I know Merrill Lynch made a market in this stuff a few years back for even smallish BDSs such as myself. I nearly pulled the trigger on a 5 or 10 year put swaption on the 10-year yield in winter 2008 when it briefly yielded below 2% (stupid, the damn thing doubled within months). Vols were so low at that point, the trade would have probably been profitable even if rates hadn't gone up. It was about as risk-free as you could get.
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Global Macro Trading Journal
- Thread starter Daal
- Start date
I know Merrill Lynch made a market in this stuff a few years back for even smallish BDSs such as myself. I nearly pulled the trigger on a 5 or 10 year put swaption on the 10-year yield in winter 2008 when it briefly yielded below 2% (stupid, the damn thing doubled within months). Vols were so low at that point, the trade would have probably been profitable even if rates hadn't gone up. It was about as risk-free as you could get.
Quote from Ghost of Cutten:
But for what reasons were sov debt crises usually bearish to a currency? Correlation is not causation, after all. Was it because of the sovereign debt, no other factors? Or was it because the countries involved had politically captured central banks that hyperinflated, or lacked competence and credibility; or had artificially high exchange rates before the crisis, which encouraged massive private sector dollar borrowing and set off a vicious reflexive downward spiral (e.g. Asia 97-98)? Or was it just that they were mostly small emerging market economies at the tail end of a huge credit boom which went pop?
There are a whole host of causal factors at work, and the EU situation is different in many of them than your typical currency collapse from the past. Germany and N Europe did not have a huge credit boom, the Euro was not a fixed currency, bunds are not in a sovereign debt crisis, they are a safe haven. Japan has had >100% GDP in debt for years and nothing happened except the Yen and JGBs soaring.
So, it's not as simple as saying 'government debt high + yields rising = currency down'.
The problem with shorting the Euro IMO is that while currency destruction appears inevitable, you don't know whether it will occur in the Euro bloc as a whole or only in a few specific countries (Greece, Spain etc.) as they're forced out of the euro area.
I think the exit of one or more of the miscreants would make the Euro a screaming buy. If they just print the money then the Euro will of course continue to be debased - but simply buying gold, possibly with borrowed euros, seems a better play on this than e.g. shorting EURUSD.
Quote from Specterx:
I think the exit of one or more of the miscreants would make the Euro a screaming buy. If they just print the money then the Euro will of course continue to be debased - but simply buying gold, possibly with borrowed euros, seems a better play on this than e.g. shorting EURUSD.
The problem with a 'miscreant exit' is the violent domino effect.
Think what would happen to Italian borrowing rates if Spain left -- or what would happen to the borrowing rates of all the periphery countries on the whole if any one of them left. Fiscal armageddon pricing would be imputed forward.
Meanwhile the fiscally responsible eurozone countries in this scenario -- Germany, the Netherlands et al -- see instant depressionary conditions as investors treat the 'core euro' as a proxy d-mark. There would be potential massive trade shocks as the currency went vertical -- which in turn would seal the doom of the remaining periphery countries, reinforcing the feedback loop.
My .02 is that Merkel, Schauble etc know damn well that Germany will have to cave at some point -- not out of principle or commitment to their fellow eurozone members, but because the blowback from a violent exit would tear them apart too. They are holding off on admitting this realization until the last possible moment, though, because standing down would be political suicide at home.
This of course doesn't say much about whether the EURUSD is a short or not. But if general increasing attitudes of U.S. bullishness take hold (a lot of it centered around shale gas), then at some point the relative strengths between the two could kick into play and make EURUSD the short all the hedgies were waiting for.
And gold is still a black box (in my humble opinion...)
Quote from Daal:
Interesting comments by Hugh Hendry
http://www.scribd.com/fullscreen/91764042
I very much agree with him with his comments of deflationary fears being in the market as a result of the 2008 crisis and its aftermath being fresh in people's minds.
I saw a blogger make a crude calculation of what is the implied probability of the US turning into Japan derived by the yields in USTs. It came out at 70%
It was a crude calculation but it should be roughly correct. It explains why yields in most industrialized government bonds are so low
Of course, this Japanification bid in bonds won't stay there forever and I believe in the case of the US its highly likely it creates a mispricing in yields of USTs. I'm only long TLT to play a greater fool trade. I realize I'm one of the fools, which might give me an advantage over the other fools
What I found interesting is his contention that the USA is reaching a 'turning point.' I have to say it doesn't look that way to me - he confuses sheer political and institutional dysfunction with 'acceptance of debt and labor price restructuring.'
Although I think major inflation is the means by which the accumulated losses from the 1980-2007 credit boom will be realized and 'written off,' the US might well follow Japan's path for much longer than many think. Maybe not twenty years but zero-bound rates through 2017-2020 doesn't seem at all unreasonable. I'm actually surprised at how 'rational' the Treasury market has been in this regard, ie that TLT didn't get anywhere near its early 2011 levels - contrary to the stock market.
Quote from darkhorse:
The problem with a 'miscreant exit' is the violent domino effect.
Think what would happen to Italian borrowing rates if Spain left -- or what would happen to the borrowing rates of all the periphery countries on the whole if any one of them left. Fiscal armageddon pricing would be imputed forward.
