The Haiku of Finance for 01/28/14

No course correction
Continue wasteful spending
Beg dollar collapse

JPMorgan Chase Will Bail Out Your Grandma For Uncle Sam

JPMorgan Chase announced that it will make good on its banking clients' Social Security and other benefit payments in the event Uncle Sam decides to turn deadbeat.  I did a double take when I heard that on NPR this morning, and I read the article to be sure I hadn't misunderstood something.  I can draw one of two implications.  Scenario number one is that JPM is supremely confident that its cash horde will withstand a one-time delay of government payments and it won't get hit with any more SEC fines or forced settlements.  The alternative is that JPM knows something no one else could know about whether it has its own backstop from the US government.

Such an guarantee is very unusual from a SIFI.  Most investors are nonchalant about hedging the possibility of a US default on its shorter termed Treasury obligations.  It sure looks like financial advisors and even portfolio managers haven't explored hedging with hard assets or futures contracts on non-US currencies.  Central banks are making appropriate preparations but the mention of increasing dollar swap lines makes me LOL.  If people panic and sell Treasuries the first thing they'll do is get rid of US dollar proceeds as fast as possible.  Central bank dollar swaps are just as likely to amplify a run on the dollar as mitigate it.

It's too late for your grandma to open a bank account at Chase to seize on this sweet deal.  The next few days will reveal whether one was necessary to bail her out.  

Forgetting FX Invest West Coast 2013

I attended last year's FX Invest West Coast thinking I could benefit from the thinking of serious currency investors.  The main thing I learned last year is that much of this finance sub-sector is driven by quant philosophies that have little to do with finding value in the real world.  I tried to register several times this year but never got a final confirmation to attend.  Maybe someone who attended last year took offense at what I wrote about stupid quant people wasting their time with Rube Goldberg trading mechanisms.  I stayed away today but here's my blind-item critique of the FX Invest West Coast 2013 agenda.  I have no idea what they actually said, or if they even showed up, because I wasn't there.  My comments below refer to publicly available information that relates to the topics of the scheduled program items.

CalPERS had something to say as an opener.  My blog article of what CalPERS had to say last year really laid into them so I can't imagine what they could have said today.  CalPERS lost my respect ever since they switched from activist investing in undervalued companies to doubling-down on illiquid, leveraged products.

FRBNY spoke on PVP settlement and replacement cost.  The New York Fed has all you need to know about their payment versus payment best practices in a 2010 white paper.  The standard definition of replacement cost means little in currency investing unless it applies the BIS best practices for reducing foreign exchange settlement risk.

BlackRock was supposed to say something about currency beta and whether active or passive investing in currency matters.  I just shake my head whenever somebody uses beta to measure anything other than a single security that belongs to a broad index.  IMHO anyone who uses active strategies in currency is merely gambling, not investing.  Currency is cash, and cash is for passive holdings until it finds an active use in some other asset.

A bunch of panels discussed BRIC currencies, ECB policies, and electronic trading platforms.  Folks, I've discussed all of those things on my blog and no so-called "expert" can hold a candle to my level of thinking.  I haven't blogged about swap execution facilities (SEFs) but I don't use them.  I suspect that the wide use of SEFs will eventually reduce the alpha that active currency managers can generate by allowing more traders to arbitrage away pricing anomalies.  It will be just like Reg D destroying the alpha available to managed futures traders.  Kiss those big bonuses goodbye, quants.

The Indian rupee (INR) has done badly this year.  No kidding.  Quants need to stop trying to day-trade this currency and start looking at India's macroeconomic fundamentals.  India's central bank is considering radical plans to play games with its gold reserves in an attempt to stabilize the rupee and India's current account deficits.  Raising short-term interest rates is the right thing to do.  You'd think quants would see that as a buy-and-hold opportunity, but quants don't think that way.

One speaker showed an interest in discussing emerging market currencies as an inflation hedge.  I've discussed that on my blog but I only like currencies from countries with low debt-to-GDP ratios and a strong rule of law.  Throwing emerging currencies into the mix just won't do it for me.  You'll end up owning currencies from Argentina, Venezuela, and other places where demagogues confiscate wealth and hyperinflate the economy.  No thanks.  I would have been squirming in my seat if I had to listen to a formal talk on the glory of EM currencies.

