Tuesday, September 17, 2013

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.