Debauch the Currency
Lord John Maynard Keynes once warned that, “The best way to destroy the capitalist system is to debauch the currency.” It would appear that the folks at Money Mumbo Jumbo have taken this to heart. Below are the top thirty examples of defacing the dollar:
1. Tron Lincoln – American
2. Boba Fett Dollar – American
3. Sparta $ – American
4. Iraq Dollar – American
5. Tron – Canadian
6. Donnie Darko Rabbit -Canadian
7. iPod Dollar – American
8. Smoking Bill – American
9. Spend More Live Less – Canadian
10. Moth Dollar
11. Dr ZoidBerg – American
12. Ronald McDonald – Canadian
13. Baby Dollar Bill
14. Cartoon Dollar – American
15. Wicked Queen 20 Pound Note – British
16. Mario – American
17. Sofa Dollar – American
18. Museum Dollar – American
19. Pizza Dollar – American
20. El Barto – American
21. Tulip Dollar – American
22. Emo President, 20 Pesos- Mexico
23. Ninja Dollar
24. Alice In Wonderland
25. Clown Five Pound Note – British
26. 2 Girls, 1 Cup Dollar – American
27. Half Life Dollar – American
28. Teenage Mutant Hero Dollar – American
29. KISS 20 Dollar – American
30. Assassination Five Dollar
Posted in Currency.
– March 1, 2010
Her Name is Rio
As a follow up to our initial post – A Brazilian – we came across this brief piece from the good folks at PIMCO this week, echoing our constructive view on the Brazilian economy. Brigitte Posch, EVP and a member of PIMCOs Emerging Markets Team, makes the following observations:
Brazilian local interest rates are attractive on both a nominal and a real basis, as they are still considerably higher than those in comparably rated countries. Because of this as well as the strength of the country’s macroeconomic policies, we expect Brazilian local rates to continue to trend lower and converge with interest rates in the developed world. For now, however, the disconnect between Brazilian rates and rates in other investment grade countries makes Brazil one of the world’s most attractive markets for yields.
With rates in Asian economies generally much lower and emerging market (EM) Europe facing fiscal constraints that are affecting policy, Brazil is the rare case of a solid and improving EM credit with credible monetary policy and the offer of outsized local yields on both an absolute and relative basis.
Proactive public policies and strong support for expansion of infrastructure studies and projects are at the core of Brazil’s plans to boost growth. In the past year, the Brazilian government has placed particular emphasis on public works as a means to offset the effects of the global economic recession.
Another happy development: Brazil recently won the right to host the World Cup of 2014 and the Summer Olympics in 2016, an event that should brings billions in fresh investment.
PIMCO Viewpoints – Posch on Brazil Feb 2010 US
We adamantly agree – particularly in light of the sovereign investment alternatives in the developed world today – and continue to hold a core position in long term Brazilian government debt. Cyclical corrections in the Brazilian Real, likely brought on by investor risk aversion, should be viewed as long-term buying opportunities.
Posted in Emerging Markets.
– February 27, 2010
Monday Musings
A few weeks ago, we noted the potential for an oversold bounce despite what appeared to be a clear shift in the investment landscape. Now that most major equity indices have rallied for two consecutive weeks (with the S&P 500 stalling at a 50 DMA which looks to be rolling over), it is critical to assess the underlying strength of this move. Suffice it to say, that the evidence is mixed at best. Many of our immediate term commodity and commodity currency models have moved back into “buy” territory, but we view Dollar Strength as a BIG RED DEFLATIONARY FLAG. The Greenback’s long term trend moved back to positive recently and the USD remains strong across all three durations – short term, intermediate term, and long term. Importantly, Financials stand out as the most overbought S&P sector on a one-year basis, in the face of strong secular headwinds and declining relative strength. Ditto for the Consumer Discretionary sector, although the stocks have yet to figure it out.
