Incorrect, look at examples like the UK 2008-2009, UK early 90s, USA 2002-2007, EU 2010 etc. There was no significantly higher inflation in the devaluating countries than in ones whose currency appreciated.
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Existential currency choice for international travellers/workers
- Thread starter Ghost of Cutten
- Start date
Incorrect, look at examples like the UK 2008-2009, UK early 90s, USA 2002-2007, EU 2010 etc. There was no significantly higher inflation in the devaluating countries than in ones whose currency appreciated.
Quote from Ghost of Cutten:
Incorrect, look at examples like the UK 2008-2009, UK early 90s, USA 2002-2007, EU 2010 etc. There was no significantly higher inflation in the devaluating countries than in ones whose currency appreciated.
u changed your premise. we are talking about collapsing currencies.
Quote from Martinghoul:
My solution is this...
Given I'm gonna be f*cked whatever I do, I will be holding as diversified a portfolio as possible. I would also make some effort to forecast (to some limited extent, all the usual caveats apply) the distribution of my future costs across ccies.
Ok, I think that works for most scenarios. However, what if you really think the local currency could fall big? E.g. US citizens in 2002, UK in 2008, Eurozone people in 2010? What is an appropriate weight to have? Like you say, it feels like damned if you do, damned if you don't. Having no home currency is rather risky and painful if you turn out to be wrong (or just if the volatility gets high), but having much of it seems like you are incinerating cash , given that you are confident it will eventually be worth a lot less.
For non-base currencies it's not so critical. But for home currency, the sheer size of the default position is so big that you have lots of risk almost regardless of what you do. Even if you have a strong forecast, a 100% position is pretty weighty no matter how you spin it.
Depends on the individual, their time horizon, their goals, and where they want to live. It also depends on how well they can see the macro trends.
For example for the person who lives between the U.S. and Europe they would do best splitting their cash into dollars and euros. Yes they could split it further into pounds, etc. but as you say the main currencies in that arena are U.S. dollars and Euros. Keep in mind there is a good chance their overall purchasing power parity (PPP) will decrease in countries other than the U.S. and Europe (over the next 15-20 years).
For the young person who wishes to maximize their global PPP with a longer time horizon (15-20 years) I would recommend converting their currency to Yuan. It is likely they would gain little in the short run, but the way that China is holding down the Yuan is much like the way that certain governments have tried to hold back their currencies and intervene (see Japan). If they wanted to diversify it might not hurt to hold some Indian rupees.
It is fairly clear that in the long run the $U.S dollar and Euro will have to be devalued to print their respective governments out of debt. With the combination of the demand for raw materials rising (largely from China as it goes through its industrial revolution) and the near zero interest rate policies of the U.S., inflation is likely to eat away at the PPP of the $US in particular.
For example for the person who lives between the U.S. and Europe they would do best splitting their cash into dollars and euros. Yes they could split it further into pounds, etc. but as you say the main currencies in that arena are U.S. dollars and Euros. Keep in mind there is a good chance their overall purchasing power parity (PPP) will decrease in countries other than the U.S. and Europe (over the next 15-20 years).
For the young person who wishes to maximize their global PPP with a longer time horizon (15-20 years) I would recommend converting their currency to Yuan. It is likely they would gain little in the short run, but the way that China is holding down the Yuan is much like the way that certain governments have tried to hold back their currencies and intervene (see Japan). If they wanted to diversify it might not hurt to hold some Indian rupees.
It is fairly clear that in the long run the $U.S dollar and Euro will have to be devalued to print their respective governments out of debt. With the combination of the demand for raw materials rising (largely from China as it goes through its industrial revolution) and the near zero interest rate policies of the U.S., inflation is likely to eat away at the PPP of the $US in particular.
Quote from eudamonia:
Depends on the individual, their time horizon, their goals, and where they want to live. It also depends on how well they can see the macro trends.
Let's say the goal is to minimize unwanted FX risk. Because you have to hold your assets in at least one currency, it's a problem you don't have in other investing decisions - you can't take a neutral view, because there is no FX equivalent of the role that "cash" has in portfolio investing. You can't "get flat", so you are forced into this Hobson's choice of which to hold.
Having macro views doesn't help all tha tmuch, because it's rare to have a macro view of such conviction that you would want 100% of your net worth in it. 90% of the time you won't have a giant conviction like that.
In finance there is no Hobson's choice only false dilemmas.
The solution here is what every Change/Wechsel/Cambio business does: continuously manage a portfolio of currencies.
The solution here is what every Change/Wechsel/Cambio business does: continuously manage a portfolio of currencies.
I don't know what to tell you, GoC...
While I do worry about these things (along lines similar to what you have described), ultimately, you gotta "put your cock in the custard", if you'll forgive my choice of metaphor. Specifically, like many other people, I will most likely be domiciled in a specific country, where I will live, earn income, pay taxes and incur most of my costs. If my choice is fundamentally wise, I should, by and large, do OK. If not, I will get screwed indeed and I can only hope that my assets are diversified enough that I am not ruined.