The one topic I might have liked would have been currencies as alternatives to bonds.  My currency ETFs are paying me a better yield than my US dollar cash holdings.  Like I said above, only low debts and strong rule of law matter in finding currencies to use as hedges or income alternatives.  Once hyperinflation destroys the US dollar, my currency ETFs will enable me to buy US dollar assets cheaply.  Currency is cash, and foreign currency in a hyperinflated economy enables wealth accumulation.

This FX Invest West Coast conference is still in progress as I'm writing this article.  I didn't miss much besides free food and coffee.  It may be just as well that I sit this conference out if they can't have me as a speaker.  I would probably offend everyone in the room with my strongly held belief in the limited portfolio role for currency strategies.  Currency is cash, and cash is productive in only limited ways:  investing in assets or paying expenses.  Currency can also hedge cash exposures but those exposures must be committed to something serious.  I have lots of cash sitting in my portfolio because not many assets in the capital markets are attractively priced and I have very few expenses to pay.  I'm too cheap and too smart to be of use to many of the numbskulls in the professional currency investing circuit.  It's their loss and they'll never know it.  

More Currency ETFs Coming Down The Pike From iShares

Oh great, just what we all need.  Here come more ETFs based on currency ideas.  The iShares family is filing to launch actively managed currency ETFs.  I can tell just by looking at the filing paperwork that there's no way I'd be interested in these instruments.

The language of the iShares templated prospectus puts me off.  "Financial exposure substantially similar to a purchase" of currency is not necessarily the same thing as the currency itself.  I am disappointed that these funds allow for the purchase of short-term debt denominated in US dollars.  The whole point of holding currencies not correlated with the US dollar is to reduce exposure to an inflationary calamity that would destroy the dollar's purchasing power.  Hiding US sovereign debt inside a currency ETF magnifies US dollar exposure rather than hedging it.

I already have long holdings in Australian, Canadian, and Swiss currency thanks to ETFs with a bearish bet against the euro.  The Guggenheim CurrencyShares are plain vanilla holdings of currency and nothing more.  Currency doesn't need to be actively gamed to be a viable hedge against home country inflation.

Full disclosure:  Long FXA, FXC, FXF; long put position against FXE.

Financial Sarcasm Roundup for 04/01/13

The prime targets for my sarcasm are still as easy to find as ever.  That is not an April Fool's Day joke.

Germany's finance minister is totally blowing smoke when he says that the cram-down of Cyprus depositors was not a template for the rest of Europe.  Of course it was a template!  Sheesh.  Maybe that's his own April Fool's joke.  He knows darn well that the troika is going to repeat the Cyprus resolution all over the Continent and then the UK and US will follow suit.  Read my blog article from two days ago about the publicly available template that has now been tested on a live country.

Delusional statements aren't confined to the Continent's leaders.  Cyprus' president is adamant that his country must stay in the eurozone.  I think he'll be changing his tune once a large number of his fellow citizens discover exactly how much of their deposits they're going to lose.  Outrage has been in a state of suspended animation thanks to capital controls and daily withdrawal limits.  It can't stay suspended forever.

Not everyone becomes delusional after handling sovereign finances.  Two of America's former federal budget directors call for spending cuts, entitlement limits, and fiscal sanity.  They're doing the right thing but no one will listen.  Americans love entitlement spending and the dollar's reserve status allows us the illusion that entitlements can continue indefinitely.

Not every country believes the dollar's reserve status will continue indefinitely.  The IMF reports that emerging market central banks are reducing their dollar exposure.  Regular readers of my blog will have noted the trend towards bilateral currency settlements that bypass the dollar.  Pretty soon the dollar will be about as welcome with central banks as an atheist in an evangelical revival tent.  The euro's problems are giving the dollar a temporary reprieve and hammering the price of gold.  Central banks are using this window of opportunity to reduce dollar holdings while the valuations of said holdings are still meaningful.