Meanwhile the fiscally responsible eurozone countries in this scenario -- Germany, the Netherlands et al -- see instant depressionary conditions as investors treat the 'core euro' as a proxy d-mark. There would be potential massive trade shocks as the currency went vertical -- which in turn would seal the doom of the remaining periphery countries, reinforcing the feedback loop.
My .02 is that Merkel, Schauble etc know damn well that Germany will have to cave at some point -- not out of principle or commitment to their fellow eurozone members, but because the blowback from a violent exit would tear them apart too. They are holding off on admitting this realization until the last possible moment, though, because standing down would be political suicide at home.
This of course doesn't say much about whether the EURUSD is a short or not. But if general increasing attitudes of U.S. bullishness take hold (a lot of it centered around shale gas), then at some point the relative strengths between the two could kick into play and make EURUSD the short all the hedgies were waiting for.
It seems to suggest exactly what I said above, that the Euro is a screaming buy under the 'violent breakup' scenario. What happens after this is pretty obscure and it seems a bit far-fetched to start looking for trades based on so many conditionals and hypotheticals. Looking at the big picture though Germany's economy might well find itself in big trouble in a few years: all that production capacity installed to meet demand from credit-bingers in China and peripheral Europe constitutes a lot of malinvestment, not to mention all the foreign loans up to and including the BuBa's target-2 balances.
But again, the problem for me is that most places are in pretty much the same boat. They're all being confronted with the choice to print or suffer one pain or another; either the pain of a deflationary depression or that of becoming a hot-money mecca as the Fed works to debase global reserve balances. When the time comes there ought to be plenty of better trades around than shorting Euros.
Quote from Specterx:
It seems to suggest exactly what I said above, that the Euro is a screaming buy under the 'violent breakup' scenario. What happens after this is pretty obscure and it seems a bit far-fetched to start looking for trades based on so many conditionals and hypotheticals.
Right, except I'm arguing the odds of the "violent breakup" actually occurring are close to zero, because 1) the periphery countries aren't suicidal, and 2) Germany isn't that stupid.
It's enough to know that a violent breakup would be catastrophic for all involved, and that such an outcome is forecastable enough, with high enough probability, to check its occurrence.
The counterpoint to this is Lehman... that the authorities saw Lehman coming and stood by anyway. But evidence suggests Hank Paulson and others wrongly believed a Lehman bankruptcy would be manageable. Does anyone really believe that, re, a Spain / Italy exit?
Quote from Specterx:
But again, the problem for me is that most places are in pretty much the same boat. They're all being confronted with the choice to print or suffer one pain or another; either the pain of a deflationary depression or that of becoming a hot-money mecca as the Fed works to debase global reserve balances. When the time comes there ought to be plenty of better trades around than shorting Euros.
I agree EURUSD short looks like a crappy trade under present circumstances; what could change that, though, would be a glaring differential in economic strength, with the U.S. appearing strong enough to weather a trajectory of incrementally tightening monetary policy, even as deep recessionary conditions and growing political unrest force Germany to accept revision of the fiscal pact (as the ECB writes big checks).
The funny thing is, the euro and gold are in the same boat to me... there are scenarios where either could be a great short, depending on what happens, or either could be a (temporary) great long, depending on what happens -- specific branches of the scenario tree and all that... the only viewpoint I'm instinctively dismissive of is the one that says "xyz wins no matter what." There are very few no matter what's out there now.
You'd be surprised. Big fortunes are lost and watered down all the time, often due to over-concentration in a high-beta investment.Quote from luisHK:
I find it highly unlikely that out of 100people who manages to growth to 10mil USD networth, 80 would lose at least 90% of this. But it's also quite likely a large amount of those people would hedge their wealth.
Good article here: http://online.wsj.com/article/SB10001424052970204336104577096410776256928.html
EURCHF floor is over, it's now a peg ...
http://georgedorgan.livejournal.com/4447.html
Bank actually sold euros in Q1. Unless Switzerland falls into a depression, floor isn't getting raised. The only good thing is the EURCHF longs from 1,2090, 1.2070, 1.2050, 1,2030 have all gotten completely fried, so at least there is some air above 1.2010.
http://georgedorgan.livejournal.com/4447.html
Bank actually sold euros in Q1. Unless Switzerland falls into a depression, floor isn't getting raised. The only good thing is the EURCHF longs from 1,2090, 1.2070, 1.2050, 1,2030 have all gotten completely fried, so at least there is some air above 1.2010.
Well, this is a rather superficial analysis that this guy has done. Indeed, EUR investments excluding FX derivatives have fallen by 6.5%. However, curiously enough, EUR investments including FX derivatives have fallen only by 0.7%. So, really, I can imagine that they just had some PNL swings, that's all.Quote from ralph00:
EURCHF floor is over, it's now a peg ...
http://georgedorgan.livejournal.com/4447.html
Bank actually sold euros in Q1. Unless Switzerland falls into a depression, floor isn't getting raised. The only good thing is the EURCHF longs from 1,2090, 1.2070, 1.2050, 1,2030 have all gotten completely fried, so at least there is some air above 1.2010.
Wow. RWE divvie just hit my account. I forgot they pay the dividend just once a year. Gotta love the German utilities! I would advise all currently pumping out pixels on earning a couple of basis points of positive expectation here or there to take advantage of the recent pullback and buy lots.