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Raj Majumder
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Raj Majumder raj.majumder@imetanoia.com www.imetanoia.com Raj Majumder is the Founder of iMetanoia, a turn of the millennium financial services firm focused on the individual investor. iMetanoia encapsulates investment best practices wrapped in investors world class education to make the... More
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  • The Exit 0 comments
    Dec 1, 2009 5:40 AM

    An orderly exit would be a nice thing to have, but very few times have we achieved it in practice.  Does the same fate await the easy money policy in the US and by extension the Dollar carry trade?

     

    It is dawning on aggressive investors that US might move out of recession quicker than is widely believed, allowing the FED to tighten more quickly.  This stops the hedgies in their trades.  The other driver of this trade the USD is looking more and more oversold, to the point that investors are beginning to build positions on the flip side.  Dubai debt standstill further accentuated the dollar’s safe heaven status, fundamentals notwithstanding. These developments, on top of already high asset values, make investors nervous.

     

     As these trades have become crowded, an orderly exit seems very unlikely.  The issue in exist is that once the reversal is widely desired it is impossible to exit.  So investors try to out-do each other by trying to exit first.  When this trickle becomes a flow, at some tipping point, the predicted unwinding creates a crash.  There are reasons to believe that the early rumblings of this move may be underway.  Its large size and impact across currencies, commodities and emerging market equities make it a daunting prospect.  While a full US recovery might is ways away – the danger is in the ‘let me exit before the crowd assembles’ deconstructive rationale of bringing that exit to the present day.

     

    The danger is not a meltdown reminiscent of the crash but a shaving of the speculative froth on the top.  That would mean reversion to more reasonable PEs in stocks and more business demand led prices in commodities.  This could well be a 20% hair-cut. Unless it is a very unruly exit, in which case it can drag down the index some more before buying support emerges.

     

    What might trigger such a move?  The holiday buying numbers out of the US would be the biggest driver.  Indications are that this might surprise to the upside.  Job loss figures could be tricky to interpret as some of the old jobs may have permanently moved overseas, so will not show up in the numbers.  Fore closure numbers are also muddied given various government support schemes.  The lack of the indicative ability of these traditional measures will make this much more of a subjective call – more prone to over reactions.

     

    Which are the sectors that would be most impacted?  Metals, Real estate and Financials would be especially at risk.  This would be a liquidity balancing correction which would be replaced by a much slower business demand led expansion.  Gold will lead this correction.

    Disclosure: None
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