Those sure are some fun, sarcastic news items.  I'd now like to say a special hello to a couple of my regular readers, "Mickey" and "Sharks Chef."  Hi losers!  I'm smarter and richer than both of you idiots put together.  It's been really nice hearing about you and your friends lately because it confirms everything people have told me.  I'd give you an April Fool's joke but your foolishness makes for jokes year-round.  Keep reading my blog for more fascinating insights and stunning revelations.

Greece And U.S. Don't Really Have Two Years

Here's today's "whoa Nellie" moment.  There will be more in years to come.  Europe is willing to give Greece two more years to meet its fiscal adjustment targets.  That's pretty silly considering Greeks are rioting right now over cuts to government spending.  They'll really light things up the longer that two-year reprieve window drags out their pain.  Leaving the euro for a hyperinflating neo-drachma will be just as painful but will probably end sooner.

The U.S. probably doesn't have two years either to solve its fiscal shortfalls but we don't know it yet thanks to the dollar's ever-more precarious status as the world's reserve currency.  Lining up business leaders to provide cover for tax increases will probably help but there shouldn't be any promises of business tax breaks in return for support.  Wealthy investors selling assets now are getting ahead of the game, so let's not count on any giant revenue boosts next year from higher capital gains taxes.  The Laffer Curve's implication that higher tax rates don't necessarily raise gross collections is becoming a self-fulfilling prophecy.

Jobless benefits are a potential casualty of the fiscal cliff but IMHO the federal government is not likely to slaughter this sacred cow.  The lesson of last week's election is that working-age Americans like their free handouts and will punish politicians who talk about taking them away.  Americans have become more like Greeks than they know.  Whatever compromise comes out of Washington will probably impact the rich first and the poor last, until hyperinflation makes everyone poor.

I have no idea whether Americans deprived of government benefits will be up in arms like Greeks.  America got its history of social unrest and agitation out of its system by the late 1960s thanks to an elite consensus in favor of a welfare state.  The end of the welfare state's income-support programs and lifestyle entitlements (SocSec, Medicare) will test our social fabric, and our elites are willing to postpone that day of reckoning even if it means they continue to bear a proportionately large share of the nation's income tax burden.

Financial Sarcasm Roundup for 10/22/12

I should have refreshed my investment portfolio today but was busy with a series of meetings that occupied all of my daylight hours.  Interacting with human beings can be a waste of time but sometimes it a necessary inconvenience.  I won't get sarcastic about the political debate from earlier this evening.  There are other matters to discuss.

Hey look, jobless claims are up again!  Did you miss that while you were buying socks again, like some newscaster said you should?  Getting past the noise on intermodal railcar loads brings us the revelation that shipments of metal and coal are way down.  Reduced demand for raw inputs is not a sign of a growing economy.

Japan's exports are down, and IMHO the country faces another credit rating downgrade whether it goes for QE or austerity.  Maybe they should rename the place Land of the Sinking Sun.

Stories on a probable market top in high-yield bonds remind me of similar stories I saw in early 2007 that wondered what was powering the high-yield market to seemingly impossible highs.  I had the foresight to exit U.S. equities in mid-2007 just as the stock market peaked.  Most people never saw it coming, nor do they see anything notable coming now.

Asia is now far advanced in its stealth run on the dollar.  China's trading partners have slowly replaced dollar holdings with yuan holdings.  Helicopter Ben has no idea what he started with his taunt to Asian central banks that they can just decouple.  His overconfidence that the Fed can now take the place of foreign bond buyers in the market for Treasuries will be the undoing of the dollar's domestic value.

Stay tuned for my portfolio update tomorrow.  I'm going to pull the trigger on a change I've hinted at making for some time now.

The Haiku of Finance for 10/17/12

Show me currency
Low-debt and high-growth country
Useful dollar hedge

Maturing Thoughts on Borrowing for Non-Productive Purchases

I have been a lifelong opponent of assuming personal debts.  I have never maxed out a credit card or applied for a loan.  The handful of times I've been late on a bill payment in my life are some of my gravest mistakes, and the tiny finance charges I paid each time for my oversights are a source of shame.  I hate debt.  That was the mature attitude to have during normal, boom-bust business cycles marked by productivity-driven growth and inventory-derived recessions.

