- Fear and change (Economist)
- The new China (Barron's)
- Too late to join the muni rally? (WSJ)
- Russia's import-substitution problem (Alphaville)
- Perry Ellis: Many avenues for unlocking significant shareholder value (SeekingAlpha)
Last week equity markets in the US took some much-needed R&R. The S&P 500 ended the week at 2,039, adding 8 handles over the previous Friday's close. Light trading was all but certain with Veteran's Day on Tuesday (US bond markets were closed) and not much in the way of economic releases.
I would like to touch on a major theme - perhaps the biggest theme right now: the enormous upside price action in the US Dollar. While the Euro's slide against the 'ole greenback has been fairly steady and persistent for much of the year (Mario Draghi has been reluctant to recognize that the EU is headed for stag/deflation), the Japanese Yen was recently crushed after enormous stimulus measures were announced by Shinzo Abe on October 31st.
There have been massive moves in several major currency pairs, and this trend is likely to continue. From the UK Telegraph:
The USD is the other side of a global carry-trade that is estimated to be somewhere in the neighborhood of between $3-5Trillion (yes, that's trillion, with a "t"). Basically, foreign countries (think emerging markets) will borrow in USD and then lend in their domestic currencies. Therefore, a cheap dollar acts as cheap credit for foreign borrows to finance investment and consumption. If this trade begins to unwind (which is likely what we are seeing the beginning of), it is the equivalent of tightening credit conditions for foreign borrowers.
This is especially concerning when you consider already-weak emerging market balance sheets and a woefully stagnant Eurozone.
In the wake of the dollar's strength commodities have been crushed (oil, gold, cotton, et al). Lower commodity prices mean tougher times for commodity-exporting countries, and discourages investment as projects lose their economic rationality.
I say all of that to say this: there is a major shorting opportunity to be had in countries whose economies are highly dependent on commodity exports and who have borrowed large quantities of dollars.
I am currently working on a comprehensive list of potentially vulnerable countries (besides the obvious Australia). The piece I wrote last week about debt spreads will be included in this; however, it just became a much bigger project than I had originally foreseen.
I humbly ask for a couple of days to put something worth reading together.
I would like to touch on a major theme - perhaps the biggest theme right now: the enormous upside price action in the US Dollar. While the Euro's slide against the 'ole greenback has been fairly steady and persistent for much of the year (Mario Draghi has been reluctant to recognize that the EU is headed for stag/deflation), the Japanese Yen was recently crushed after enormous stimulus measures were announced by Shinzo Abe on October 31st.
There have been massive moves in several major currency pairs, and this trend is likely to continue. From the UK Telegraph:
David
Bloom, currency chief at HSBC, said a “seismic change” is under way and may
lead to a 20pc surge in the dollar over a 12-month span. The mega-rally of 1980
to 1985 as the Volcker Fed tightened the screws saw a 90pc rise before the
leading powers intervened at the Plaza Accord to cap the rise.
“We are only at the early
stages of a dollar bull run. The current rally is unlike any we have seen
before. The greatest danger for markets and forecasters is that they fail to
adjust their behaviour to fully reflect a very different world,” he said.
…Hans Redeker, from Morgan
Stanley, said the dollar rally is almost unstoppable at this stage given the
roaring US recovery, and the stark contrast between a hawkish Fed and the
prospect of monetary stimulus for years to come in Europe.
“We think this will be a four
to five-year bull-market in the dollar. The whole exchange system is seeking a
new equilibrium,” he said. “We think the euro will reach $1.12 to the dollar by
next year and will be even weaker than the yen in the race to the bottom.”
The USD is the other side of a global carry-trade that is estimated to be somewhere in the neighborhood of between $3-5Trillion (yes, that's trillion, with a "t"). Basically, foreign countries (think emerging markets) will borrow in USD and then lend in their domestic currencies. Therefore, a cheap dollar acts as cheap credit for foreign borrows to finance investment and consumption. If this trade begins to unwind (which is likely what we are seeing the beginning of), it is the equivalent of tightening credit conditions for foreign borrowers.
This is especially concerning when you consider already-weak emerging market balance sheets and a woefully stagnant Eurozone.
In the wake of the dollar's strength commodities have been crushed (oil, gold, cotton, et al). Lower commodity prices mean tougher times for commodity-exporting countries, and discourages investment as projects lose their economic rationality.
I say all of that to say this: there is a major shorting opportunity to be had in countries whose economies are highly dependent on commodity exports and who have borrowed large quantities of dollars.
I am currently working on a comprehensive list of potentially vulnerable countries (besides the obvious Australia). The piece I wrote last week about debt spreads will be included in this; however, it just became a much bigger project than I had originally foreseen.
I humbly ask for a couple of days to put something worth reading together.
No comments:
Post a Comment