BLOG IU.EU Tuesday, January 06, 2009 02:28 AM (CET) Posted By Jim Wiandt Money Is POWER Paul—we look at all these macro issues from sort of an abstract investor perspective. But what's going on underneath it is very real. You had some nice links there, and reflecting on history can always lend a sobering perspective to the current outlook. As I've mentioned, I find currencies endlessly fascinating, because their shifting rates are reflective of a whole range of issues, including macroeconomic fundamentals, currency flows and market psychology. One of the most interesting recent phenomena has been the relative continued strength of the dollar and of U.S. Treasuries through an absurdly woeful set of fundamentals for the currency, including enormous current account and trade deficits. Partly (especially since October) that has had to do with deleveraging bets and buying back dollars to pay back loans made in that currency, as well as a retreat toward quality (forgive me the snicker). But above all, the dollar's strength has been about China agreeing to fund the enormous U.S. deficit. China has quietly built a massive economy on the back of this "18 months NO MONEY DOWN" financing. The shrewdness of that is only magnified by the fact that as a side benefit, China OWNS the U.S. now. How much screeching have you been hearing from the U.S. government about human rights and the like of late? That's because when the U.S. government asks itself the question, "Who's your daddy?" the answer is China.  Friday, January 02, 2009 14:23 PM (CET) Posted By Paul Amery The Great Immoderation It's only a year or two ago that the world's monetary authorities, G8 politicians and their cheerleaders in the press were celebrating the arrival of a new era in economic policy making. They named the perceived combination of steady growth, low inflation, and low unemployment "the Great Moderation." Here are Ben Bernanke on the subject, and Gerard Baker of the Times in London. Markets seemed to concur. In 2007 the VIX, which measures the volatility expectations built into equity option prices, fell to all-time lows of below 10%, implying that investors saw only steady going ahead. But as we confront the economic realities of 2009, it's becoming more and more evident that the "great moderation" was in fact a debt-fuelled asset price boom, and one without precedent in recent human history - a great immoderation, in fact. For a sobering look at the scale of the problem, take a look at the debt-to-gdp charts in Australian economist Steve Keen's blog (especially the last one, showing aggregate debt levels in the US). Note also the interesting charts from Japan, which show that, although private debt levels have fallen since the early 1990s, government borrowing has more than taken up the slack. The result (for Japan) has been nearly two decades of stagnation. As one of the commentators to Keen's article put it, the crowding out effect of the huge public debt levels means that Japanese economy slows to a stop, as soon as rates are moved much above zero. What does this mean for the US, and the other Anglo-Saxon economies? Unfortunately it looks as though our governments will follow exactly the same path as Japan, with an explosion of state debt to try and counteract the private sector recession. Interest rates will be held at very low levels, whatever the cost, and if it looks as though there is insufficient demand for government debt from investors, forced savings schemes such as this one or this one will be introduced (giving a couple of UK examples - incidentally, forcing banks to buy government bonds at 1%-3% yields, while they have to pay 12% back to the state on their preference share issues, doesn't seem likely to restore these institutions to financial health any time soon). There doesn't seem any ultimate escape from the debt trap that we are all in than widespread default, or massive inflation to devalue the burden of the contracts. This resolution, however, may be many years away - Japan, after all, has muddled through for years, exchanging private debts for public ones, without ever being able to restore the economy to a state of vibrancy. So the hangover from the great immoderation is likely to be a very long one - indeed, in time we can expect it to be proportionate to the length of the debt binge. On Steve Keen's charts, measuring that takes us back to the early 1980s for the Anglo-Saxon economies - a quarter of a century. That's a sobering thought for the start of 2009!
Wednesday, December 31, 2008 13:23 PM (CET) Posted By Paul Amery FX Winners And Losers Reviewing the currency world's risers and fallers for the year ending tonight. Jim, your blog on currencies prompted me to check the 2008 risers and fallers in the world of fx - and a selection of currency rates from the end of last year, and from this morning, is given in the table below. I've also shown the percentage change for the year.
