budget deficit; and

 2) Foreign governments. 

Budget deficit: it is almost impossible to lower our budget deficit in the current political environment. As a result, I am very confident we will live with an annual $1 trillion deficit for a while. Someone has to lend us the money. In other words, there is immense pressure to weaken the dollar.

Foreign Governments: The biggest driver of all foreign governments is China. China is already showing signs of purchasing less treasury bonds than before. What will really accelerate the weakening of the dollar is when China decides to sell treasury bonds in bulk. China wants to slowly establish its own CNY as a global currency. It makes sense, therefore, for China to hold fewer dollars, especially when China can transact in CNY directly. This is evident in the case of Angola, where China purchases oil directly with CNY.  Last week, China just started oil futures denominated in CNY in Shanghai.



If none of the things I said above made sense, make sure to get a second opinion from someone you trust before you invest. If it made sense to you, then your action is simple - buy UDN.


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