Hugh Hendry has been making the rounds

I really like Hugh Hendry. For starters, he brings a historical context that is deep and broad. Then, he's OK with putting himself out there by making bold contrarian calls. Lastly, he doesn't pander to investors or the media.Viewing the remainder of this article requires a Subscription

Did you hear the one …

A Frenchman, a German, and a Spaniard walk into a conference room... What happens then would be funny if it wasn't so tragic.Viewing the remainder of this article requires a Subscription

Remember when the USD was dying?

Remember when the USD was gasping for its last breath? Remember when Russia decided to diversify its foreign cash holdings along with China and bought up more euros? Remember . .Viewing the remainder of this article requires a Subscription

I hate to bring this up again…

Over the past two years I've brought up 1987 periodically as just a mere possibility that has to be factored. I don't want to think back to those days of currency wars, political grandstanding, and crazy volatility, but alas, every time I try to clear my mind . . .Viewing the remainder of this article requires a Subscription

Bank Runs Are Deflationary First, Inflationary Second

It is Thanksgiving, so for most Americans an opportunity to spend time with family, go crazy, and use the excuse to purchase some frivolous electronics at half of what our neighbors paid last month - a truly feel-good holiday.Viewing the remainder of this article requires a Subscription

Berlusconi is having a bad week

I assume Berlusconi is having some sleeping problems this week as his government falls; his only consolation is that prognosticators who predicted Italian bond yields would fall when he's gone have turned out to be completely mistaken. The problem with Italy isn't Berlusconi . . . it's Italy.Viewing the remainder of this article requires a Subscription

The Big Squeeze

We started off the week with a big, low volume squeeze - but that's not news anymore. The intraday moves and even the successive day swings have been violent  and the numbers being reported by different mutual funds and hedge funds attest to the difficulty of consistent returns in such tumult.Viewing the remainder of this article requires a Subscription

Euro and European equities aren’t the same

As the euro continues to disappoint the market, or just live up to my negative expectations, European equities are following the erratic behavior, and for good reason.Viewing the remainder of this article requires a Subscription

Increased Euro Short

A quick update for subscribers - we'll have an updated portfolio review later this week, but I increased my short euro exposure.

Tags: currency trading, Euro, USD

Currency | | August 31, 2011 2:40 pm | Comments (0)

It’s the End of The Euro as We Know It…And I Feel Fine

For a brief moment, the markets believed. For a brief moment, the Greek problem was solved. But then reality set it. Greece’s fiscal austerity and monetary headache is going nowhere and German’s are getting fed up with supporting their neighbors.Viewing the remainder of this article requires a Subscription

G3 Currencies

G3 Currencies I’ll say it: G3 currencies are not making sense. Forget about irrational, or momentum, or fundamental, or whatever. There appears to be almost no underlying logic in some of the recent moves exhibited by the major currencies.Viewing the remainder of this article requires a Subscription

Right and wrong…

…or yen and euro. Long time readers know that I have maintained short exposure to both the yen and euro starting in November of 2009 – pretty long by currency traders perspective. I am staying with both positions, but one has been more right than the other, I’m just not sure why.

After toughing a 77 handle right after the tsunami, the yen has gotten progressively weaker and is now trading with an 85 handle. I get that, and I also maintain that it is the most vulnerable developed market currency at this point in time, so I wouldn’t be surprised if we see a 100 handle soon. Easy enough to hold on.

The euro, on the other hand, is more perplexing. We shorted it at 1.5, held on as it went to 1.2, and now are watching it break back up through 1.43. At the same time, Portugal is falling apart, Greece is already undone, and Ireland is shaving all the debt holders. More importantly, Spain is facing 20+% unemployment and about to face a major financial crisis of its own. Trichet has commented that the EU will focus on inflation pressures, signaling that they might raise rates. Two things can happen, rates will rise and the peripheral countries will fail bringing about the breakup of the euro, or Trichet will fall under the pressure and ease. Either way, the markets should be discounting the fact that in both scenarios the euro is in bad shape.

Some have stated that the euro is an FX vent as investors flee the yen. OK, but that is a two-sided statement. I understand the “flee the yen” side, but why flee to the euro? Almost any other currency seems in better shape, including multiple emerging markets currencies. See, for example CEW (no position):

Yet, they’re not outperforming the euro recently. Perplexing, to say the least.

Relevant ETFs: FXY, YCS, FXE, EUO, CEW

I don’t want to write about gold

I don’t want to write about gold and silver, but I just can’t help myself. Gold is at all-time highs and silver is at all-time ex-Hunt brothers highs. I don’t want to write about them, first because I already have exposure, second, because I’ve had exposure, increased exposure, and am not changing exposure. Lastly, I write about precious metals often enough that it feels as if there is nothing new to say. And there isn’t. In the grand scheme, gold and silver have been the longest consistently-used currencies in the world and all that there is to say about them has probably been said already at some point in the past. So I will only add a little tidbit here: what is the message implied by the rise in precious metals? Is inflation getting worse? Is this the end of fiat currencies? Are other commodities going to follow and reach new highs? If so, why haven’t they done so until now?

