Biggest U.S. Export? Bubbles

FIFO, LIFO & LILO

"Where is the money [created by the U.S.] going? Where the problem's going to be: Asia. You can see asset prices going up, not only in Korea, in Taiwan, in Singapore and in Hong Kong, going up to levels that are incompatible or inconsistent with the economic fundamentals."

--Donald Tsang, Hong Kong executive; "A Dollar Warning From Asia," The Wall Street Journal (11/17/09)

Cheap U.S. money is stimulating the economy, all right.

It's just that the economies being stimulated the most . . . aren't in the U.S.

Rather, they're in places like China, India, and Brazil.

Like flood waters flowing over already saturated land, a tsunami of U.S. dollars is pouring into those economies because . . . that's where the growth is.

A dropping dollar makes this play even more profitable.

ABC's of the Carry Trade

Through the magic of something called "the carry trade," sophisticated investors can borrow depreciating dollars, make a higher return elsewhere, then essentially re-pay less than what they borrowed (that's what depreciation means).

Say it all at once: 'last one into the carry trade pool is a rotten egg!'

The only problem with that is . . . all the splashing.

The carry trade magnifies the downward pressure on the dollar, creating a vicious, bubble-inflating cycle.

Its balloon-inflating effects are most pronounced on the smaller, developing and emerging economies, where capital inflows can "move the dial" more than they would in a bigger economy.
Just think of it as the sovereign equivalent of the stock market, where "mega caps" like the U.S. and China typically are harder to move up -- or down -- than "small" and "micro-cap countries" like Malaysia or Peru.

Also inflating: many of the old bubbles, including worldwide stocks, gold, and other commodities such as oil and silver.

"FIFO and LIFO"

Who are the losers?

For starters, all the casualties of the old bubbles, including residential (and coming soon) commercial real estate, and before that, high tech stocks.

Next come all the risk-averse savers, whose money market yields and interest on savings have vanished.

Most at risk now?

Anyone who's last into any of the new bubbles.

Call them the Last-in-Last-Out's, or "LILO's" (vs. the more connected and favored FIFO's).