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Greetings! I am a professional investor, with substantial experience investing in equities and distressed debt in a hedge fund capacity.
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  • The Race to Devalue Your Currency - 6/1/10 0 comments
    Jun 20, 2010 1:42 PM

    On Tuesday 1st June 2010, @hedgefundinvest said:

    The race to devalue your currency
    Been talking to fellow buyside individuals, and the consensus is that the world is bound by unsustainable debt. (Believe it or not, there are those that may disagree on this point, but I digress.)

    What's a country to do when its government and people are heavily indebted? When exports are shrinking? Print more money -- weaken the value of debt (vs other currencies), and shift the earning power to future income streams by devaluing everything now.

    The U.S. did this (sort of) not too long ago, post 2008. Europe is doing it now. China will have to find a way to keep up if it is to keep its export machine on. It becomes a race to debase.

    While this is hardly a new theory, it brings up some interesting game theory. Who moves next? By how much? How do they do it?

    Invariably, there are losers in this. Who loses? Anyone who holds the debt. This is why we saw, and will continue to see, sustained spreads for European sovereigns. It's just not worth it like it used to be.

    The conundrum comes to US spreads. How is it that UST demand continues unabated? This demand probably comes from those that think future growth (near term) will be dampened. Well, yes, that may be the case, but this condition would not continue in perpetuity. I don't know when, but 10 year UST are hardly attractive. At some point, this will be a beautiful short. Yields can only go so low!

    Now onto gold. Gold is the only currency that governments cannot print. So, suffice to say, I can understand if every government is motivated to print money to fight deflation/debt burden, then gold should trade up.

    This thinking has become conventional wisdom amongst the hedge fund community. Hence the piled gold trade. I'm coming around to seeing the thoughts behind this, but the mitigating factor will be inflation, and how to combat it. That requires higher rates. Higher rates make gold unattractive. (It doesn't generate interest, like other currencies.) Then we may see the great gold sell off.

    The world is out of whack at the moment, fueling volatility and speculation like we haven't seen in a while.

    It's gonna be a bumpy ride.

    Disclosure: No positions
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