Ray Hendon

The G-20 Sings a Song of Sixpence

I suggest you do a little more research on J.M. Keynes, including his role at the Bretton Woods Conference, and his place in establishing macro-economic theory. If you look at any elementary economic text book for the last forty years, Keynes' theories and policy recommendations have dominated about half the volume.

I also reject any bias because I use to teach economics and finance in college. No one deserves to be assigned either a liberal or conservative label just because they chose that profession. Economic theory does not come in flavors of liberal or conservative. It comes as a study in trade-offs between competing goals with limited resources.

If you want some current relevance of Keynes, study his liquidity trap theory, which thoroughly explains our current situation of trying to use monetary policy to get out of a serious economic downturn.

Lastly, I did not expect any great things from the meeting of this week. I suggest you re-read what I wrote. I think the next meeting, in 100 days or so will be the more meaty of the two. All participants need some tome to study their options, and there will be some fundamental differences about the role of regulation, size of stimulus and IMF participation.

I also disagree with your assessment of the IMF over the years. Check out the hundreds of countries what have borrowed from the IMF and taken their advice on how to straighten out their economies. I think once you are more familiar with the facts of the situation, you will draw a different conclusion.

Everyone of good will wants the situation to get better. I have no particular biases that cannot be broken if it would help. I am not sure you understand the seriousness of the crisis we face. The wheels have come of the world's economies. Major stuff is needed to put them back on. Clinging to ignorance and prejudice will not do the job.

Also, to assign to Keynes the problems the UK has had since WWII is rather simplistic and, simply, wrong. He was a private economist and currency trader. The British Empire was at the end of it life because of a host of factors, none of which were under the power of J.M Keynes.

Best wishes,

Ray

The G-20 Sings a Song of Sixpence

The major contributors to an expanded IMF fund would be Europe, America, Japan and Saudia Arabia. All these nations have good supplies of foreign reserves, and could make contributions in the hundreds of billions of dollars if needed.

I agree with you that the Bush Administration has used the IMF and the World Bank as dumping grounds for washed up hacks. But it hasn't always been that way, and it will not be in the future, at least is the G-20 members gave their way. Also, some of the past Administrations have actually put good people in these positions.

Best Wishes,

Ray

Opportunities for Currency Investors Amid Market Turmoil

I do not expect the dollar to weaken in a long-term sense. It has spent the last seven years doing that, and I believe it has weakened past the point where it was reasonably valued.

You seem to be taking a narrow point of view about the dollar, looking at it from your American perspective. But the demand for dollars is truely world wide, and all over the world, the dollar is still a sought after currency because it can be used to purchase what America sells or what other countries sell and will accept dollars for. America produces over 35% of the world's GDP, and people want what we sell, whether computers, software, airplances or stocks and bonds.

Nor is the bailout relevant to the dollar supply world wide. The bailout is a mere trading of assets. We sell debt and trade the proceeds of that debt for other debt. We may win or lose on the trade, but this is not the same as pumping raw money into the bankings system. We are buying assets that will, in the long run, be quite valuable. Even if there are mortgage defaults, the underlying property can be re-mortgaged to more qualified buyers.

Also, things may be bad here, but they are not as bad as elsewhere, at least for many places. Europe is further into a decline than we are, and all of developing Asia is hurting. With the decreasing supply of world dollars eminating from reduced foreign purchases by Americans, there is even more need for dollars to satisfy world liquidity needs. No other currency can take its place, at least for now. And, I don't think there will be a viable competitor for its place in world finance for some time to come.

In this sense, then, the dollar is not being over produced. It is now or will be soon, actually undersupplied as the world's clearing currency. I see the demand for it going up rather than falling, because all other currencies are now taking their turn being hammered.

You may be right. I confess I don't know what will happen. But I'm still long on the dollar and will be until the fundamental value gets out of line. It is still out of line on the down side for now. And it will probably take a long time for it to get into an overvalued position. At least that is my take on it.

Best wishes,

Ray

Opportunities for Currency Investors Amid Market Turmoil

Joe: This is a very real possibility. As of today, not only Japan but the G7 finance ministers also, are talking about selling yen in order to keep it from getting too higy. I put some references in my latest blog about this development it you'd care to check it out.

Best wishes,

Ray

Currency ETFs: Consider the Commissions

John: My experience with mexican peso, using CitiTrade was different than yours. The spread was over 100 pips--I was selling the us/mx short. And, it took hours after the order was made to get it executed.

Also, there is the rather important issue of leverage. The investors I work with would be lost handling the complexities of leverage and shorting pairs. For the type of investing they do with currencies, ETFs are ok.

