The Dying Dollar: Rumours and Misinformation

Thursday, October 15th, 2009

Martin Wolf writes an interesting column in the FT.com October 13, 2009:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

This is an idea that we have covered at some length during the course of the year, so it is a dear subject for us to feature, as it goes hand in hand with the raging debate between equity bull and bear, and deflationist vs. reflationist.

During the first quarter of this year, when equity markets were tanking the dollar was strengthening, and that was a direct result of the market taking a large long position in the dollar, via cash instruments and other short term government securities. By February 2009, the Fed’s cash position had reached such an untenable shortage because investors and banks were hoarding it, that the Fed and Treasury Department were forced to resort to Quantitative Easing (QE) measures that added $2-trillion of printed liquidity into the credit market. Most in the market missed the fact that there was, at the time, a panic among monetary authorities that the physical supply of cash would run out.

With the Dow benchmark crossing over 10,000 yesterday, and other markets attaining commensurate or higher levels, is it any surprise, given that US$450-billion has moved from money market funds alone to be re-invested, that the dollar is faltering? In the simplest of terms, the global equity markets’ slingshot recovery has led to a slingshot devaluation of the dollar.

Superficially, the shortage of cash in February was deflationary. In the present, the flood of liquidity from QE, plus the US/UK Zero-Interest-Rate-Policy, are fueling re-investment in risk assets, and driving the dollar to an out-of-balance devalued state. To put it mildly, if this is the current basis for long term inflation, it too, is rather shallow.

The most likely scenario at this stage would be monetary intervention - and that means that while gold may continue to rise a little bit further from its current highs, it is due for an IMF selloff in concert with the G20, all of whom have a vested interest in seeing the greenback at higher levels against the Euro, Yen, and RMB.

The less likely scenario rests with whether or not the Fed can convince its public that the economy is expansionary, thus enabling them to reinstate an interest rate, which too, would raise the dollar’s value and repatriate cash from assets to the money market.

Our suspicion is that the Canadian dollar’s recent run and that of other non-dollar centric currencies would end upon either scenario.

Therefore, there may be a strategic currency-based opportunity in buying US dollar denominated assets, and preferably in short term government securities. If you have the stomach for it, the real opportunity may be in longer dated US government bonds, as either intervention or re-instatement of interest rates would result in lower long term yields.

Tags: Alternative Arrangements, Avw, Bull And Bear, Canada, Cash Instruments, Cash Position, Collapse, D1, Death Bed, First World War, Global Monetary System, Gold, Gold Bugs, government securities, Hawks, Img Src, liquidity, Martin Wolf, Misinformation, Monetary Authorities, Mongers, Openx, Qe, Random Number, Rumours, Treasury Department, Trillion
Posted in Gold, Markets | No Comments »

Bill Gross Investing in Long-Dated Treasuries

Tuesday, September 29th, 2009

Bloomberg reports that PIMCO’s Bill Gross is exchanging his corporate bonds for longer-dated government securities out of concern for deflation. This is a theme that we have written extensively about during the course of the year.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he’s been buying longer maturity Treasuries in recent weeks amid a re-emergence of deflation concern.

“We’ve exchanged our mortgages for the government’s check” as the Federal Reserve winds down purchases of agency debt, Gross said in an interview from Newport Beach, California, with Bloomberg Radio.

Gross boosted the $177.5 billion Total Return Fund’s investment in government-related bonds to 44 percent of assets, the most since August 2004, from 25 percent in July, according data released earlier this month on Pimco’s Web site. The fund cut mortgage debt to 38 percent from 47 percent.

This is very interesting if you’ve been following Bill Gross’ calls during the course of the year. Late last year and early this year, Gross was a huge investor in corporate debt, particular the debt of financials that received support from the government in the form of guarantees. Gross’ main thesis was and continues to be “Shake hands with the Government.” By the way, corporate debt has outperformed its equity peers during the course of the year, and was considered by many large investors as the superior bet given the option to invest in equities. The strategy of buying corporate debt (which was regarded as a lower risk than equities earlier this year) is one that eluded most retail investors because the credit market is generally perceived as out of reach or sophisticated.

Much of the “easy” money has already been made in corporate debt, and its likely now that investors, who are still for the most part sitting in record levels of cash, may stay there, or be lured into the equity market by the powerful rally seen the last two quarters.

If, on the other hand if you’re in the same camp as Gross, that deflation is still something to worry about, then longer dated governments may be the way to go. In Gross’ “New Normal” de-leveraging, de-globalization, and re-regulation are three dominant themes that flatten out the yield curve, which remains steep, and a flattening yield curve means short term rates rise while long term rates fall. The short term rates will be a little while in rising as it may be a little premature for the Fed to touch them, but the long term rates will come down as the market continues down the deleveraging path Gross and a few others are counting on, as assets get substituted for cash on institutional balance sheets. For the large institutions who continue to target their balance sheets, this ‘recovered’ equity market is a perfect opportunity to sell some reflated assets, and that means that a large amount of cash will be used to retire debt  and/or refinance Option ARM mortgages for that matter.