When the market’s prior leaders fail to rebound convincingly, the market often struggles. And at this point, the reflation trade has failed to return to prominence with the biggest disappointment, visibly the dull bounce in emerging markets. This may be the beginning of a transition in the investment landscape – and odds favor the outperformance of Quality at this point in the cycle. Interestingly, Energy, Consumer Staples, Healthcare & Telecom remain at the bottom of our one-year mean-reversion scoreboard.
And speaking of the cycle, the charts below from Albert Edwards at Soc Gen, continue to be the primary reason for our defensive posture, despite tentative signs of a market rebound from extremely short term oversold levels. As Big Al describes:
“Early last year the safe re-entry back into risk assets was signaled by a clear upturn in leading indicators. So too now should investors be concerned that the leading indicators are topping out. The recovery in the leading indicator for China seemed to precede that of the composite for the OECD and similarly China has now topped out ahead of the OECD composite (see chart below). Indeed, other emerging economies such as India (below) and Brazil are also seeing clear warning flags of cyclical caution.”
Once again, we think Dr. John Hussman accurately portrays the Market Climate today:
“As of last week, the Market Climate for stocks remained characterized by unfavorable valuations and unfavorable market action. Internals have improved moderately during the rebound of the past two weeks, though price-volume behavior remains poor. Interest rates have become notably hostile, and presently would weigh on the prospective return/risk ratio of stocks even if internals were to improve here. That suggests that the rebound we’re seeing from the correction low of a couple of weeks ago may turn out to be a whipsaw. For now, the Strategic Growth Fund remains fully hedged, and the combination of rich valuations, yield pressures and potential credit strains are the primary concerns.”
We’ll wrap up our thoughts this morning with a few brief articles worth reading. The first from George Soros, followed by Ambrose Evans-Pritchard, and a few former Treasury Secretaries who “get it.”
The euro will face bigger tests than Greece
“The euro was a unique and unusual construction whose viability is now being tested. The construction is patently flawed. A fully fledged currency requires both a central bank and a Treasury. The Treasury need not be used to tax citizens on an everyday basis but it needs to be available in times of crisis. When the financial system is in danger of collapsing, the central bank can provide liquidity, but only a Treasury can deal with problems of solvency. This is a well-known fact that should have been clear to everyone involved in the creation of the euro.”
“As of today, the British government must pay a higher interest rate to borrow money for ten years than either the Italian or the Spanish governments, despite the extraordinary ructions going on within the eurozone. While Britain went in to this crisis with a much lower public debt than Greece or Italy (though higher total debt than either), it now has the highest budget deficit in the OECD rich club — and perhaps the world — at 13pc of GDP. I have a very nasty feeling that markets are about to pounce on Britain. All they are waiting for is a trigger, perhaps a poll prediction of a hung-Parliament or further hints that Tories dare not confront the beneficiaries of state spending.”
Ex-Treasury Secretaries Back Volcker Rule
“The principle can be simply stated, the five said in a letter to The Wall Street Journal. Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services.”
Posted in Portfolio Strategy.
– February 22, 2010
Professor Fergie vs the Big Bad Wolf
In our recent post, Coming to America, we encouraged readers to study Nail Ferguson’s concerns voiced in the Financial Times – A Greek crisis is coming to America. It does not take a wild imagination to see that ballooning debt levels on government balance sheets pose a grave systemic risk to the global economy and capital markets. This is precisely why we are left with our tongue on the floor when we hear Nobel laureate Joseph E. Stiglitz describing the prospect of a US or UK default as absurd, “particularly in the US because all we do is print money to pay it back.” Excuse us Joey, (wonder if the friends of a Nobel economist call him Joey, or maybe even “Joey-Bag-a-Donuts” as we affectionately call my cousin Joseph who’s not a Nobel economist but a pretty strong “quant guy”), but don’t default and hyperinflation effectively accomplish the same goal? Perhaps that’s a better question for our German friends?
We digress. But our intention is simply to clarify a few important points in this economic scuffle. To do so, it is only fair that we also share the “glass is half full” point of view recently outlined by the FTs Chief Economist, Martin Wolf here. “The Wolf” (wonder if his friends have seen Pulp Fiction) makes some important points in this piece, so we will highlight a few of them and offer up some food for thought.