Times have changed.  The historically normal boom-bust model is giving way to its once-in-a-lifetime deformed cousin, the hyperinflationary depression crisis.  An overindulgence in government, business, and household debt is driving the Fed to quantitatively ease away the dollar's value.  This will destroy dollar-based fixed income assets.  That's bad for savers, bondholders, banks, and hedge funds holding fixed-rate notes.  That's good for debtors owing fixed-rate loans, as the devaluing dollar enables them to pay off old debts with dollars of lesser value.

My point is that now is the time for previously debt-averse people like me to seriously consider taking on debt as a time-based arbitrage strategy for a self-destructing currency.  I scoffed for years at consumers who  took out automobile loans.  Owing money on a consumer good that immediately loses half of its book value upon purchase ought to be financial suicide.  Buying a vehicle with debt is good if said vehicle is used as an income-producing asset, i.e., a taxi cab, delivery van, ice cream truck, or urban safari tour bus for the hills of San Francisco.  I thought that way until very recently.  Now I think a loan of any kind, even for something as unproductive as a new car, is a useful way to acquire a hard asset with an increasingly worthless liquid asset.

I've been window shopping for a new car for some time.  My 2003 Ford Mustang still hums but at 80K+ miles it's getting long in the tooth.  When I turn the ignition key on a brand new sports car of some sort (another Ford Mustang or a Porsche are my leading contenders), it will be with the help of a fixed-rate loan that I will be happy to owe.  Watching the loan lose its value in the years ahead as hyperinflation enables me to pay it off in today's equivalent of pennies will be great for my net worth and my stellar credit rating.  Why, I may just pay that five-year loan off a month early as a show of generosity just to ensure I'm not the final nail that drives Ford Credit or its hedge fund syndicate into bankruptcy.

Nah, just kidding on that last count.  I'd never accelerate my payment schedule or do anything else to give a brain-dead counterparty some temporary advantage.  They'd probably assess me a prepayment penalty just to reach for my wallet one last time from beyond the bankruptcy grave.  Don't think a creditor wouldn't resort to that if a post-hyperinflation political regime allows it in one final act of financial repression.

I'll be checking with my local auto dealers soon to see what kind of financing terms they offer on new, flashy sports cars.  I'll also be checking with my bank's loan desk to see if they'll let me max out some one-year consumer loans just before this hyperinflation show gets rolling.  The Godfather of Soul, James Brown, once sang "Papa's Got a Brand New Bag."  Well, Tony here needs a brand new car, paid for by creditors dumb enough to loan me money as the dollar goes down the drain.  

The Haiku of Finance for 10/01/12

No dollar crash yet
Euro crisis still plays out
Give it some more time

The Haiku of Finance for 08/20/12

I hedge currency
Strong ones in low debt countries
Negate dollar crash

Financial Sarcasm Roundup for 08/13/12

Remember the movie 300 and its famous "This is Sparta!" rallying cry?  Well, this isn't Sparta.  This is sarcasm.

The national tickets for this election cycle are now complete.  The American chattering classes have three more months to convince us that we have a real choice.  The truth is more depressing.  Neither party will advocate the reforms to unfunded middle class entitlements that will prevent the bond market from rejecting the U.S. dollar.  Enjoy the free entertainment while it lasts.  

The Chinese government has now endorsed Ponzi finance as the final prop for its growth story.  Asset-backed finance has been hard enough in the U.S. with questionable title chains for mortgages underlying the ABS in many institutions' portfolios.  China thinks that's okay.  The big secret is that Chinese institutions selling ABS probably also owe debt that can and will wipe them out, bringing the hard lessons of securitization full circle from across the Pacific.  This new development will give knowing investors enough time to unload Chinese equities on suckers chasing the non-existent safety of ABS.  I may even use whatever window exists to unwind what remains of my long FXI position, if enough idiots want to chase it at some insane valuation.