Long term rates are likely to fall on this development.

Read the whole article here.

Tags: Bill Gross, Bloomberg Radio, Bond Fund, Corporate Bonds, Corporate Debt, Deflation, Easy Money, Emergence, ETF, Federal Reserve, Government Bonds, government securities, Guarantees, Investment Bonds, Investment Management, Maturity, Mortgage Debt, Newport Beach California, Pacific Investment Management Co, Peers, Retail Investors, Treasuries
Posted in Markets | 1 Comment »

Hendry: Fears of inflation could trigger bigger downturn

Tuesday, June 30th, 2009

We have followed Hugh Hendry, the outspoken and bold CIO of Eclectica Asset Management, and one of the few profitable absolute return hedgies during the last 12 to 18 months, as he built his high conviction case for deflation, and invested as such, in long dated government bonds, Gilts and 30-year US treasury bonds. Last year, it was Hendry who pointed out that 10-year US treasury bonds were signalling deflation, and that in a sea of risky assets, they were the only asset that was up, and up by 15%, while stocks declined in value by 20% or more, the first half of 2008. Falling interest rates, a flattening yield curve, which came as a result of investors flight from risk in equities and commodities, paid off, with Hendry ending the year up some 40% in his flagship Eclectica hedge fund.

In the months since the beginning of March, however, his thesis has been challenged by the market’s renewed embrace of inflation risk, and stocks recovered off brutal lows, as a result of the deemed “risk” trade. By April, Hendry, who is not known for being a buy and hold investor, despite his standing beliefs, reduced his positions in long duration government bonds, treasurys and gilts in the short term, challenged by yields returning to last year’s levels as the economic “green shoots” teased.

We recently posted Hendry’s June 2009 letter to investors in which he re-iterates his view on inflation/deflation, and explains in fair detail that rough waters lie ahead for stocks and commodities as a result of the markets’ over-anticipation of the effects of the whirring central banks’ printing presses. He has avoided investing in stocks for most of the last year, making almost all of his fund’s returns from owning long duration government securities.

Hendry, an avid market historian, believes it possible that we have already experienced the very inflation and hyperinflation the market fears, during the 2002-2007 period where creditor nations (BRIC) amassed enormous forex reserves in the trillions, while gold broke out of a 27-year trend and oil skyrocketed to $147 per barrel. In yesterday’s interview, he also points out that during in the last 7 years the US dollar lost 40% of its value, an occurrence which is often overlooked or underplayed, but that he calls unprecedented. He explains this view in yesterday’s CNBC interview. As usual Hendry’s clarity on the matter is enlightening, as he has a mastery of the complexity of currency effects arising from carry trades and currency crosses.

One year ago, Hendry warned the Hungarian finance minister that the Hungarian economy, and others like it in Eastern Europe, which were financing their growth with Yen and Swiss Franc crosses and/or carry trades, would be unable to keep up with the spectre of cyclical currency fluctuations which could rapidly destroy the monetary liquidity they were awash in during the “strong Euro” era.

Click play to watch the June 29, 2009 interview:

CNBC: Fears about inflation and hyperinflation could create another economic downturn, bigger than the one the world went through, Hugh Hendry, chief investment officer at hedge fund Eclectica, told CNBC Tuesday.

The stock markets are due for a correction after having risen dramatically this year, but this is not likely to come in the summer and another rally is possible, Hendry, who said he was remaining risk-adverse this year, told “Squawk Box Europe.”

“We have a huge intellectual conviction… that this is a more profound downturn that we’re experiencing and markets will be under pressure,” Hendry said.

“People get more get more concerned about government debt… and it sows the seeds of its own destruction,” Hendry said. “We’re actually tightening the screw, we make monetary policy tighter and tighter.”

Long-term yields on government bonds have been rising, as investors fear central banks, especially in the US and the UK, will have to absorb excess liquidity from the system and raise interest rates to fend off inflation once an economic recovery takes hold.

“I think this paranoia today that inflation is happening today I think it puts in place a motion for a decline in the economy,” Hendry said. “I think they’re not printing enough money… with regards to the wealth destruction that has been happening over the past 18 months.”

“We raised interest rates and actually we killed the golden goose,” he added.

Stock Market Correction

A correction in the stock market is likely, but it will not come over the summer, and the S&P 500 index may even hit 1,000 before the downturn, according to Hendry, who admitted he is not stepping in to catch the tail of the rally.