The Wolf argues that Prof Fergie’s numbers for gross federal debt to gross domestic product are wrong. He states that “White House projections are for federal debt held by the public to be 71% of GDP in 2012 and not to exceed 77% by 2020.”
- While we haven’t taken the time to confirm or dispute either number, we think The Wolf is missing the point. As Dylan Greece of Soc Gen has accurately illustrated, our governments are already insolvent – what’s “off balance sheet” (Social Security, Medicare, etc.) dwarfs current White House projections, which just account for liabilities “on the balance sheet.”
The Wolf declares that “there is no reason to balance budgets in a country whose nominal GDP grows at up to 5% a year in normal times.
-
Let’s ignore for a moment the comical claim that “there is no reason to balance budgets” and stick with the 5% growth projection in normal times. To be sure, these are not normal times. And while 5% nominal growth may have been normal in a past era of credit-driven growth, that party has left the building. In fact, Wolf even correctly quotes both a McKinsey report and a paper by Carmen Reinhart and Kenneth Rogoff, which both clearly demonstrates that median growth rates fall dramatically once public debt to GDP exceeds natural limits.
The Wolf explains that “huge increases in fiscal deficits were appropriate to the circumstances.”
- We generally agree. Although as we’ve voiced before – quickly pumping out a massive dose of fiscal stimulus may have played a part in avoiding Financial Armageddon. But it has in no way guaranteed a sustainable recovery. Unfortunately, to have any chance of doing so, fiscal stimulus must be thoughtfully drafted and focused on those projects best suited to drive productivity and innovation, thus generating a multiplier effect on future growth. Instead, we got “cash for clunkers” and a tax credit on home purchases, encouraging over-spent and over-leveraged American consumers to take on more debt and continue to spend. As our childhood friend C.B. might say . . .
– February 18, 2010
Government Sachs
We can’t help but share the “shocking” news we came across in the Sunday Times that former US Treasury Secretary (and former Goldman Sachs CEO) Hank Paulson does not believe that banning proprietary trading at large banks (i.e. Goldman Sachs) insured by tax payer dollars is a good idea. Since most of those in Washington with the power to formulate financial reform have spent most of their careers on Wall Street, and maintain close ties with their former pals, this “shocking” news should not come as a surprise. But it still makes us sick to our stomach.
But perhaps even more appalling is the fact that Hank Paulson led the Wall Street Charge to reduce capital requirements on investment banks in 2004, while he was CEO of Goldman Sachs. This exemption led to a predictable explosion of debt and leverage ratios, resulting in the greatest credit bubble in modern history. The NYT provided an excellent recap of the events at the time in a must read article published in October 2008.
Unfortunately, our current Treasury Secretary has not exactly been an obvious improvement thus far. Timmy Geithner insists that his actions to date – actions best described as printing trillions of dollars to “save” our financial system – have cost far less than the alternative. We’ll acknowledge that the joint blunders of Bernanke and Geithner have managed to avoid Financial Armageddon. But our praise stops there. We’ve done nothing to correct the previous structural imbalances. Consumer deleveraging has just begun. Unemployment will remain high and sticky for years. Small business continues to struggle. And the only thing we can see that is experiencing a v-shaped recovery is bank profits and the bonuses of Paulson’s old cronies. What’s wrong with this picture?
Disclosure: At the time of publication, the author was short Goldman Sachs, although positions may change at any time.
Posted in Policy.
– February 17, 2010
Comfortably Numb
Today, we’d like to share a thoughtful review of the economy and markets by our good friend and colleague Emery Pike, CIO of Stratford Advisors Inc. I had the pleasure of getting to know Emery through my involvement with CFA North Carolina, where Emery served as a Past President of the Board. As we share many of the same concerns, or shall I say skepticisms, sharing ideas came natural for us and we’ve since formalized these conversations through weekly calls between our offices. Emery is a voracious reader with a tremendous ability to absorb information and quickly shape relevant conclusions. He has taught us a lot over the years in subjects ranging from rock and roll history to the economics of junior gold miners. We hope you enjoy his insights as much as we do.