What stands out? The yen has been the big gainer, rising over 20% against the dollar, and by 42% against sterling. Suddenly I don't feel so bad holding the Lyxor Japan Topix ETF in my self-select pension plan (SIPP) - for a UK-based investor the yen's gain has pretty much counterbalanced the Japanese equity market's fall in 2008. The Euro (+4%), Swiss Franc (+6%) and the Chinese Yuan (+6%) have all gained against the dollar, although it's been a year of wild swings, with the USD hitting both 1.60 and 1.25 against the Euro, before settling in the 1.40s (where it began 2009) at year-end. Sterling has taken a beating, approaching parity against the Euro in the last few days, having started the year at 1.36 - although the UK is left in second place, amongst the "developed" economies (these classifications are increasingly debatable) in the competition for credit crunch victim of the year, by Iceland, whose currency lost a cool 97% against the dollar. Emerging market economies started to feel the strain towards year-end as well - 2008 saw devaluations versus the dollar of 20% for the Russian rouble, 33% for the Brazilian real, and 54% for the Ukrainian hryvnia - most of the moves occurring in the last couple of months. Devaluing the currency is the easy way out for governments faced with deflating economies, debt problems and fiscal strains and, as you say Jim, we're likely to see a lot more of this in 2009. The only question is who devalues first and fastest. Looking from a UK perspective, it's a surprise that our devaluation hasn't attracted more press coverage as, after all, we've all become a quarter poorer against our Euro-based neighbours over the year, before even starting to calculate the losses from property and equity market declines. Perhaps everyone's too numb to notice - or perhaps most people don't have much in the way of savings and don't care. In any case it's a mystery to me why investors are happy to lend to the government, via the gilt market, at yields of 1%-3%, when the pound has been depreciating at a rate which is multiples higher. One currency I didn't mention - gold - also had a reasonable year, gaining 3.5% against the dollar (from $833/oz to the current $862). I suspect that gold and its sister currency, silver (a 25% faller versus the dollar in 2008, from $14.77 to $10.98 an ounce), will be the ones to watch in 2009, as the fiat currency experiment that we've been part of since 1971 takes another step towards the final conflagration of paper, or should I say electronic, money. All will be revealed, starting tomorrow. In the meantime I wish all IndexUniverse.eu readers a healthy, peaceful and prosperous new year! ***
Tuesday, December 30, 2008 09:41 AM (CET) Posted By Jim Wiandt Currency - The Real Story In Global Markets For 2009? Paul - it has been absolutely breathtaking to watch currency movements of late - and I think that trend will continue. The U.S. dollar plummets to 1.60 to the euro in the spring, and then soars to within 1.25 as U.S. banks collapse left and right this fall. The British pound takes one of the most shocking falls this side of the Argentinean peso and is on the verge a falling to par with the euro ... which is practically unimaginable to me, and makes it look like the U.K. should have gotten into that mighty euro while the getting was good. The mighty euro? Talk about a phenomenon that is hard to believe. The European economy is impotent, as is the ECB's ability to take strong coordinated action in the face of crisis. And interest rates are getting down to the zero zone seen in the rest of the world, so why the strong euro? Well, in a world of the blind, the one-eyed man is king I guess. The fundamental factors are so stacked up against the U.S. (and now U.K.) in terms of trade and current accounts deficits in the U.S. and a dire array of factors seemingly bordering on what are effectively fears of a national default in the U.K. So the dam had broken, or is breaking. Really only the deleveraging during the thick of the credit crisis propped up the dollar ... and pound sterling's plummet to me is absolutely stunning - I'll leave it to you to explain that, Paul. But the point of all of this is that with their wild volatility, currencies have been HUGE drivers of returns (negative or ... less negative) of late, and I suspect this will continue to be the case. If you're not aware of currency movement in your portfolio, you've got a blind spot that could amount to the majority of your percentage returns. When prospects are bleak as now, the only upward movement may be in the "zero sum" part of the market. Consensus is dollar bearish, Chinese yuan bullish. Talk about a dam waiting to break ... if/when the yuan ever floats, look out below for all the rest of the currencies. The Chinese have held down their currency, propping up exports, while being extremely savvy in extending enormous amounts of credit to the U.S. and financing their own boom and coming to OWN the U.S. while the Fed and U.S. financial giants were asleep at the switch. Interesting times ... and currencies are among the most fascinating parts of the market to watch, because they are tied intimately to the flows and the big macro factors in the global economy. What currencies have done and will continue to do are effectively markers in history, and determinants for your portfolio returns. Pay attention.  Friday, December 26, 2008 21:57 PM (CET) Posted By Bobo ETF DATA TOOL LIVE - BOBO ARRIVES IN EU Bobo has a field day on his European vacation, bringing his sublime genius across the pond. EEEEE AAAH OH OOOOOOOOOOOOOOOO!!! (a very Merry Christmas to all!!!). For those of you in Europe who have not had the pleasure of meeting Bobo, I'll provide you with a brief introduction. Bobo is the dart-throwing monkey (chimpanzee actually) who works for Index Publications, the company that brings you IndexUniverse.eu. But in truth, we all actually work for Bobo because of the astonishing run he is on. You see, Bobo has the uncanny ability to be able to throw darts at a board of ETF tickers and come up with portfolios that beat his more actively chosen (and more expensively managed) competitors time and time again. Beat them is a gentle way of putting it. In recent years, he has in fact CRUSHED his competition. And now, my European friends, prepare to bask in the Glory of Bobo, because he's bringing his zen-like ability to hit all the right ETFs with his darts (BLINDFOLDED MIND YOU) to Europe. With the launch of the new IndexUniverse.eu data tool, covering the range of ETFs across Europe, it was easy for us to bring out a dart board and put the little guy (our champion monkey) to work. No holds barred, Bobo has thrown 10 darts at the board for the European ETFs. And here, NOW, TODAY, on this fine Boxing Day, is what he came up with (much like the www.indexuniverse.eu data tool, Bobo knows no boundaries, so the selections are from across Europe—most of the selected ETFs are multiple-listed; we use the listing Bobo's dart hit):
So there you have it. Now watch the magic of Bobo start to work. And one last quick word from Bobo: EYYYYAAAAK OW OOOO EEEEKAH Wah WOAHHH! (My arm is tired. Time to sit back and start making some money. Where are the *$%&! bananas and "wahwoe" {cane wine}? Welcome to the wonderful world of Bobo, Europe. And a Happy 2009 to all!
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The views expressed by Jim Wiandt and Paul Amery are for informational purposes only and should not be construed as a recommendation for any security.
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