“I think the government solution to a problem is usually as bad as the problem and very often makes the problem worse.”
– Milton Friedman
A close friend bought a $1 million condo but he did something very unusual, he borrowed the mortgage loan in Yen instead of dollars. This can be confusing so let’s try to simplify and cut to the chase. Loans from both countries were offered at low favorable interest rates but he believed that the U.S. dollar would move higher relative to the Yen so he borrowed in Yen. Since he lives and works here in the U.S., his daily life is based in dollars. Not only does his home appreciate in terms of dollars, his living is made in dollars and the food he buys is in dollars.
Since he took out that loan, the dollar has appreciated 50% against the Yen. This means that it will take just $500,000 to pay back the one million Yen based mortgage. Good news for my friend as he can, if he wishes, walk down the street to his local bank and refinance his mortgage (but this time based in dollars). However, both he and I believe the dollar is going even higher – for now. So he is sitting tight.
Of course, his decision doesn’t come without risk. The dollar could continue to appreciate or it could decline in value against the Yen. Such are the risks we take.
Here is the main point of today’s OMR:
According to the Bank of International Settlements, non-bank borrowers outside the U.S. have borrowed, in dollars, $9 trillion. This is an increase of $4.5 trillion since the financial crisis and it places that $9 trillion on the wrong side of the dollar bet.
The broad trade-weighted dollar strengthened 12.3% since last June. Tack an extra 12.3% on top of $9 trillion and you can see how the borrower is beginning to get squeezed. I, along with a number of other forecasters, expect the dollar to continue higher. If I’m right, this is going to get a lot worse.
The dollar debt is an example of how the Fed’s tightening will impact the world economy. This is a pressure cooker and the pot is starting to boil.
Founder & CEO CMG
Stephen Blumenthal founded CMG in 1992. He is CEO, Chief Investment Officer and portfolio manager at Capital Management Group, Inc. where he manages equity and tactical investment portfolios. He is a frequent speaker and writer on investment strategies and has been featured in various media sources including the Wall Street Journal, Barron’s, Investor’s Business Daily, Pensions & Investments Magazine, Investment News, RIA Biz and Smart Money. He has been a guest on CNBC, Wall Street Journal Live, and Bloomberg. Mr. Blumenthal is a frequent speaker at industry conferences (NAPFA, IMCA, Index Universe, Opal Financial Group Indexing & ETF Summit and NAAIM) and is author of CMG’s popular investment research commentary. With 30 years of investment management and industry experience, prior to founding CMG, Mr. Blumenthal worked for Merrill Lynch Institutional, Merrill Lynch Retail and Prudential Securities.
Mr. Blumenthal graduated with a Bachelor of Science degree in Accounting from Pennsylvania State University. He is married, has three children and is active in his community coaching youth soccer.