Grexit a 50/50 possibility…

…according to financier George Soros.

Personally, I have a hard time dealing with Mr. Soros’s Donald Trump-ish nature.  In his book The Alchemy of Finance, for example, he claims to have invented the thesis-anti-thesis-synthesis explanatory pattern that was introduced to European thought by Hegel in 1807 and developed by Marx later in that century.  Hard to believe Mr. Soros, who studied philosophy, is completely unaware of either of these seminal figures.  I’ve also thought that a significant amount of the success of his Quantum Fund was due to Soros’ less well-known partner, Jim Rogers.

If there’s one thing, George Soros knows about, however, it’s currencies and politics.  So his view that it’s a flip of a coin whether Greece stays in the EU or leaves, is well worth listening to.

The short story of Greece’s woes is that after joining the EU it racked up so much sovereign debt using the implicit repayment guarantee of being in the euro (kind of like having a credit card that can’t be maxed out) that it can’t possibly pay all of it back.  The gravity of the situation came to light several years ago when a newly installed (and now gone) government announced  the previous administration had been falsifying the country’s national economic accounts  for years.

Greece has since been negotiating for debt concessions in return for ending its spendthrift ways.  Its strategy so far has been to promise reform in return for debt relief   …but to do nothing.    This tactic seems to have recently passed its “sell by” date.  The EU and the IMF now appear to believe that the moral hazard risk of continue to accommodate Greece is worse than the potential damage to the Eurozone from expelling it.

As I see it, the ball is now clearly in Athens’ court.

For what it’s worth, I think Grexit would turn out to be a genuine tragedy for Greece, but far less damaging to the euro than is commonly believed.  Rather than giving encouragement to breakaway movements in the UK, Spain and elsewhere, I think Greece outside the EU–substantial currency depreciation, loss of access to external finance–would serve as a cautionary tale instead.    Think Argentina without the farm wealth.

My guess is that the euro would decline a bit on Grexit.  The banks might have a rocky time, too.  It’s very possible, though, that the markets would be happy just to have the situation resolved–and that any fallout would be small and short in duration.



HSBC says the dollar is peaking

HSBC (Hong Kong Shanghai Bank Corp) has begun to seek publicity for a research report arguing that the US dollar has peaked.  I’ve seen mention of it both in the FT and on Bloomberg (the link above).

HSBC is generally pretty good at economics, and has been ahead of the curve on major moves like this before.  So I think its argument is worth considering.  It also fits in with the way I’ve been thinking over the past few weeks.

The HSBC argument:

–the EU is starting to show economic strength as the US is beginning to slow a bit

–on purchasing power measures, the US$ is more overvalued than everything except the Swiss franc

–the Fed is reaching the end of its tolerance for dollar strength

–sentiment is universally bullish for the dollar (i.e., where are new buyers going to come from?)

–the dollar typically weakens after the first Fed Funds rate hike.


Risks to the view are mainly geopolitical:

–Greece exits the euro

–emerging markets crisis

–perceived failure of Abenomics

–US legislation forcing American companies to repatriate foreign cash holdings.


my take

I don;t know David Bloom, HSBC’s chief currency strategist and the report’s author, personally.  But I see his work as another piece of evidence that the pro-dollar consensus is beginning to crack and that at least a mild reversal of form is likely sooner rather than later.



Tiffany (TIF) vs. Nike (NKE)–US multinationals in a strong dollar world

TIF and NKE are two iconic US retail names.  Both have large international exposure.  As a result, results of both have been dented by the fall in the US$ value of their foreign sales.

Both stock charts also look virtually identical   …until the euro started falling in mid-2104.  Since then, NKE has continued to motor ahead, while TIF has fallen by the wayside.  From last June until now, NKE is up about 35%, while TIF has fallen by around 15%.  The S&P 500 has risen by  7% over the same span.

Both reported overnight.  As I’m writing this, NKE is up strongly, in a market that’s up; TIF is down.

Yes, I know the two brands stand for much different things, the products are very different and the business structures are, too.

Still,  NKE shows that foreign currency exposure in a rising dollar world need not be lethal if the underlying business is growing fast enough.

