Tuesday, September 06, 2011

Goldman Sachs' New Euro Bearishness Proves Instantly Costly

We have fresh evidence that trading ideas from the masters of the universe over at Goldman Sachs aren't all they're cracked up to be.  In a "leaked" report that quickly went viral through the financial blogosphere, a Goldman Sachs trading strategist advised the firm's hedge fund clients to consider a complex bearish option play against the euro as a way to profit from multiple economic headwinds.  The headwinds themselves - capital-starved European banks, lack of U.S. job creation, questionable Chinese prospects - have proven costly enough to investors.  What proved even more costly today would have been any hedge fund action to follow through on GS's bearish options for the euro. 

The Swiss National Bank threw a big monkey wrench into that anti-euro strategy today by announcing a fix of the Swiss Franc at 1.2 to the euro.  The SNB's intent to buy unlimited euros would have destroyed any bearish options initiated against the euro prior to that announcement.  It remains to be seen whether GS will apologize to any hedge fund clients that acted on its leaked report's bright idea.  Investors also now have one less safe-haven currency available, as capital fleeing to quality recently bid up the CHF and priced Swiss exporters out of markets.  Now the SNB's frantic franc printing will inflate the price of any imports Swiss consumers need. 

Price inflation spawned by desperate central banks is rapidly becoming commonplace worldwide.  Soon no currency will be a pure safe haven (although a basket of them may be useful as portfolio diversifiers and arbitrage instruments).  The sovereignty crunch is in full swing.  John Robb at Global Guerrillas is proving more prescient by the day in tracking this truly global crisis of capitalism. 

Full disclosure:  No position in GS at this time.  No position in Swiss francs (commonly noted as CHF) or any CHF-derived instruments (such as the ETF trading as ticker FXF) at this time.