More euro stuff
Nov. 24th, 2011 01:47 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
peterbirksThe euro had its biggest fall against the dollar in several weeks on Wednesday, which was attributed to the abysmal failure of a Bund sale on Wednesday morning. I don't have any currency positions now, having closed out everything over the past few days. I think that there's a lot of volatility ahead, but I'm not sure what things will look like when the dust has cleared.
As I said in my previous post, I think that the market is slowly coming round to the view that anything which indicates the euro staying as it is (through eurobonds or ECB cranking out the cash) is bearish for the euro, whereas anything leading to a break-up (the peripheries chucked out) is bullish for the euro. Beyond that is the "total break-up" option, which is neither bullish nor bearish, because the euro ceases to exist.
Anyhoo, this meant that my view was that Baroso's speech probably had more of an impact on FX sentiment than the German bund sale. After all, why would people be hesitant about German bunds? Because if eurobonds come in, it will cost Germany more to borrow. Indeed, the theory might be that the rest of the dogs in the eurozone might break the back of Germany. The disadvantages to Germany of maintaining the euro might actually outweigh the advantages. But, if there's a break-up... German bunds start to look sexy again -- the safe haven in the storm.
So, the future looks set for some weird euro gyrations, with some ostensibly "good" eurozone news actually being bad for the euro, while other "good" eurozone news might be good for the euro. The trick is to be a bit like Taleb -- ignore what the analysts say and just ask yourself "does this make it more or less likely that the euro will still be around in its current form 12 months from now?" If your answer is "yes", then you short the euro. If your answer is "no" then you go long. This interpretation is still the opposite of the common wisdom amongst the standard currency analysts, although I got a hint from Steph Flanders' latest column that she's coming round to this line of thought.
My 60:40 guess is that we will see a further decline in the euro to my old target of $1.26 or $1.25, but I've made enough to put myself into the black for the last couple of years on IG Index (after spunking away quite a lot on equity bets and index bets). So I might just take out a couple of grand and pay off a bit more of the mortgage.
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As I said in my previous post, I think that the market is slowly coming round to the view that anything which indicates the euro staying as it is (through eurobonds or ECB cranking out the cash) is bearish for the euro, whereas anything leading to a break-up (the peripheries chucked out) is bullish for the euro. Beyond that is the "total break-up" option, which is neither bullish nor bearish, because the euro ceases to exist.
Anyhoo, this meant that my view was that Baroso's speech probably had more of an impact on FX sentiment than the German bund sale. After all, why would people be hesitant about German bunds? Because if eurobonds come in, it will cost Germany more to borrow. Indeed, the theory might be that the rest of the dogs in the eurozone might break the back of Germany. The disadvantages to Germany of maintaining the euro might actually outweigh the advantages. But, if there's a break-up... German bunds start to look sexy again -- the safe haven in the storm.
So, the future looks set for some weird euro gyrations, with some ostensibly "good" eurozone news actually being bad for the euro, while other "good" eurozone news might be good for the euro. The trick is to be a bit like Taleb -- ignore what the analysts say and just ask yourself "does this make it more or less likely that the euro will still be around in its current form 12 months from now?" If your answer is "yes", then you short the euro. If your answer is "no" then you go long. This interpretation is still the opposite of the common wisdom amongst the standard currency analysts, although I got a hint from Steph Flanders' latest column that she's coming round to this line of thought.
My 60:40 guess is that we will see a further decline in the euro to my old target of $1.26 or $1.25, but I've made enough to put myself into the black for the last couple of years on IG Index (after spunking away quite a lot on equity bets and index bets). So I might just take out a couple of grand and pay off a bit more of the mortgage.
____________
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Bull, Bear, or Aardvark?
Date: 2011-11-27 01:10 am (UTC)It's at the macro-macro level, but as you know I've been pontificating ignorantly about the death of the Euro for the last two years or so. From a historical perspective, predictions like this are seriously volatile. I mean, we're well into Taleb territory here, although in this case the Black Swan is staring us in the face. It's easy to say that the markets have "priced in" the collapse of the Euro, and I note that financial commentators are, indeed, beginning to say it. But what does it mean? How do you price an event of that magnitude in?
If an extreme right-winger claimed that the Elders of Zion had "priced in" the Second World War, we'd just laugh in their face.
... Well, I'm heading off the rails again. Anyhoo. From a pure currency speculation POV, I suppose you could argue that the collapse is neither bullish nor bearish. Except that, even there, it's probably bullish (if you go short on the Euro) or bearish (if you go long). Mega-bullish and mega-bearish, I would have thought. In fact it's where your (correct, I feel) analysis that the currency markets have it the wrong way round at present turns out to be wrong, because life returns to "normality" and they have it right all along, once you factor in the consequences. I wonder where the tipping point is?
Bear in mind (or bull or aardvark if you prefer) that this is only thinking about the currency markets, possibly the bond markets, nothing much beyond that (little matters like bills of lading and trade in general and so on).
As I say, I've been wittering on about the collapse of the Euro for some time. FWIW, I see it surviving beyond Christmas, simply because Christmas is a dead time of year (funny that, you'd expect it to be Easter. God is inscrutable). But I honestly cannot see it surviving more than halfway through a year where, according to Peston, $800 billion of debt (denominated in Euros, or tied to the Euro through inter-bank lending) is due up with no buyers in sight.
(And I know I've also wittered on about large numbers and how people can't get a grip on them, so I'm thinking of this particular one as "half of Britain's GDP" to put it in scale. Since it's due over the course of a year, that's a pretty good scale.)
The point is, I've never actually sat down and thought about what happens if the Euro implodes. Nor, I suspect, have the politicians, other than to chant "it will never happen." (Nor, really, I suspect, have the bankers.)
On the currency markets front, for example. What happens to your notional Euro position, either way? The thing you're betting on/against no longer exists. And it will take a very long while to unwind all the macro stuff before you can even begin to define what it would have been, should it still exist. And even then, there's the fine print in the legal contracts to consider, because I very much doubt that there's a Section 8, Paragraph 3, Clause 4 - heh heh - that describes in detail what happens "in the event that your counter-party turns out to be a dealer in used toilet paper..."
I think, at that point (and I'm off the currency markets and back to macro), somebody will have to step in with a Bigger Fiat. ("Ferrari currency?")
But who, what, where, why, and when?
Financial journalism is about to get quite exciting.
Re: Bull, Bear, or Aardvark?
Date: 2011-11-28 09:58 pm (UTC)PJ
Guy Hands Night
Date: 2011-11-27 05:24 pm (UTC)Hedge Funds and Private Equity in general are about to get screwed over leverage, which (I borrow from Peston again, although it is hardly a secret) is coming due for repayment next year.
Now, let's see. The whole argument for leverage was based upon free enterprise and taking risks and an abundance of cheap finance and maximising your assets and so on ... and it's all going tits up in 2012. In fact, at least 10% of the sector went tits up in 2011, albeit under-reported.
It's going to be carnage in 2012.
I wonder what governments (who by definition can print money and can therefore grab this stuff on the cheap) will do about it?
no subject
Date: 2011-11-27 05:37 pm (UTC)In poker terms, what you would say to the hedge funds and private equity firms is: you took a bet on the flop, the implied odds looked good, you refinanced on the turn and you got killed on the river. Well, I lost interest in the Thames once it passed Oxford, anyway.
At some point, somebody is going to pick up the rake. It would be nice to know that it isn't some divot oligarch in Azerbaizhan.
Daytrade forex from home, Free learning Demo
Date: 2011-11-28 12:57 pm (UTC)