A New Way to Bet Against the Dollar

07/30/2009 9:17 am EST

Focus: ETFS

Peter Way

Founder and CIO, Peter Way Associates

Peter F. Way, editor of Block Traders’ ETF Monitor, says a leveraged inverse US Treasury ETF is a good way to hedge your exposure to the US dollar.

There are at least a dozen and a half exchange-traded funds providing investments in currencies of the world, including some direct bets on the US dollar, along with dozens of ETFs facilitating investments in packages of stocks from various countries.

What is easy to forget, at least by US investors, is that for the dominant proportion of our investments, our standard unit of measurement is the dollar. A different “commodity” that has a world-wide market, and is now being bothered by questions of dollar value, is the debt certificates of the US government.

The most attractive ETF today, on our reward/risk tradeoff ranking scale, is UltraShort 20+ Year Treasury ProShares (NYSE: TBT), an inverse, leveraged ETF that goes up twice as much as the perceived value of the 20-year US Government bonds it holds goes down.

Based on the actual price experiences of dozens of forecasts, the next three months should see higher prices for TBT 80% of the time, and lower ones 20%. Historically the most extreme declines are less than -4% and the extreme gain potentials are better than +16%.

[That may be] a touch less exciting than the comparable 20% return (in three months) potential of a Chinese aluminum company or some specialized industrial services companies, but the implications of these kick-in-the-head evaluations of what is likely to happen to the dollar are a whole lot more troubling.

Capable evaluators of the market’s prospects (the big-money market makers) are telling us that what our country’s present administration is attempting, in order to rejuvenate our economy, is likely to do serious damage to everyone in the form of an inevitable inflation tax on just about everything. They, like many others, are saying that you can’t spend your way out of a recession.

The markets are starting to say those notions are fatally flawed and we had better watch out. The American family has recently come to the realization that borrowing against inflated assets to support a life style beyond one’s income can’t go on for long. Our government(s) need to get the same wake-up call. It is starting to happen at the state level now, with threats that even local municipal tax revenues may get raided by the larger entities.

If governments, starting at the federal level, had the reality of the family budget to deal with, instead of specious accounting mysticism, the dollar would be, and could stay, sound. If politicians and their committees and agencies were charged with economically buying things instead of lavishly spending to support programs and projects designed simply to “put voters to work” and to reward political support organizations, then we would have healthy motivations in place.

Don’t overlook the odds-on profitability likely from short-position, leveraged ETFs in US government bonds.

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