“It’s kind of fun watching it from the sidelines, I must say I’m not participating,” he said. “My flower opens in the winter, not in the summer.”

There is a tight correlation between the oil price and the Chinese currency, the yuan, with oil prices rising as the yuan was strengthening, Hendry said. This is because Chinese speculators had borrowed in dollars as the yuan firmed, and all that liquidity was thrown into the oil market last year.

“The one non-confirmation in the world is that, since July, the Chinese currency has done nothing, it was flat vis-à-vis the dollar,” he added.

Hendry said he still prefers conventional government bonds, and admitted they were the cause his fund was 3 to 4 percent down on the year. But, he added, government bonds were down 20 percent – although he doesn’t think they will end the year like this.

China and other countries with a current account surplus are not as safe as they seem at first glance, because their economies are still hugely dependent on exports to the US, which is still “down on its luck,” he said.

“If that’s the case, the last place you want to be is the surplus countries,” Hendry said.

Source: CNBC, June 29, 2009

http://www.cnbc.com/id/15840232/?video=1167997692&play=1

Tags: Absolute Return, BRIC, Central Banks, Chief Investment Officer, Cnbc, Cnbc Interview, Commodities, Creditor Nations, Duration Government, Economic Downturn, Excess Liquidity, Finance Minister, Flattening Yield Curve, Forex Reserves, Gilts, Government Bonds, Government Debt, government securities, Hedgies, Hugh Hendry, Hyperinflation, Inflation Deflation, Inflation Fears, Inflation Risk, Intellectual Conviction, Investing In Stocks, Lows, oil, Printing Presses, Risky Assets, Rough Waters, Squawk Box, Stock Markets, Stocks And Commodities, Term Yields, Treasurys, Trillions, Us Treasury Bonds
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Hugh Hendry: Commodities Stocks to Remain Weak?

Tuesday, December 16th, 2008

Hugh Hendry, the eloquent and outspoken CIO, Eclectica Asset Management, in an appearance on CNBC’s PowerLunch (Dec. 10) shares his thoughts on agriculture commodities stocks such as Potash, and Syngenta.

Among other things, Hendry makes a forthright confession that he was wrong earlier this year to make the call to be long commodities stocks. He continues on to say that when he realized he was wrong, he promptly sold them too. Hendry runs a long-only Agriculture fund, as well as his primary hedge fund, and has been controversial in some of his choices to oppose his funds’  mandates at times in favour of cash or government securities.

His main quid pro quo is his caution that although commodity stocks  could revisit highs, we could be waiting as many as 10 years for it. Its a must watch.

In a 7-minute segment earlier the same day, Hendry discussed the idea that as the financial crisis deepens, civil liberties are curtailed by governments eager to put an end to falls in share prices and economies. This is an insightful discussion, a must-watch.

“The government has gone to war, it is an economic war. And in a war the government takes a larger and larger role in the society. That’s fine, you have to accept that,” Hendry said. “What is concerning is the erosion of civil liberties.”

The ban on short-selling financial securities in the UK is one example of erosion of civil liberties, another is a statement made in parliament last week which opens the way to silencing the press during financial crises.

The Treasury Select Committee said that it will look at the role of the media in financial stability and whether financial journalists “should operate under any form of reporting restrictions during banking crises”.

“We’re only a year into this and suddenly, already, our liberties are being brought back, brought in,” Hendry said.

Tags: 10 Years, Agriculture Commodities, Array, Asset Management, Caution, Choices, Civil Liberties, Cnbc, Commodity Stocks, Confession, Economic War, Erosion, Favour, Financial Crises, Financial Crisis, Financial Journalists, Financial Securities, Financial Stability, government securities, Hedge Fund, Hugh Hendry, Mandates, Minute Segment, Potash, Powerlunch, Role Of The Media, Share Prices, Syngenta, Treasury Select Committee
Posted in Commodities, Markets | No Comments »

James Grant: Return-Free Risk

Sunday, December 7th, 2008

James Grant, founder and editor of Grant’s Interest Rate Observer, and an editor of the newly published sixth edition of “Security Analysis,” by Benjamin Graham and David L. Dodd, has published a column at FT.com and been the subject of a 24-minute Bloomberg audio interview (below) about the new nature of the market and government securities.

Click Play for James Grant’s December 5, 2008 Bloomberg Audio Interview

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Grant very succinctly redefines the bond market as providing Return-Free Risk, rather than the old standby, Risk-Free Return. Here are a few excerpts:

The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.