I’ve also been thinking a lot lately about the possibility that relative currency values can’t continue to diverge at the current rate forever.  More important, at some point–far ahead of the facts–Wall Street will have fully discounted likely potential changes in currency values.  At that point, even though weak foreign currencies may still be carving a chunk out of corporate results the stocks will no longer react badly when the ugly earnings are announced.

To my mind, that’s when it will be safe to de-emphasize domestic-oriented firms and pick through bombed out multinationals.

We’re apparently not there yet.

But TIF may well be a good indicator to gauge when investors have fully played out their desire to sell foreign currency earners.




yesterday’s Fed meeting announcement

My experience with Fed meetings is that the stock market usually heads off in the wrong direction on the release of the Fed statement and accompanying documents, but then quickly reverses course and moves in the way one might reasonably have predicted by actually reading the Fed materials.  This is not just computers trading.  The US market has operated this way for as long as I can remember.

Not this time, though.  Instead, the S&P made an immediate strong upward move   …and never looked back.

What’s different this time?

I think it’s the PDF where the Fed shows, among other things, where its voting members believe the Fed Funds rate will be at the end of this year, next year and in the longer term.

The previous release, in December 2014, showed the median estimate for 2015 at 1.0%.  For 2016, the figure was 2.5%.

Yesterday’s, in contrast, suggests the rate will be between 0.5% and 0.75% this December, and at 1.75% as we enter 2017.

That’s a big haircut for just three months.

The factors involved in the change are:

–the rise in the US$,

–moderation in domestic economic growth over the first quarter, and

–the lack of any sign of inflation.

Stocks and bonds spiked on the news.  The US$ came off its highs.

my take

Investors continue to be fixated on the numbers the Fed releases, and to be distrustful of any qualitative statement by the Fed saying it has taken the tragic 1990s example of Japan seriously and will err on the side of caution in raising rates.  Doesn’t make a whole lot of sense to me that the market doesn’t believe this, but it’s the way it is.

My stocks were having an unusually strong day yesterday before the Fed announcement.  They lost a bit of their relative strength afterward, though.  Arguably, this shows I was preparing for faster rate increases than the market now thinks will occur. I have no desire to become more aggressive, but I will be interested in how my stocks fare today.

I’ve been mulling over whether to try to play a potential rally in domestic-oriented EU stocks.  My experience is that this isn’t safe until the domestic currency in question has stopped falling.  I wonder if yesterday was a turning point?  Again, more data today.

uncorrelated returns: hedge funds as the new gold

Every stock market person knows what beta is.

It comes from a regression analysis, y = α + βx, where y is the return on a stock and x the return on the market).  It shows how a given stock’s past tendency to rise and fall is linked to fluctuations in the market in general.  A stock with a beta of 1.4, for example, has tended to rise and fall in the some direction as the market, but move 40% more in either direction; a stock with a beta of 0.8 has tended to exhibit only 80% of the market’s ups and downs.

The professor in a financial theory course I took in business school asked one day what it meant that gold stocks had, at the time, a beta of zero.

The thoughtless answer is that it means they aren’t risky, or that they don’t go up and down.

A consequence of this thinking is that you can lower the beta, and therefore the risk, of your investment portfolio by mixing in some gold stocks.What’s interesting is that in the early days of beta analysis that’s what some institutional portfolio managers actually did with their clients’ money.

That didn’t work out well at all.

What should have been obvious, but wasn’t, is that the zero beta didn’t mean no risk–or that gold stocks are/were a good investment.  It meant what the regression literally indicates–that none of the movement in gold stocks could be explained by movements in the stock market in general.

The riskiness of gold stocks is there, but it came/comes in other dimensions, like:  how mines develop new supply, the ruminations of the gnomes of Zürich (in today’s world, Mumbai and Shanghai), the potential for emerging country craziness, the propensity of the industry to fraud.

Why write about this now?

I heard a Bloomberg report that institutional investors as a whole are upping their exposure to hedge funds, despite the wretched performance of the asset class.  Their rationale?   …uncorrelated returns.

It sounds sooo familiar.

Admittedly, there may be a deeper game in progress.  It’s impossible to say your plan is fully funded by projecting a gazillion percent return on stocks or bonds.  But who’s to say that a hedge fund can’t do that?