Fund Manager Christian Broda Clashes With US Dollar Bears

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Will the U.S. dollar remain the primary world currency of choice, as University of Chicago academic and hedge fund manager Christian Broda believes?  Or is the U.S. dollar in danger of losing its status as the world reserve currency of choice to a new “super currency” – and with it the world’s economic leader could say goodbye to “exorbitant” financial privileges to rack up historic high government debt levels and engage in never before seen quantitative easing experimentation?

Standing in the balance of this debate is the economic future of a nation at a crossroads.

Christian broda

“There’s a dollar paradox,” said Eswar S. Prasad, a Cornell economics professor, senior fellow at the Brookings Institution and author of the new book “The Dollar Trap: How the U.S. Dollar Tightened Its Grip on Global Finance.”

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“You might think that after the global financial crisis — after the world experienced so much financial turmoil because of U.S. policy actions — that the dollar would be losing some of its importance. But the truth is the opposite of that,” he said, championing the beliefs of Christian Broda. “We’re seeing this today as emerging markets run into trouble. It’s just making the dollar stronger.”

Many have predicted fall of dollar

Prasad argues it will be difficult to unseat the dollar-centric system.  He sits in company with traditionalists that point to a history littered with those who have inaccurately predicted for the U.S. greenback’s downfall.

When quantitative easing began, the economic discussion was filled with talk of a collapsing U.S. dollar, yet academic / hedge fund hybrid Christian Broda, a professor at the University of Chicago and managing director at Duquesne Capital Management, didn’t buy it.  Author of numerous academic papers, in 2009 Christian Broda published a white paper with Ethan Harris that speculated market forces would keep inflation low for a long period, a notion that has come to pass as inflation has remained under their prediction of 5% for the past 4 years.

With challenges to petrodollar trade and rapidly expanding U.S. government debt, trouble ahead

While dollar bulls like Eswar Prasad and Christian Broda paint a picture of US world currency domination, talk among certain hedge fund managers, cutting edge economists and market watchers say the U.S. needs to forget its sense of supreme divinity, a notion of invincible entitlement, and grasp the reality of spiraling government debt, much of which is unaccounted for, and a weakening petrodollar alliance that could reshape the world order.  The result could be a U.S. dollar not worth much more than the paper it’s printed on; a piece of paper backed by a hedge fund known as the U.S. Federal Reserve, a private organization with a multi-trillion dollar long bond balance sheet at a time when the value of bonds could plummet in a rising interest rate environment.

In his coming book, “The Death of Money,” economist and bestselling author James Rickards points out “the next financial collapse will resemble nothing in history,” nothing that the international monetary system has collapsed three times in the past hundred years, in 1914, 1939, and 1971.  And, he notes, each collapse was followed by a period of tumult: war, civil unrest, or significant damage to the stability of the global economy.  He is not alone in his skepticism.

A basket of currencies

The World Bank’s former chief economist, Justin Yifu Lin, recently made comments that rattled the world economic community when he called for replacing the U.S. dollar with a single global currency, citing a more stable global financial system will be the result.

“The dominance of the greenback is the root cause of global financial and economic crises,” Lin said. “The solution to this is to replace the national currency with a global currency.”  Lin, now a professor at Peking University and advisor to the Chinese government, advocates a basket of major reserve currencies.

The concept of a basket of currencies proposed by Lin – which includes the dollar, euro, yen and pound sterling – is not new.  Joseph Stiglitz, a 2001 Nobel Prize winner, advocated for the concept with the goal to reduce worldwide volatility – a concept rejected by Prasad and Broda as well as well.

Christian Broda: Remain in U.S. denoted investments

While many market observers note with trepidation the Fed’s unwinding of quantitative easing, Christian Broda said he thinks investors should remain in dollar detonated investments.

“Now that the Fed may actually exit, the natural conclusion is that the dollar should strengthen even further,” Broda said. “Japan is still doing QE, Europe is opening that possibility in recent weeks. It seems wise to keep your investment in the US, and think twice about following the conventional wisdom that emerging markets is the place to put your money.”

Broda is also supportive of the Bank of Japan (BoJ).  Back in 2004, amidst the dire warnings of Japan’s fiscal collapse, Christian Broda, along with Columbia University’s David Weinstein, offered a far more hopeful analysis of Japan’s future than was conventional at the time.

“That was based on fundamentals that were not well understood at the time, and some issues with differences in the way Japan accounts for its debts relative to international practices. But 10 years later, with a lot more debt, it is harder to make the same predictions we did back then,” Christian Broda said. “We are in uncharted territory now. And it is hard to say that we are at levels where the bond market should not care about the current fiscal issues. But given the size and credibility of the BoJ’s commitment it is hard for anyone to be on the other side of the BoJ’s QE. The real test will be if real rates can remain in negative territory if and when inflation settles at higher levels for a long period of time. We don’t yet know if that will happen. We should keep a very close eye on Japan, because just like in their pioneering role with QE in the 90s, they will be highly informative of the policy debates in the west in 10 years.”

Zero Hedge world reserve currency of choice

The reserve currency of choice has never been held by one country forever (see chart above. Source: Zerohedge.com).  As the petrodollar trade teeters along with volatility in the Mideast, and forces around the world conspire to replace the U.S. dollar as the chosen single currency in which to trade, understanding the key factors to watch for a potential unraveling could be the difference between success or failure in investing. Christian Broda, however, advises investors to keep the faith in the dollar, predicting it will endure.

Christian Broda is also supportive of the Bank of Japan (BoJ).  Back in 2004, amidst the dire warnings of Japan’s fiscal collapse, Christian Broda, along with Columbia University’s David Weinstein, offered a far more hopeful analysis of Japan’s future than was conventional at the time.

“That was based on fundamentals that were not well understood at the time, and some issues with differences in the way Japan accounts for its debts relative to international practices. But 10 years later, with a lot more debt, it is harder to make the same predictions we did back then,” Broda said. “We are in uncharted territory now. And it is hard to say that we are at levels where the bond market should not care about the current fiscal issues. But given the size and credibility of the BoJ’s commitment it is hard for anyone to be on the other side of the BoJ’s QE. The real test will be if real rates can remain in negative territory if and when inflation settles at higher levels for a long period of time. We don’t yet know if that will happen. We should keep a very close eye on Japan, because just like in their pioneering role with QE in the 90s, they will be highly informative of the policy debates in the west in 10 years.” 

 

 

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com