But one difference this time is now the dollar, rather than the yen, looks like the best funding currency, and the dollar is a deeper market, so the scale of potential damage is much greater.
The size of currencies has come up a couple of times during this event in terms of certain countries (like Iceland and Switzerland) simply not being big enough to bail out their banks if they needed to. This context though is new, to me, but of course also matters. There are greenbacks everywhere. Many countries use USD for all sorts of purposes and so the breadth or scale as Yves says stands to be much larger if things become disorderly with the dollar as compared to the yen or the euro for that matter.
The word disorderly as a benchmark for concern gets used all the time but without definition. Perhaps we will "know it when we see it." Ooof.
Here is a link to the Hugh Hendry investor's letter. John Mauldin posted in on Barry's site and I saw a link to it on Seeking Alpha as well. I mentioned Hendry several years ago after seeing him on CNBC Europe. He is always a good read, but a better listen for the Scottish accent, because he tends to come at things with a unique viewpoint. I tend not to focus on whether he is right about something so much as trying to see what I can learn from the viewpoint (agree or disagree) and whether there is some kernel to work into my viewpoint.
He warms up with this;
The ability of fractional reserve banking to leverage this liquidity many times over provided the monetary mo-jo to instigate ever higher commodity prices.
There are quite a few fractional zealots out there and while this subject may not be my wheelhouse and definitely not my passion this part of the model becoming warped has contributed to whatever history will ultimately say about this decade.
It is not clear to me that the current prices of popular risk assets are at levels that will prove to be ruinous should they drop but perhaps we are early on in a trajectory that will prove to be ruinous. This is possible but do keep in mind that iShares Emerging Markets made a high two years ago near $55 and today after (or in the middle of) a heroic run it is at $41. The PowerShares Commodity ETF (DBC) hit $45 in the summer of 2008 thanks to crude craziness and is now up a good amount to $25. Even the SPDR Gold Trust (GLD), which I own personally and for clients, at $112 is only up 13% from its 2007 high.
Any of these things could drop or collapse as some might say but it is not obvious that the pricing of these things is here today nuts; N V T S (History of the World Part I reference). Money has flowed in yes but the prices do not appear ruinous. No matter the best way to describe the price action of these things, if you now own more than you should the logical course of action is to shave the positions down. If the dollar starts a meaningful counter trend rally tomorrow it should be obvious that the things we are talking about here would likely get hit very hard.
Hendry later ties in a similar idea as Yves Smith about the dollar being used in so many global financial functions. Hendry differs a little, as I read it, saying that the dollar has already devalued. Well it is down a lot and I have opined before that with so many other countries having a stake in the dollar an implosion seems unlikely because so many participants would be motivated by self interest to step in. A continued slow erosion still seems very likely though which should result in higher interest rates here.
Toward the end he lands this self-deprecating jab; "you have to discount the solace I seek in finding people even more miserable than myself."
There are no easy answers here. I believe the simplest approach involves a view from 30,000 feet. The US faces some fundamental obstacles that other countries do not. I would focus on the "do not" crowd.
The picture is from the United Animal Friends 2010 calendar that my wife and her friend Gayle put together. They are for sale at the UAF website and there are a lot of great pictures. I hope you can check it out.
5 comments:
Thanks for trying to keep things simple, Roger. The global economy is exiting a recession and growth is accelerating. The credit crisis has passed. Interest rates are low and will stay that way for quite some time.
Invest wisely, harvest and rebalance, and ignore the pundits looking for monsters under their beds. I wish I had your open-mindnessness to learn something from these folks. I just don't.
I think you should start endorsing penny stocks or scams on a regular basis :)
The future of the dollar. If I could nail that one down I would be a happy man.
I love Hendry even if I think he gets his timing wrong some times. I learn a lot and he makes me think. He is a lot more fun to listen to and not because of his accent.
Look at the Baltic Dry Index. Of course the market will eventually hit a high and start to decline, BUT WHEN.
The fed is printing, the economy is growing, and this expansion could last a lot longer than people envision.
A .25 increase in the federal fund rates would be a definite help for the dollar and would not have a huge effect on the overall economy. Has there ever been a strong country in history with a perenial weak currency?
I concur with Winslow. Even the uber bull Kudlow rails about how a country has never found prosperity by letting its currency devalue...Never. Of course, so many countries have debt denominated in dollars that it should keep demand high, which could mean a rally in the future despite the Fed's best intentions.
For Anon 732, I wouldn't be so fast to say the credit crisis is over. It certainly has abated due to the Fed's recapitalization efforts and the change in mark to market. But, that doesn't fix the problem. It stops the bleeding.
My fear is the recent growth is short lived. The Fed doubles the money supply in 112 days and doubles its balance sheet with undisclosed junk and the government has plowed billions into the economy. Yet, we only get a 3.5% growth, which will certainly be revised down after the recent trade deficits number. On top of that credit, the lifeblood of business growth, is drying up.
Many will argue that this pessimism means the market will be heading higher, and I hope it does. But, I think most folks are ignoring the historical lessons of a de-leveraging economy. Time will tell.
The UK declined over many decades
They have nuclear subs and a decent curency
We will follow a similar decline but the US is much larger and it will be a SLOWER decline
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