Weakening US Dollar Hedge

[kagame]

RYDEX SER DYNAMIC WEAKENING (RYWBX)

Apparently it performs inverse the dollar x2

Anyone have any of this? Seems like a genius general investments hedge. Commodities only inversely correlate to the dollar so far...

"The investment seeks to provide investment results that will match 200%the performance of the US Dollar index. The fund employs as its investment strategy a program of investing in derivative instruments, such as index swaps, futures contracts and options on securities, and futures contracts.On a day-to-day basis, the fund holds U.S. Government securities or cash equivalents to collateralize these futures and options contracts. It also may enter into repurchase agreements. The fund is a nondiversified enhanced index fund."

from:

RYWBX-MSN

[DcifrThs]

this is trade weighted i presume.

a few countries make up a vast amount of trade w/ the US and i don't know if the yuan is in that index.

if so then it's basically the GBR, EUR, JPN, CAN, AUS, & CHN. i don't know how the weights work out, but this hedge is only ideal for you if your liabilities or views are such that you are sensitive to the trade weighted dollar rather than just one or 2 currencies.

the dollar should be strengthening vs. the Yen but weakening significantly against the Yuan. i'd be bearish the dollar vs. the loonie, pound & euro & aussie & yuan but bullish the dollar vs. the yen. depending on how you want to use this fund, i think it makes the most sense to :

1) not use the enhanced one (tracking error issues & volatility issues)

and, 2) make sure you know what you're hedging and why.

an inverse trade weighted dollar index is probably good if you want an easy way to hedge say the MSCI EAFE (though not exactly). in this sense, the largest traders w/ the US are probably some of the biggest allocations in the MSCI EAFE ex US.

might be an easier way than forward hedging w/ fewer transaction costs but it is far far far less exact and will allow a bunch of the volatility from currency allcoations to foreign equity markets seep to the bttom line of your sharpe ratio.

how are you thinking of using this as a hedge exactly? (i.e. hedge against precisely what?)

Barron

[kagame]

I'm actually not sure its trade weighted. It might just be short dollar in absolute terms. These are some of the questions I have, and I can't find out much.

Why would you want this to be a hedge against a fund of foreign currency/stocks?

I was thinking this could be genius as a hedge (counteracting my "life in dollars") against inflation, declining purchasing power, or perhaps as a way to maintain my relative wealth if I want to move outside the country for an extended period (England would be the likely destination).

With our outrageous debt levels, foreign military entanglements, oil dependence, and entirely fiat currency system...

I guess I just worry that the dollar will eventually be nearly worthless. Sometimes it already feels that no one really makes enough money to support a standard lifestyle here.

[kimchi]

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I was thinking this could be genius as a hedge (counteracting my "life in dollars") against inflation, declining purchasing power, or perhaps as a way to maintain my relative wealth if I want to move outside the country for an extended period (England would be the likely destination).

With our outrageous debt levels, foreign military entanglements, oil dependence, and entirely fiat currency system...


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Thought about gold? Much prettier than a hedged currency.

[Woolygimp]

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With our outrageous debt levels, foreign military entanglements, oil dependence, and entirely fiat currency system...



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Spoken like a true jackass who has no idea what he's talking about.

[DcifrThs]

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I'm actually not sure its trade weighted. It might just be short dollar in absolute terms. These are some of the questions I have, and I can't find out much.

Why would you want this to be a hedge against a fund of foreign currency/stocks?

I was thinking this could be genius as a hedge (counteracting my "life in dollars") against inflation, declining purchasing power, or perhaps as a way to maintain my relative wealth if I want to move outside the country for an extended period (England would be the likely destination).

With our outrageous debt levels, foreign military entanglements, oil dependence, and entirely fiat currency system...

I guess I just worry that the dollar will eventually be nearly worthless. Sometimes it already feels that no one really makes enough money to support a standard lifestyle here.

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you'd want to hedge against foreign stocks in which you invest to eliminate (or severely reduce) the extra volatility that currency risk introduces.

the dollar index has to be weighted somehow. currency is a 2 way street. being short the dollar must mean being long something else. how would they measure the fall of a dollar vs. nothing?

as a result, in order to get any hedge right, you have to know what you want to hedge against. if you want a hedge against realized inflation, buy TIPS. if you want to hedge against the dollar falling vs. another currency, go long the other currency vs. the dollar. if you are afraid of a dollar fall vs. a trade weighted basked (meaning who we trade with, and thus what we import), then going short the trade weighted index is what you want. that is probably the thing you're concerned about: the purchasing power of the dollar.

one thing that has propped up the dollar and financed our massively wide trade deficit is the disproportional desire of asian banks & commodity exporters to save in dollars (to the tune of $1.3 or so trillion). if you believe that faith will decline significantly, then a falling dollar would likely have to result in order to reflect the balance of payments situation we have gotten ourselves into.

Barron

[kimchi]

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if you want a hedge against realized inflation, buy TIPS

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These require the government to adjust their rate to their index which is the CPI.

The problem with CPI is that it's the government's highly understated version of inflation. It excludes food and energy (a large % of people's expenditure). A carton of eggs has outperformed the DJI over the last few years and we know what has happened to the price of oil.

As the number of TIPS outstanding increases, then so does the government's incentive to to reduce their value by fiddling with CPI number in order to continue to understate true inflation.

The bottom line (as I see it) is that TIPS provide a cushion, but not a "protection" against inflation as their acronym suggests.

