A word on portfolio effects of the US dollar

Something important is being widely overlooked to date in the asset declines of 2015. Foreigner investors that held US assets (stocks, bonds, real estate) have been shielded from losses to a large extent to date by the appreciation in the U$ currency.

In other words, although many US assets lost value in 2015, because the U$ appreciated as against most foreign currencies, many foreign holders noted net gains and not losses to date on US assets. For example, Canadians who held the S&P 500 or funds and ETFs based on it, saw those positions rise in C$ value in 2015 even as the S&P lost value. (Those holders would have made higher C$ gains with less risk just holding the currency and not the falling assets, but few pay attention to this).

The bottom line is that the masking effect of the rising U$ to date has prevented many from selling what would otherwise be losing positions in their portfolios. But once the U$ rise slows or begins to reverse however, the positive portfolio effect will subside. Then as US assets decline or even stay flat amid a falling U$, people will suddenly notice capital losses. At that point foreigners who have bought high and stayed too late in the cycle will look to bail out all at once. That is when the bear will have its usual maul of complacent capital, and will set up buying opportunities for the few who have stayed on guard and prepared for it in advance.

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