Yes, Treasuries might conceivably redeem the hopes of their besotted admirers. Maybe a deflationary chasm is about to swallow us all. Never before has the US been so leveraged. And-just possibly-never before were lending standards so reckless as the ones that brought joy to so many astonished mortgage applicants in 2005 and 2006.

In their magnum opus Security Analysis Benjamin Graham and David L. Dodd advise that “bonds should be bought on their ability to withstand depression”. They wrote that in 1934. So far is that rule from being honoured by today’s financiers that not a few bonds-and boxcars full of mortgages - could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?

On non-Treasury and corporate bonds:

The non-Treasury departments of the credit markets have crashed. No surprise then that prices and values are deranged. Market makers have closed up shop for the year, while hedge funds cower in fear of redemptions. You’d suppose that professional investors – doughty seekers of value – would be combing through the debris for bargains. Alas, no. Most seem content to lend money to Henry Paulson (subsequently to Timothy Geithner) at 2 per cent or 3 per cent.

In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was they—and almost they alone—who owned convertibles. Now many of these folk must sell them.

Few buyers are presenting themselves, however, though extraordinary bargains keep popping up.

“Risk‐free return” is the standard tag attached to the government’s solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description - “return‐free risk”.

Read the complete article here.

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Posted in Bonds, Credit Markets, Economy, Markets | No Comments »

Hugh Hendry Interview: Invest in Long Government Bonds

Tuesday, November 11th, 2008

Hugh Hendry, the brilliant, brash and outspoken and eloquent CIO of Eclectica Asset Management, one of the UK’s most prolific asset managers discusses global markets and is investing in long-term government securities in the US and UK. Dominic Frisby, of Money Week and Commodity Watch Radio conducts this interview, which was recorded on November 1, 2008.

Here is a summary of some of Hendry’s thoughts:

• the present environment is all about the return of your capital, not return on capital.
• he is intrigued by government bonds and bets that interest rates will be cut further than people anticipate at the present time.
• interest rates will come down to unprecendented levels but it won’t make a difference.
• monetary policymakers will be pushing on a string.
• Hendry has been investing in long term US treasuries
• he is profoundly bearish on commodities, for now
• He believes that gold will drop further to below $600 as a result of the deflationary pressure that we are facing from the fixing of the system, then as a result of all the stimulus, we will face profound inflation. When long-term bond yields drop to around 2.5% that’s when you want to own commodities. That’s when he’ll back the truck up for gold, the big 16 oz. bars.
• For now Hendry will place his bets on deflation and falling long term interest rates.

If being leveraged means shorting cash, then deleveraging means buying cash, and he’s afraid the deleveraging is far, far, from over, because debt levels are still very high at this point. That means the dollar will continue to rally on the resultant repurchasing or short covering of the dollar. The rallying dollar, and ongoing asset liquidation is deflationary for now.

Hendry’s case and outlook is deeply compelling and worth taking seriously.

The second part of Dominic Frisby’s interview is with Dr. Francis Claessens of Peers, who tells us what the super rich have been doing with their money. Claessens leads WealthPeerGroup.com, a peer group that meets on a monthly basis to discuss financial issues. Minimum entry to this group is investable assets of £5-million ($8-million). This too is very interesting, i.e. if you’re interested in what’s worrying the very HNW investor these days.

Listen to the entire interview here:

Tags: Blog, Claessens, Commodities, Commodity, deflationary pressure, Dollar, Dominic Frisby, Eclectica, Eclectica Asset Management, Gold, Government Bonds, government securities, Hugh Hendry, inflation, interest rates, interview, Markets, Monetary Policy, podcast, Rally, risk, Term Bond, UK, Value, Video
Posted in Bonds, Commodities, Gold, Markets, Outlook | No Comments »

European Credit Crisis Deepens Global Selloff

Tuesday, October 7th, 2008

Ongoing credit market turmoil and a rapidly deteriorating economic outlook have hit global equities very hard.

Ongoing credit crunch worries and evidence of resultant effects on the global economy are diminishing the remnants of confidence among investors. Investors are fleeing all risk assets indiscriminately, moving into safe havens such as cash and government securities. Widening concerns of global bank failures continue (regardless of last week’s approval of the U.S. TARP program, now anti-climactic), bringing about runs on banks in several countries and preventing financial institutions from lending to one another. 

Germany and Denmark announced guarantees on all private deposits following Ireland’s first-mover decision last week. Looks like we’ll have to wait for Europe to come to some unified solution such as a concerted bailout, and some nationalization of the banking sector in some of the larger markets.

Source: BCA Research, October 7, 2008

Tags: Bailout, Banks, Credit, Credit Crisis, Credit Market, Economy, energy, Euro, Germany, government securities, Markets, oil, risk
Posted in Credit Markets, Economy, Markets, Oil and Gas, Outlook | No Comments »