Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: KyrosL who wrote (72257)	1/30/2010 3:27:13 AM
From: Haim R. Branisteanu	Read Replies (1) of 74559

Is Greece too small to fail? - is the USD rally overdone? The answer from a market, economic and political perspective is yes. The straitjacket of the Euro will enforce harsh medicine and they will be supported in that effort if necessary when they show that they are seriously and structurally addressing the issues. At that point the EURO will be seen for what it has become. A serious alternative reserve currency and finally a worthy successor to the Deutshemark and its associated discipline in monetary and economic affairs. Sadly it will have taken a crisis (As it often does) for it to make this final step. Does anyone remember the 1998 episode when concerns about Russian default began to materialize. At that stage people were worried both about their positions in Russian bonds and also about German exposure to Russia(German banks in particular). So everybody decided the ‘hedge” trade was to be long USDDEM. The trade did work for a while until everybody had it. Between May and August 1998 USDDEM stayed quite bid moving from 1.75 to 1.83 (low to high) and standing at around 1.8100 in August as the crisis took hold. That is when we saw that the only hedge to a bad trade is to cut the trade. The long USDDEM “hedge” imploded and it fell from 1.8100 in mid August to below 1.59 by October. Are people making the same mistake again today? Time will tell In addition if this plays out as we think let us look at the relative dynamics. Does anybody remember what happened in Japan between 1990 and 1995.In particular USDJPY in a deflationary/sluggish economic environment with high real interest rates. It fell from 160 to 80 On the other side in the U.S. we have • Zero interest rate policy • Huge fiscal deficit • Policy driven by fear of great depression • Too many Dollars in the hands of Sovereign wealth Funds/Central banks as the USD was accumulated as the World reserve currency. What happened to Gold when it lost its favour as the backing for the financial system??? How about a 20 year down trend. • China (at this point) refusing to revalue thereby causing even greater accumulation of the USD in Asia which is then being funneled into other currencies (Euro in particular) Taking all this into account where you are “loaded with Dollars” (Sovereign funds) and see one zone (Europe) taking the pain and causing a tight fiscal and monetary regime and retaining the “real value” of the currency in classics Bundesbank fashion. One the other hand the 2nd zone (U.S.A) is pursuing a loose monetary and loose fiscal policy in an attempt to reflate and inflate. In this environment which Bond market and currency market (from a big picture perspective) is likely to be a better store of value. To us this remains a no brainer… The Bund and the EURO.

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