Why I Shorted the US Dollar

In this brief note, I list 10 bullet points why I took a short position in the US Dollar as a hedge of dollar exposed assets. This of course is not investment advice, but rather just me sharing my thoughts and color on the market.

1. The U.S. is facing potential for significant violent revolt in the presidential election (not something seen before) and now just 19 days away.
2. The market is aware of this but has essentially dismissed it as Biden’s lead in the polls grows wider -- the thinking is that a landslide victory dramatically reduces the chance for legal challenge (like when Bush defeated Gore in 2000 by a narrow margin of only 537 votes in Florida.)
3. This is possible, however there is also the possibility a landslide more quickly accelerates into violence, as it would be the only option left. Remember President Trump has said the only way he loses this election if it’s rigged.
4. In the face of significant violent revolt in the U.S., the US dollar would lose its status as the safe haven asset, being backed by the sovereign at the epicenter of the crisis.
5. The Fed’s response to pretty much anything these days is to print more dollars and further liquify the banks (i.e. the old saying “when you’re a hammer, everything is a nail.”) However with more US dollars in the system it will only exacerbate the sell-off.
6. Typically a sharp US dollar sell-off could be expected to be met with resistance due to its use in foreign trade -- however with the US lagging other industrialized nations in recovering from the Covid virus the US trade deficit reached its highest level in 14 years in August, further suppressing economic demand for dollars.
7. Now think what happens to US financial markets if equity markets sell-off by 10% (as a noted economist in a private call mentioned this week under such a scenario), combined with a sharp sell-off in US dollars: a double-hit to assets with a Fed not oriented to manage thru the crisis.
8. My hedge of choice was the DB US Dollar Index, a basket of 6 major currencies - euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc.
9. I had also considered gold and bitcoin, but in my opinion the two are behaving too much like “risk-on” assets these days to be considered reliable hedges. (I am however a HODLer of both).
10. I also think the DB US Dollar Index will have the prospective benefit of an asymmetric return profile -- i.e. if the worst happens (which I’ll still say is unlikely but significant enough to pre-emptively position for) I see a sharp sell-off in the Index (rally in short position); however in the hoped-for event of no material violence, I wouldn’t expect this Index to show much (if any) price movement to the upside -- remember there will be another stimulus package in the US in the coming months one way or the other, which will again add trillions of new dollars to the mix.