There is nothing new in these questions. The Roman Empire faced hyperinflation as the bureaucratic machine to manage far flung regions buckled under its own weight and successive emperors had to devalue the currency, leading to massive food inflation. On the flip side, the Great Depression led to such widespread fear that cash AND gold kept their value, while the price of almost everything else went down. Of course there were differences, so it’s not a one-to-one comparison, but rather just an acknowledgment that the questions we face now are not new.

I have written before that gold will peak on fear, not greed. The next step is to try to figure out fear of what. Is it fear of the end of fiat currencies or fear of the destruction of value in other asset classes? Certainly, at some point, even gold bugs will have to admit that the S&P priced in gold can become cheap:

I’m not saying we’re there (I’m long gold, short equities), but that the day will come at some point. This entry is only to serve as a thinking point for what will the peak in gold look like. Will equities bottom out as gold peak? Or will gold and equities move in tandem against the USD? I’m not sure and a lot of the traditional analytical tools we have at our disposal are limited in their capacities to anticipate the unimagined. So we’re left with sentiment and gut. For now, my bias is that equity markets are the overpriced assets, even against fiat currencies. However, I’m not so confident that I’m adding to my short exposure. Limiting position size can be just as important as the position itself in these environments.

Relevant ETFs: GLD, SH, SPY, UUP, SLV

Always looking for the ugly duckling

And right now, there’s one asset that looks pretty ugly…

What if I told you there was an asset that was sitting at 52-week lows. It has some negative fundamentals, and a few relative positives, but no foreseeable absolute positives. Long term, this asset has very little cashflows, is difficult to value, and everyone thinks is worthless. It has the potential to become a huge value trap. It has a brand name which has lost global appeal. It is vulnerable to macroeconomic whims of politicians. I can go on and on about the negatives and positives, but will say one final bit: almost everyone has some long exposure to it already and almost everyone believes that it will go down in the near future.

The asset, of course is the US dollar:

While I don’t know that this is the absolute low for the dollar index, I do have to wonder: how much of the bad news is already priced in? How much of the inflation fears are already priced in? How much more strength can the yen and euro (which together account for around 70% of the index) exhibit? I’m already short yen and euro in various vehicles, and I have to admit that I thought dollar strength would become evident as geopolitical turmoil generated a flight to safety mentality. The fact that this did NOT happen leads me to believe that either the US dollar is no longer the safe haven recipient or investors did not actually seek safe haven storehouses at all. The latter is hard to argue, since gold, the other safe have stand-by, continues to approach all-time highs.

Maybe that’s the end of the story. Investors have flocked to gold as the de facto reserve currency and are expressing their fear through the yellow metal rather than the greenback.

The flip side of that is that the dollar is still just a fiat currency and as it has gotten weaker, the euro and yen got stronger, presumably on weaker fundamentals and weaker demographic and tax bases. So I’m not that quick to draw the above conclusion.  There is nothing for me to do with this view right now, but – in line with our thoughts on everything being relative – we can wait and watch, because I believe there is an opportunity forming.

Relevant ETFs: UUP, FXY, YCS, FXE, EUO, GLD

Geopolitical turmoil

The Middle East is an informational black hole. Is Libya calmer or not? Is Bahrain flaring up? Are the riots in Saudi Arabia under control? Where’s Iran? All of the unknowns are pushing oil higher, and the threat of supply disruptions are becoming all too real, even as domestic inventories rise.

In the meantime, China currency talk is getting louder as leaders try to push for yuan reserve currency status. Why? At this point, I’m inclined to believe that the Chinese leadership might be thankful for unanswered prayers. With social unrest increasing, the yuan getting revalued higher may increase any slowdown, bring the real estate bubble to its knees, and actually increase social unrest in the short term. True, inflation might be mitigated, but it’s all about the speed and unintended consequences, 2 things that I’m not sure the government will be able to control.

Lastly, I can’t help but be amazed at the big, pink elephant in the room that is being totally ignored: the euro is unsustainable, yet it’s getting stronger!?!? Can anyone say “Ireland”? Great. Now that we know that Irish bondholders are getting a haircut, what about the rest of the complex? Spain is about to go back 30 years in terms of development. With already high unemployment and a real estate bubble that is not being priced on anyone’s balance sheet, Spain is the big risk for the euro now, but no one is talking about it. Instead, the euro is getting some relief bid that it’s not collapsing. Well, it should…and it will – at least in its current form.