Another Strategy Bites the Dust 9 comments
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Macro Man sure is glad that he finally got on the distribution list for "the memo." Yesterday's memo about the breakdown of correlations and the underperformance of carry and emerging markets proved to be timely; the Illuminati have done their job well over the past 24 hours.
Currency de-leveraging has had a particularly strong impact on EUR/USD; given that the euro was directly or indirectly the beneficiary of speculative flows funded by dollar borrowing for much of the past six years, the unwinding of these trades has been nothing short of spectacular. Macro Man's post-holiday expectation that the USD would range-trade has proven to be spectacularly incorrect; fortunately he did not follow up with any sort of nonsensical vol-selling strategy. Was it really two years ago that he was moaning about the lack of volatility? EUR/USD has fallen 20% in 3 months!
From a long-term perspective, the rally in the dollar has actually been pretty modest; the chart below shows USD/DEM monthly candlesticks since 1980. EUR/USD could sell off quite a bit further and the dollar bear market remain intact. Yet the buck seems to move in seven year cycles, and the current bear seems to be at or past its sell-by date. With the situation in Europe no better than the US -- and one could argue the future newsflow will be worse -- might the current unwind represent the genesis of some sort of deflation-driven dollar bull? (Think JPY in the first half of the 90's.)
In any event, it looks like FX carry is the latest strategy to blow up, following a distinguished line that includes high-yielding structured credit turds, equity long/short, fixed income RV, and energy/commodities. The chart below show the performance of a simple G10 carry basket as of last night - it should lurch down again on today's close.
The real pain, however, is being felt in emerging markets. The Turkish lira has taken a beating, and anecdotal evidence suggests that local corporates are short USD. Latin America looks ugly, as does Eastern Europe. And Asian sovereign CDS blew up last night, including China (owner of the odd $2 trillion or so in cash), which rose 70 bps.
And of course, it wouldn't be any sort of crisis if Argentina didn't default, a development that now looks imminent. So after FX carry and the emerging markets miracle have been taken behind the woodshed for a beating, Macro Man is left to wonder: where are the remaining sacred cows to be taken to the abattoir, the pink flamingos that have yet to be hunted? Because Macro Man has little doubt that another strategy will, like those before it, bite the dust.
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This article has 9 comments:
Long DGP.
1. Dollar currency cycle (right, 7 years), combined with commodity bubble popped. I outlined reasons for being bullish on dollar here: muddlinginvestor.blogs....
2. World crisis, both political and economical. Bullish for dollar, outlined here: muddlinginvestor.blogs...
The only currency stronger than dollar right now is yen. I have no idea why, probably because of unwinding of yen carry trades. Or maybe because Japan Central Bank stopped dumping yen for dollar.
Disclosure: Long UUP.
When Goldman paper has 11% yields, anyone going to take Argentina's instead at the same figure?
Capital is scarce and it is on strike as to taking any risks, until authorities stop catering to populist sentiment by destroying capitalists wholesale. That has happened in the west at the peaks of policy, if it still hasn't filtered down to the rhetoric of pols yet (who are still talking as though they want to barbacue bankers and eat them raw, rather than help them, even as the central banks do help them).
As for why Japan is even stronger, Japan has the highest savings rate in the world, and it respects and protects capital. Capital is going to earn higher real returns in the future - and the world that wants it otherwise is going to go straight to hell until it accepts that. That has to benefit the greatest savers on the planet, and the best places to invest capital on the planet, which are respectively Japan and the US.
The end of the world traders wanted to pretend that the developed world was history, that the Brics and commodity producers would inherit the earth, that the hard currencies were waste paper and only real assets worth anything. But they were wrong about all of it and it is they who blew out, as soon as they caused enough damage to the financial system they actually depend on.
If the best banks in New York can't borrow money, nobody will be allowed to, anywhere.
If you want to hear a big joke... Moody's gave this Panama Canal expansion project one of their glowing ratings (as usual). From what I hear, on the ground, the project is one ditch full of government corruption. But what the hell, right Moody's -- go out and put a halo on their head.
U.S. Corporations=Joke+Farc...
Rating Agencies=Joke+Farce+Fr...
=Investor without shirt
You know things are REALLY BAD when you see the puppet of the market system, Warren Buffett, begging people to buy stocks. AFTER YOU WARREN BUFFETT! I'll tell you what Warren, you do what Paulson tells you to do and I'll wait a few years and I'll see how you do... As I've said before, Warren, no cuts in the soup line!
This sucker is going down and we can blame human greed coupled with zero ethics.
Secondary reasons for the dollar's climb is that there's no good replacement for dollar as world's trusted storage and common trading currency. What's the world's factories, oil fields, etc going to use after selling? With less buying by the American Consumer, the world's supply of dollar is drying up, and thus reflected by the climb in value.
I would hesitate to assume that this will last though. There's talk about rewriting Bretton Woods 2. There's discussion that perhaps a basket of currency will be used instead. If a suitable solution is found, and If dollar is no longer the world's currency, then USD will drop faster than it has risen so far.
If you owe a billion to the world's economy, you have a problem.
If you owe a few trillion (or hundreds of trillion in this case) to the world's economy, they have a problem.
USA is looking bright simply because it screwed up others.
Twisted? Yes, will they accept a second (future) reaming? This part is what're waiting to see what world govt decides.
Yes. Consider this: The old saying... "Payback. It's a mother f*****."
What make you think that countries can't, or won't give a little payback for all of the bad paper we handed them?
I think they'll get mad and get even.
I think the stronger dollar is going to cause major problems for a host of companies, particularly the big-cap tech names whose earnings have been boosted significantly by the multi-year decline in the USD. The tailwind is now a headwind, so I'd be careful in getting excited about these "cheap" stocks, especially when the economy is slowing.