Posted in Portfolio Strategy.
– February 16, 2010
Me Still Love You Yuan Time
China recently raised the Reserve Requirement Ratio by 50 bps to 16.5% for its domestic banks. This is the second hike in the past month and certainly not the last as China’s economy is still sprinting ahead. While equity markets have begun to price in the risk of “global exit strategies,” currency markets have yet to consider the implications of continued strong underlying growth in China. It is likely that additional Chinese monetary tightening will be accompanied by pressure to revalue the yuan.
We came across an interesting piece from Ned Davis Research recently that increases our conviction for a Chinese currency revaluation. Recall we first discussed the prospects for a major revaluation of the renminbi here. NDR compiled the table below to illustrate current economic indicators relative to levels seen in July 2005 and July 2008 – other instances when China changed their currency peg.
Source: Ned Davis Research, Inc.
For individual investors unable to trade currency forward contracts, the Wisdom Tree Dreyfus Chinese Yuan Fund (CYB) remains the best vehicle to position for this event. CYB is comprised primarily of U.S. government, corporate and treasury bonds; repurchase agreements; and short-term currency forwards. The fund seeks to achieve total returns reflective of both money market rates in China and changes in value of the Chinese yuan relative to the USD. While CYB does make income distributions, investors should not expect large movements in value until an actual revaluation takes place, so patience is a virtue. That being said, when viewed relative to earning approximately nothing in a US savings account – and the near certainty of decaying purchasing power due to reckless monetary and fiscal policy – we are happy to sit and wait. As we stated in our initial post:
We don’t believe that today’s expectations accurately reflect the yuan’s true trajectory. To effectively dampen China’s underlying inflationary pressures, exchange rates would have to rise substantially more than levels implied by the market today. A 50-100% revaluation is even plausible if trends in commodity prices persist, and as history suggests, China overshoots in policy accommodations.
Disclosure: At the time of publication, the author was long WisdomTree China Yuan Fund, although positions may change at any time.
Posted in Currency.
– February 15, 2010
Strike Two
As we discussed in the most recent Broyhill Letter:
Given the size and the maturity profile of the country’s debt, combined with the absence of monetary policy as a tool to reflate the local economy, external assistance is needed to avoid crisis. But financial rescue packages come with difficult fiscal demands at a time when Greece is already facing a backlash from unions and civil servants. Importantly, any assistance must be significant in size, as well as quick and efficient in order to prove successful. Unfortunately, history suggests policymakers will miss at least one of these targets at first blush and initial attempts will likely prove too little, too late. We consider the EU’s ringing endorsement of Greece’s fiscal plan as strike one. Strike two will likely be an insufficient response aimed at calming investors’ nerves and reducing volatility. Any subsequent market reaction would thus be short term in nature, ultimately leading to increased risk of contagion as sovereign balance sheets become a growing theme across the globe.
We submit today’s Statement by the Heads of State or Government of the European Union as “Strike Two.”
Posted in Macro.
– February 12, 2010
Coming to America
Great quote from our friends at Zero Hedge this morning:
The only thing in this world worse than Hank Paulson showing up in Congress with his initial 3-page TARP proposal giving him unlimited control over the US printing press? 12 non-Hank Paulsons, all of whom speak different languages, all of whom are hell bent on bailing everyone and everything out (just not on their political or physical dime…or 10 eurocents as the case may be), and all of whom have no idea how to bail out others’ (and soon their own) economy… oh, and none of whom have access to Hank’s reserve currency printer.
Nail Ferguson echoes our concern for the recent explosion in sovereign debt, which we outlined in our latest Broyhill Letter, in the Financial Times today – A Greek crisis is coming to America.
Posted in Macro.
– February 11, 2010