I don't think traders would ever buy ETFs. It's not in their interest--I agree with you on that. But I like them for the type of investing I do. Bundles for diversity, for example.

Best wishes to you , too. And make a bundle.

Ray

Currency ETFs: Consider the Commissions

I can think of several important reasons to favor the ETF or ETN format to that of a currency broker. First, an exchange traded product does not require the buyer to short a currency. While you are using dollars, for example, you don't have to short them. Shorting half of a pair doubles the risk for an investor, and for the carry trade, the buyer prefers that the two currencies remain constant so the interest earnings can be fully enjoyed.

Secondly, on pairs that are not the big six, the spread with a broker is huge. Try buying the Mexican peso (which you have to buy paired with a shorted dollar) from a broker. The spreads are over a hundred times that of the $/Euro. Also, most of the forex trading platforms I checked out do not have more than 30 or 40 pairs, and fully a third of the pairs are denominated in either dollars, euros or yen.

Thirdly, if one opens a forex account the account must be funded. That means selling some of your other assets and paying taxes on the gains--which may be inconvenient at the time. This is especially bothersome if you have your money in a tax protected account. In that case, you must jump through a number of hoops just to get your hands on your money, and you may lose some of the principle because of early withdrawal.

I am not putting down forex trading--although I do not engage in it myself. I am advocating a less frenetic way of investing in currencies, either carry trade or value investing, without having to devote your entire life to learning forex trading--and you must admit it is a lot to learn (assuming you want to be successful--and even then, the odds are against you).

Finally, you can get various bundles of currencies in exchange traded products, which would be difficult to duplicate in a forex account. Diversity is much easier to achieve in the ETF, ETN products. There are some exceptions, I see lately, coming from the forex brokers. I am glad to see them begin offering bundles or other strategy accounts that make forex investing more accessible to ordinary investors.

For traders I can see the advantage of a forex account. But for a more casual investor, who still wants to participate in the benefits that currencies bring to a portfolio, I think an exchange traded product is a good way to proceed. Of course, this is just an opinion, and I may be entirely wrong.

Best wishes,

Ray

Currency ETFs: Consider the Commissions

For accounts that allow free ETF trades, see: seekingalpha.com/artic...

Currencies: Dead Cats and Yapping Dogs

Muddling Investor: You have the right idea to dig into your own research. I am sticking with Mexico and Brazil, but I believe both these currencies may be in for a rough patch ahead. Both countries have slid into trade deficits, and, in my view, Brazil is likely to allow the real to slide vs. the dollar in order to help it correct its deficit. This will probably mean giving up some points of its gain over the last few years. But, I don't think the carry trade investor will lose because the interest rate there is so high.

elwin45: I must say the economic scenario you lay out is beyond my ability to follow. I don't know what world you are being real about, but it isn't the one I live in. Generally, an increased supply of a currency, such as U.S trourist in China spending for motels, food and taxis, will put downward pressure on their currency--not upward. And, in my world, nations holding bad debt denominated in dollars will not increase their purchases of dollars because of it. I actually don't see much relationship between those two items, other than a tendency to dump the debt and recycle the proceeds into other investments--assuming something is left to recycle. Whether the recycled purchases are in dollars or not will depend on the interest spreads and currency spreads at the time. I'll give you credit for original thinking, but I just don't follow it. Good luck.

ikkyu: I always enjoy your perspective, and I appreciate your comments. As far as interest being the only attraction of the carry trade, I think you are speaking of motive, which is highly personal, and I am speaking of a strategy. I tend to be somewhat of a purist when dealing with strategies and theories, and try to stay focused on the driving force behind it. But, you are correct that holding currency pairs involves risks, and they may be substantial, in that there is likely to be some appreciation/depreciat... between them. So no carry trader can ignore the prospects of having a profit or loss from the transaction. In fact, if there is a big interest rate differential between two currencies, that is reason enough to expect there to be some change in their currency relationships. The carry trade is a temporary opportunity that requires an exit strategy to be successful.

As far as JEM and DBV being correlated, that may prove to be true over some time period, but I think that the developed economices and emerging markets do follow a different drummer. So, I don't look for a strong sympathy between them. But, I'll keep an eye on this possibility.

Best wishes,

Ray

Currencies: Dead Cats and Yapping Dogs

surgcare: I consider a currency strong if it is going up or at least holding its own against other majors. I consider it weak if it cannot hold its own, as the dollar did not do for the last sever or so years. I feel the dollar is undervalued now, not because of any great fiscal restraint or wisdom coming from our political learers, but simply on the what you get when you pay for something in America with most any other currency. It has been my experience that currencies almost always overshoot the mark and become under or over valued briefly before a correction set in. I think the dollar is there now. But, of course, I may be well off the mark on this estimation.