So, ultimately, I view this as a sort of an asset-liability matching exercise, with some creative thinking arnd hedges/insurance. The hedges/insurance bit might be interesting to explore further, in case there are new solutions out there. Other than that, it's just the way the cookie crumbles, as far as I'm concerned.
While I do worry about these things (along lines similar to what you have described), ultimately, you gotta "put your cock in the custard", if you'll forgive my choice of metaphor. Specifically, like many other people, I will most likely be domiciled in a specific country, where I will live, earn income, pay taxes and incur most of my costs. If my choice is fundamentally wise, I should, by and large, do OK. If not, I will get screwed indeed and I can only hope that my assets are diversified enough that I am not ruined.
So, ultimately, I view this as a sort of an asset-liability matching exercise, with some creative thinking arnd hedges/insurance. The hedges/insurance bit might be interesting to explore further, in case there are new solutions out there. Other than that, it's just the way the cookie crumbles, as far as I'm concerned.
The thing is, I don't want to take a view unless I actually have one. In normal trading this is fine - no view, no position, I just stay in cash until something comes along. Zero risk, zero vol, zero stress.
An FX portfolio cannot do this. You have to have a position at all times, even when you have no view. This means when your conviction is zero, you will suffer substantial risk for zero return.
I guess the only way to avoid that is just estimate your future liabilities as best you can, and accept the tracking error. Stay in your estimated base currency weightings whenever you do not have a clear view.
When you do have a view, you simply have to express it at the same weighting as you would if it were a pure speculation, and then make this a deviation from your default FX weighting. So for example if you were 50% USD 50% EUR, and you then became a dollar bear, you would say ok if I were running a fund how much size would I want to short the USD in? Let's say it's 40%, then you shift to 10% USD and 90% EUR. Your base position and your speculative view position are effectively managed as two separate entities, but overlap to form a total net exposure (like a long/short equity fund).
So if your home currency collapses, you are basically going to lose some international purchasing power unless you have the balls to put on a huge speculative short position. In compensation, you become relatively rich in local terms. You can't have your cake and eat it.
Summary:
default position = weightings equivalent to your guesstimated personal spending/liabilities in each currency.
when you have no strong view, stick to the default weighting
when you have a strong view, overlay a position of the same size/risk you would take if you were running a directional speculative FX fund, and net them off against the default position to get an overall net exposure.
Possibly an additional guideline would be to scale back exposure whenever a base currency gets 25%+ above PPP, and diversify into a G7 basket with some of your assets. Another option would be a moderate holding in gold, which would provide some protection by default, although at a cost of its own risk and drawbacks (no yield, negative carry, volatility).
An FX portfolio cannot do this. You have to have a position at all times, even when you have no view. This means when your conviction is zero, you will suffer substantial risk for zero return.
I guess the only way to avoid that is just estimate your future liabilities as best you can, and accept the tracking error. Stay in your estimated base currency weightings whenever you do not have a clear view.
When you do have a view, you simply have to express it at the same weighting as you would if it were a pure speculation, and then make this a deviation from your default FX weighting. So for example if you were 50% USD 50% EUR, and you then became a dollar bear, you would say ok if I were running a fund how much size would I want to short the USD in? Let's say it's 40%, then you shift to 10% USD and 90% EUR. Your base position and your speculative view position are effectively managed as two separate entities, but overlap to form a total net exposure (like a long/short equity fund).
So if your home currency collapses, you are basically going to lose some international purchasing power unless you have the balls to put on a huge speculative short position. In compensation, you become relatively rich in local terms. You can't have your cake and eat it.
Summary:
default position = weightings equivalent to your guesstimated personal spending/liabilities in each currency.
when you have no strong view, stick to the default weighting
when you have a strong view, overlay a position of the same size/risk you would take if you were running a directional speculative FX fund, and net them off against the default position to get an overall net exposure.
Possibly an additional guideline would be to scale back exposure whenever a base currency gets 25%+ above PPP, and diversify into a G7 basket with some of your assets. Another option would be a moderate holding in gold, which would provide some protection by default, although at a cost of its own risk and drawbacks (no yield, negative carry, volatility).
Quote from Ghost of Cutten:
Let's say the goal is to minimize unwanted FX risk. Because you have to hold your assets in at least one currency, it's a problem you don't have in other investing decisions - you can't take a neutral view, because there is no FX equivalent of the role that "cash" has in portfolio investing. You can't "get flat", so you are forced into this Hobson's choice of which to hold.
Having macro views doesn't help all tha tmuch, because it's rare to have a macro view of such conviction that you would want 100% of your net worth in it. 90% of the time you won't have a giant conviction like that.
In life there is no flat position. Everything is a calculated risk. The greatest risk of all is taking no risk.
It may be rare to have a strong macro conviction, but rarity doesn't imply worthlessness. Most of the time markets revert to the mean. Except when they don't. Having a strong conviction at that time might mean a great deal.