Germany is headed for recession by the end of 2012.  Really?  You mean, all those broke Greeks can't afford German exports anymore?  Angela Merkel's gamble on a federal EU referendum is a smokescreen for the Greeks to make a quiet exit from the eurozone.  Ms. Merkel may hope they will be the only nation to exit, but I'm pretty sure I know better.  The German economy will sink even faster when Spain and Italy stumble through the exit.  

FedEx is considered a bellwether stock because its shipping volume indicates the ability of businesses to spend.  Voluntary employee buyouts at FedEx are an ominous sign that layoffs are in the near future.  If logistics providers are cutting back, then so is the rest of American business.  Forget everything you hear between now and Christmas about how the economy is growing, because FedEx would be hiring rather than laying off if things were so great.  

BTW, Notre Dame is still worthless.  

Full disclosure:  Long FXI with covered calls.  No position in FDX.  

The Limerick of Finance for 06/10/12

It's good to have strong currency
But the Fed's run by Ben Bernanke
He wants to inflate
Waiting may be too late
Hedging cash is one trick he can't see

Alpha-D Currency Diversification for June 2012

I did it.  I contemplated this move for many months and finally executed last Friday during market hours.  I added foreign currency diversification to my Alpha-D portfolio with long positions in CurrencyShares Australian Dollar Trust (FXA) and CurrencyShares Canadian Dollar Trust (FXC).  I can explain this fairly radical departure.

I like what John T. Reed has published on the desirability of holding currencies other than the U.S. dollar as hedges against hyperinflation.  He correctly identifies several countries that rank high on Transparency International's list and low in relative debt-to-GDP ratios.  My tactical approach to holding the currencies differs from Mr. Reed's.  He advocates opening cash accounts with banks in each of his chosen countries.  I chose instead to hold ETF securities that represent cash holdings of currencies held in trust outside the U.S.

I reserve the right to add CurrencyShares Swiss Franc Trust (FXF) to my holdings but I suspect the Swiss central bank will continue its efforts to hold down that currency's value relative to the euro.  That's why I sold puts underneath FXF, as I suspect central bank action may drive its value lower relative to the dollar (as well as the euro).  I read the prospectuses on the CurrencyShares website before I made these choices.  The good news about these ETFs is that they are physically held outside the U.S., beyond the reach of confiscation and capital controls should the U.S. government enact those policies.  The potentially bad news is that JPMorgan is the depository for the currency.  In the event of JPM's bankruptcy, holders of the ETFs would be considered unsecured creditors of JPM and could suffer partial or total losses (hmm, shades of MF Global).

There is no way to mitigate the risk of JPM going bust.  The only consolation available to me is the possibility that the U.S. government will selectively backstop the balance sheets of systemically important institutions, and JPM appears to be one of the favored few.

I would like to take a position in New Zealand's currency but I can't find an ETF that represents holdings there.  I am not about to book a flight there just to open a savings account.  I may add more cash to my long positions in FXA and FXC in the near future.  Alternatively, I may not do so if I find some good hard asset stocks.  It's my money and I'll protect its value any way I like.

Full disclosure:  Long FXA and FXC with covered calls; short cash-covered puts under FXF.  No other non-U.S. currency holdings at this time.  

The Haiku of Finance for 06/04/12

Currency safety
Low debt countries won't inflate
Seek stability

Fed May Use More Than Swaps To Save Europe

The European Central Bank isn't as powerful as the Fed.  Legal restraints and the absence of a true federal union mean the ECB has fewer tools to manage monetary policy and cannot facilitate inflation as a solution to sovereign indebtedness (or at least cannot do so as easily and rapidly as the Fed).  That's why the ECB's president is now urgently calling for political actors to provide policy and fiscal solutions to Europe's debt crisis.  They won't help, of course, with Greece and now Spain ready to fall into the abyss of sovereign default.

The Fed is waiting in the wings to supply the liquidity backstop that the ECB cannot provide.  Readers are welcome to do homework on the $16T worth of dollar swap lines the Fed activated during the first round of this crisis.  I would not be surprised if those swap lines have been multiplied several times over.  Hyperinflation in the U.S. and Europe has not yet occurred because all of that magic Fed juice has not leaked out into wages; it has remained locked inside commercial banks' balance sheets.  I am not sanguine enough to presume that this condition will hold throughout the remainder of this crisis.  Transmission mechanisms are all that is necessary; a politically popular push for home mortgage relief with direct six-figure gifts to bankrupt Americans or Europeans would start the boulder rolling downhill.