As far as Rome, I guess we, and millions of others could discuss the causes of Rome's fall until the end of time. From my limited knowledge of its history, I think Rome was ultimately a moral failure: it never rose above slavery, and it lost the support of the general poplulation over the course of centuries of warfare. In the end, it seems, there was no one left to defend it from more aggressive peoples clammoring to take it.

Thanks for the comments.

droskoph, thanks for the compliment. In reading it again, today, I feel I could have said about the same thing with many fewer words, but I almost always feel that way when its over. I wasn't targeting any one in particular about the Rome comments. It's a popular thing to do.

Best wishes,

Ray

Carrying the Dollar Upstream

Brian, thanks for the comments. Your idea may have merit, but I can see one downside. As long as interest rates go down with the currency, your plan would be great. But, if interest rates are going up while the currency is depreciating, then you have the worst of both worlds. Remember that the price change in a bond is equal to its average duration times the negative of the price change. So, 3% rise in interest rates would be 60% drop in value of the bond if it was a twenty year average duration. This would devastate investors of the currency.

But, there may be some optimal mix of short and intermediate term bonds that could be held that would cut the worst losses and still make a good positive in the cases when interest rates were falling.

I hope Mr. El-Asner reads your commets--maybe it will give him a good idea.

Best Wishes,

Ray

Finding Your Comfort Zone with Currency Investing

Hi, Les,
I am not aware of much research on currency ETFs. They are probably too new to attract much attention from analysts. However, even if they were I would be skeptical of their opinions. I'm equally skeptical of my own. No one can do much of a reliable prediction in this type of market, in my opinion. Things can turn on a dime at the slightest quiver of a wind from any direction.

I have read a book on trading currencies, and I thought it was fairly good. Remember, all we have are opinions, and currency trading (vs. investing) is not necessairly a teachable subject. The book I read is : Getting Started in Currency Trading by Michael Duane Archer. It is probably out of print, but I found a copy at Amazon. Also, there are a couple of authors who contribute to Seeking Alpha. Chen and Lieu (if my spelling is correct) are two you might check on.

I would encourage you to approach this subject with the greatest caution, and consider, instead, currency investing--something like the carry trade. Trading is fast paced and will eat you up fast if you are not exceptionally able to cope with it. Few are!

Good luck.

Ray0

Finding Your Comfort Zone with Currency Investing

I haven't been following CNY, since I detest most ETNs, and your report reaffirms my view on this instrument. I believe CYN is one of the ETNs that doesn't pay dividends, so the interest income, if any (and the Chinese Yuan is the last place I would go to earn interest) you will see only to the extent their forward contracts include any such accumulation. Apparently they are not. The reason for this, I believe, is that China pays less than 1% on their foreign deposits, so that precludes leaving any money there. But, even worse,the yuan is mostly traded through forward contracts which the providers "hope" will include some interest earnings. But, you can't prove that by me--especially with most ETNs.

Also, even Wisdom Tree, whose yuan fund I like more than Van Eck's, only pays dividends on an annual basis--if I recall this correctly. China is not a good place to play the carry trade.

I thank you for your post. Our readers need to know how these differences will affect them and their investments.

Best wishes,

Ray

Finding Your Comfort Zone with Currency Investing

For ETFs the providers list their assets under management on a daily basis. For ETNs they list the indicative value, which is the last price per share times the number of shares outstanding.

Best wishes,

Ray

Currency Counter-Cyclicality

elobrate what?

The Burden of the Carry Trade

Hi, Mark

I don't know your situation, but as a general idea I like the ETFs of Rydex and Wisdom Tree. The specific ones to buy will depend on the strategy you wish to follow. The carry trade options are limited to about five, and a value strategy is even more limited. I have had good success with both the FXM and BZF funds, but I also like Australia (FXA) as a value play and as a carry trade prospect. China (CYB)) is probably the best value play, in my view, but CYB doesn't hold the yuan, it buys forward contracts, and the interest earnings are unattractive.

For strategy funds, I prefer DBV over ICI simply because I prefer the Deutsche Bank Index over the Morgan Stanley Index--but I have no way of knowing which would be better over the years. Right now, DBV has outperformed ICI by a small margin, but both are young funds.

I have also read of strong recommendations on the Swiss Franc (FXF), but I would encourage you to do some research on this currency--it has a long record of good stability and a haven in the storm type of play, but I don't know what to expect of it as a growth prospect.

I am a long term investor, so I don't look for fast turnover. You may be of a different temperment, so I can't give you advice or opinion of much value.

Good luck.

Ray