Monday, August 8, 2011

Stance on the US downgrade: neutral

My stance on the downgrade of the US: neutral

Why? Because any diligent investor with some historical knowledge knows that the USA is not a AAA credit when you factor in the theft of value their 'currency debasement' program posts.

The holding of US Treasuries today, in my opinion, goes based on:
- 'this currency is also my benchmark' so I can justify to my investors that nothing can be done to stem this loss of real value unless I take risks (buy gold, or stocks, etc)
- The USD has a reserve-currency status which means that people will run away from other currencies to store value in USD when the shit hits the fan
- Positive historical correlation with risk-aversion (as above)
- Central Banks and global treasury departments having to intervene in their currency markets to stem appreciation. I think Central Bankers have an edition of "Currency Crisis Management 101: The Asian Episode" in hand and they want to avoid credit bubbles in their countries. They hate the UST, but they must try to avoid the worst problems (zero-rates) hitting their home field.

When Asia opened last night alongside western electronic futures equity markets gapped lower and commodities came along. The CHF was rock-solid, the JPY was robust. The ECB spitting a press-release that signalled they'd be active in the larger periphery debt markets propped up the EUR x USD. Some people I talked to on a chat were talking about limit-down on the S&P, others were worried about the US Treasury markets...

My stance is that the markets will keep its downward trend with large volatility, but nothing 'unheard of' unless we see the US dollar drop against EM currencies and US Treasury rates wider.
That has not happened yet. THAT would be limit-downs and panic.

I don't think this downgrade will have any significant medium-term effect in market prices and the US will remain for some time as it is now: supreme, but losing value as time goes by. Because that is the path they have chosen to fix their fundamental problems of a fat balance sheet, delevering.

To another topic now...

A friend sent me an interesting piece last week that pointed that the next QE that we will see is the European one, not the Bear-man-QE one. It was from Michael Aronstein from Marketfield Asset Management, being interviewed by Bloomberg. Spot on.

European banks are getting killed with these exploding yields of the periphery. Austerity packages and signs of an oncoming recession helping of course.

And then we saw last night's comments from Europe: let's dig Italian and Spanish bonds out of the hole.

So basically the periphery funding dries out and risk sets in or the Europeans decide to print Euros to save themselves. Either way the Germans pay the bill and the EUR looks worse.

And what happens with the German Bunds and German CDS? Wider. It seems that Michael was right and indeed European leaders will bring in their new QE program to stem this risk-off mood we're in. That has been the case today at least. Too early to call anything permanent, but yes, Bunds are wider, the EUR is lower x G7... Let's see how this ends up.

Outlook: more intervention, more QE, more money printing, more currency debasement, slow growth...

What trades are you looking at waiting for an better entry point?

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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