In other words, more gigantic dollar swaps increase the risk of the hyperinflationary genie being let out of the bottle.  Using even more creative Fed tools - like direct loans to troubled European banks to prevent them from collapsing - raises the risk even further.  

The Probable End Of The Euro

Plenty of market commentators are all over the trouble Greece is giving the euro.  Even the EU's leadership is now openly admitting the need to prepare for Greece's departure from the Eurozone.  The strongest remaining Eurozone nations will face difficulty selling debt if they continue to insist on backstopping their deadbeat neighbors.  Witness Germany's new zero-interest bonds; investors' tolerance for zero interest won't last long if Germany can't let Greece leave its cage.  The EU has probably already laid contingency plans and so has the Fed, but the rest of us not in the know won't hear about them until after they're executed.  My best guess is that the next round of EU / IMF financing will bypass Greek banks entirely and go to Spanish and Italian banks exposed to the sovereign debts of their respective countries.  This is a risky bet that Greece (and maybe Portugal and Ireland) can be triaged from the euro.  Future financing rounds have probably also incorporated dollar swap lines from the Fed, which of course we won't hear about either until this next crisis is long past.

I'm not staking my own capital on any question of whether the EU can afford to let any of its southern economies leave the currency union.  I'd rather focus on the effects outside Europe.  Any shock to the euro from sovereign defaults and bank runs on the Continent will make the U.S. dollar look pretty dog-gone good as a reserve alternative.  That sunshine will last until whatever fiscal cliff in the U.S. - from expiring tax cuts, sequestered spending, and what not - sparks a run on the dollar worldwide and a spike in U.S. short-term interest rates.  The U.S. may hit its fiscal cliff in early 2013 or may muddle through for a while longer, as the Eurozone has done to my continual amazement.

I have no plans to go anywhere near U.S. stocks or bonds in anticipation of this mess.  My preferred hiding places are going to be the currencies of countries with fairly low debt-to-GDP ratios, specifically Canada, Australia, and New Zealand.  

What If China Shorts Dollars?

I've been pondering Chinese forex policy lately.  News that China will allow its banks to short U.S. dollars is more than just a safety valve in the event of a run on the dollar.  It allows banks to hedge any long positions they have in U.S. Treasuries.  Placing limits on short positions is smart but basing those limits on annual turnover is not.  Safe limits would be based on the net notional value of currency positions marked to market daily, complying with Basel rules on capital.  Western banks are pretty good at getting around capital adequacy rules, so perhaps China is just taking a less subtle approach.

Don't expect to see a whole bunch of Chinese banks piling into dollar shorts all at once.  Greece's potential exit from the euro makes that currency look increasingly weak and the dollar look relatively strong.  That means the U.S. federal government can continue to finance its ginormous budget deficits cheaply and Chinese banks can breathe easier about the value of their Treasuries.  Wait a few months after the euro breaks apart.  The British pound and the dollar will then be in the spotlight.  

Full disclosure:  No short positions in the U.S. dollar or long positions in other currencies at this time.

The Haiku of Finance for 05/04/12

Bond breakdown coming
Market run on the dollar
Destroy life savings

There Are Bigger Numbers Than Dow 13,000

The DJIA is flirting with 13,000 after a few years of resetting closer to what I believe should be its fair market value (hint: a lot lower!).  There are plenty of numbers far larger than that one.  Our planet is about 4.5 billion years old, with 7 billion people living on it, and it's approximately 93 million miles from the Sun.  Okay, I'm goofing off here.

The big numbers we should really concern ourselves with as investors are the federal government's unfunded liabilities, which totaled over $61 trillion in 2011.  That's the figure that will ultimately drive the global bond market away from Treasuries and any other dollar-denominated fixed income investment.  I don't listen to market commentators who urge the investing public not to miss the next bull market into Dow 13,000.

Full disclosure:  No position in Treasuries at this time.