I think a 12-month moving average of CPI is sometimes used (not sure if it's used for TIPS) which would actually eliminate the volatility caused by food and energy (despite their absense) which effectively provides a double-dildo blow to the unwary TIPS purchaser as they would be linked to trailing (ie lower in an inflationary environment) understated inflationary numbers.

Not sure about that last paragraph though.

[DcifrThs]

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[ QUOTE ]
if you want a hedge against realized inflation, buy TIPS

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These require the government to adjust their rate to their index which is the CPI.

The problem with CPI is that it's the government's highly understated version of inflation. It excludes food and energy (a large % of people's expenditure). A carton of eggs has outperformed the DJI over the last few years and we know what has happened to the price of oil.

As the number of TIPS outstanding increases, then so does the government's incentive to to reduce their value by fiddling with CPI number in order to continue to understate true inflation.

The bottom line (as I see it) is that TIPS provide a cushion, but not a "protection" against inflation as their acronym suggests.

I think a 12-month moving average of CPI is sometimes used (not sure if it's used for TIPS) which would actually eliminate the volatility caused by food and energy (despite their absense) which effectively provides a double-dildo blow to the unwary TIPS purchaser as they would be linked to trailing (ie lower in an inflationary environment) understated inflationary numbers.

Not sure about that last paragraph though.

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the governemnt doesn't "fiddle" with the CPI #. it is a basket of goods excluding food & energy. the basket is meant to represent what the "average" american consumes in a given time period. it is only changed to try to reflect any new info/habbits etc. that affect how the "average" american consumes. these figures are published and looked over for accuracy. any "fiddling" would be detrimental to the other branches of the govt that need that # to be correct (so the incentive for fiddling...i.e. lower coupon payments on TIPS, is way more expensive for other branches of the govt that make policy off of the #...i.e. the federal reserve board)

it isn't a perfect hedge, but far better than nothing and way better than simply buying only a basket of commodities. if you want to hedge specifically against food & enegery, buy a self made basket of oil (or RBOT or whatever it's called Gas), live cattle, live chickens, & wheat/corn. if their prices go up, you make money and then spend that money to buy those things. sux for you though if the prices go down and you lose a ton since they are extremely volatile. maybe they have a de-enhanced index fund that mimics only 50% of the daily price moves of a similar basket outlined above so that a normal person like OP wouldn't be exposed to the massive price swings in their attempt to hedge consumption exposures.

what i meant by "realized" above was basically what you said. you get paid CPI. i am pretty sure it isn't a TTMMA, i.e. just CPIt+1/CPIt*C where t is 6mo for each semi annual payment. i could be wrong here but i'm pretty sure that is how the inflation protection factors into it.

Barron

[gonebroke2]

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any "fiddling" would be detrimental to the other branches of the govt that need that # to be correct (so the incentive for fiddling...i.e. lower coupon payments on TIPS, is way more expensive for other branches of the govt that make policy off of the #...i.e. the federal reserve board)

Barron

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You really think the CPI numbers are legit? They have a huge incentive to understate them because of entitlements like social security and medicare.

[DcifrThs]

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any "fiddling" would be detrimental to the other branches of the govt that need that # to be correct (so the incentive for fiddling...i.e. lower coupon payments on TIPS, is way more expensive for other branches of the govt that make policy off of the #...i.e. the federal reserve board)

Barron

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You really think the CPI numbers are legit? They have a huge incentive to understate them because of entitlements like social security and medicare.

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well i just did some fact finding and it turns out that CPI DOES include food and energy. the fed's favored measure for policy, however, does not. that is an issue that is always debatted (why CORE CPI rather than overall CPI is used for fed policy).

for some reason during this discussion i assumed we meant core and not regular CPI.

TIPS track CPI not core CPI. CPI includes food & energy along w/ housing and home equivalent rents as seen here:

CPI news release & review of methodology from BLS

so actually, TIPS are as good as that gets.

in terms of the govt.'s incentive to understate them, the way the BLS is structured is that its sole mission is to come up w/ and compute labor statistics. they aren't the ones that use the #s to determine social security funding ratios or medicare's funding ratios. that is done in a separate branch of the govt for the exact reason that you're concerned about.

one major factor in economic price stability is the consumer's faith in the central bank's ability to set policy.

that setting of policy is determined by looking at the #s the BLS compiles along w/ a ton of other analysis. if it came out or could be proved that the CPI was being "understated" that would be very detrimental to the faith in the system.

similarly, independent shops immitate CPI and see if they get the same types of #s. the weights are readily available for checking so again i think CPI is about as legit a # as it gets in terms of the methodology used to create it.

your argument is very similar to the RNG debate in online poker where the nay-sayers state that since online cardrooms have so much to gain from increased rake that their incentive to move the #s around to give more people more highly valued cards would overtake the world and thus online poker is not beatable. that argument is usually put forth by losing players as you can imagine.

similarly, your logic of moving CPI #s around seems to stem from a lack of understanding as to how they are computed and what they are used for in addition to who checks them.

hope this clears all that up.

Barron

Excerpt from the above link:

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The CPIs are based on prices of food, clothing, shelter, and fuels,
transportation fares, charges for doctors' and dentists' services, drugs,
and other goods and services that people buy for day-to-day living...In calculating the index, price changes for the various items in each
location are averaged together with weights, which represent their
importance in the spending of the appropriate population group. Local
data are then combined to obtain a U.S. city average.

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