Ugly, Uglier and Ugliest

I’m a bit rushed today. Airports, taxis, meetings…

As such, if this post appears rushed that’s because it is being typed while trying to ignore the woman on my right, who won’t shut up about her “lovely new condo she’s purchased which EVERYONE should see.” Note to self… freaking insane! If for some reason I get drugged or get horribly drunk, I must burn it into my mind NOT to sign up to buy one of these things. Credit bubble..?  You bet!

Looking up, I see news bytes on the mounted plasma, and while I’m not listening I can see it’s this Portugal bailout nonsense back in focus again.

This has got me thinking a few thoughts which I will share with you. Firstly, the wonders of technology, ahhh… I can plug in my iPod ear phones and even though no music is playing, the woman to my right doesn’t know this, and has actually begun scanning the room for other prey. Magic!  They don’t advertise this stuff, but there’s a market for busted ear phones. Just plug them in and voila that annoying _______ will stop talking to you. Call me if you’re in marketing and we’ll make a deal. We could market it to husbands of annoying wives and wives of annoying husbands. Demand will be huge.

Seriously though, the fact that Europe is back in the headlines has prompted Mark and I to take some positions that I thought I’d discuss.  The premise for our positions and thoughts are around the big 3 currencies. The EURO, YEN and the USD.

The Euro

Portugal can theoretically be bailed out here, but if Spain come begging for alms its game over. The money just isn’t there. Aside from the fact that bailing out Portugal, and previously Greece and Ireland, is a completely ridiculous and futile exercise that will only aid in the destruction of the Euro (which is incidentally a good thing in our opinion).

Bailing out Portugal will actually make the Euro crisis worse not better. Why?  Nowhere have I seen any logical explanation as to how providing emergency funding is going to stop the crisis spreading to the next country. It certainly hasn’t so far. Remember Greece, and Ireland? Bailing out Greece didn’t stop the markets focusing on Ireland, and bailing out Ireland didn’t stop the markets moving to Portugal – and the stakes are getting higher all the time while the fiscal positions are getting worse.

The real problem here is that politicians are like Vegas gamblers. Once they hit Vegas they are going to gamble. It’s what they are there for, it’s in their genes, and with politicians it’s actually worse because it’s not their money anyway. They might start out with $10,000 to play with; they blow a hundred bucks here and a couple hundred there, finally waking up to find that they’re down to their last $500. Holy smokes how did we get here so fast they ask themselves…?

Now they HAVE to go all in. In order to get back to their starting point they have to make a huge win, and if they don’t they are so far gone anyway that the difference between zero and $500 just doesn’t seem to be big enough to warrant a change in strategy. Perhaps this is why they come out with moronic things like last year’s European “money bomb.” This was meant to calm markets and restore confidence, but I digress.

What should happen is that the gambler should accept that he made a mistake and take his $500 home and STOP GAMBLING. In other words it’s better to admit the EU screwed up, wasted large quantities of money and to then simply restructure Portuguese debt. It’s going to get restructured anyway so why pretend it’s not? The only difference now is that this will speed up the demise of the Euro, which was inevitable anyway.

The Euro is currently holding up pretty well, however earlier last week I noticed that yields on Portuguese government bonds soared. Once these yields get out of control the game is typically over. Looking at the history of 10 year bonds it would seem that a 7% yield seems to be the line in the sand. Once rates move over this level the proverbial toothpaste is out of the tube, and getting it back in is not easy.

Long story short; It’s a big wide, deep hole and clearly they’re (politicians) going to keep trying to dig themselves out of it. I’m struggling with finding reasons to own the Euro here.  Anyone?

Our next contender: The Yen

We discussed various thoughts regarding Japan previously, so I won’t rehash those here. Earthquakes, Tsunami, $240B in costs and mounting, a government with a debt to GDP over 200%… All of this equals trillions upon trillions of new Yen entering the market. The consequences for the Yen don’t appear good.

Let me just caveat this viewpoint. This is a short term take, and the situation is fluid. I consider this a trade and not an investment. In the longer term the Japanese will, for a number of reasons, but primarily demographic and now reconstruction, have to repatriate funds.  This will push the Yen higher and the Dollar lower. Japan holds an enormous amount of USD Bonds and we are… how do we say… bullish on Government stupidity, which makes us very bearish on Government bonds of almost any variety. After all, debt is debt, and money that can’t be repaid won’t be repaid. As such, both of these markets have looked like a fly in search of a windshield for some time now.

OK, onto the mighty Greenback

With QE2 scheduled to end in June and increasing political opposition to a continuation of the program, plus an economy that, relative to its sickly peers mentioned above, seems to be looking pretty damn healthy, could all result in a stronger Greenback short term.

The Fed is putting up a fantastic “trash the dollar” pitch, but right here and now they are losing the fight to be the ugliest. As such we’re bullish in the short term on the dollar and bearish on the Euro and Yen.

Another way we are playing this is to get out of US stocks, or even go short while going long Japanese stocks. I own the index, and while we haven’t taken any positions in it yet we have been keeping our eye on some EWJ options. Just be careful with this trade since as the market rises (if we are correct) so too implied volatility will decrease and take some zap out of the options. Playing the futures may make more sense from a risk perspective.

What about gold and silver?

These are in a bull market of course, and this bull is not finished snorting by any stretch of a wild imagination. Volatility is to be expected, and right now very few people seem to think that the precious metals will correct. The idea seems to be that they will keep rising and rising. This strikes us as foolish and makes us nervous. To be sure we’re not advocating selling but we certainly ain’t buying here.

I’ve gotta run now, but I would love to know your thoughts on all this.  Feel free to disagree, agree, or just add your thoughts below in the comments section.


This purchase (of a Phuket condo) will definitely work out better than our home in Battersea has.
– The insane woman next to me.


This Post Has 8 Comments

  1. Brian

    Are you expecting U.S. markets to fall in anticipation of the removal of QE2 – I know tactically speaking the old adage sell in may was very helpful in 2008 and 2010 (obviously disastrous in 2009)?

  2. Chris MacIntosh

    A couple of caveats first: At the end of the day Ben has your back. As such I believe this is a trade…not an investment theme. Secondly make sure you’re not focused solely on just anything listed on US markets. A company for example that has its assets in Ghana and Kazakhstan, its revenues in USD and its debt in USD is a completely different beast to one that has revenues in ZAR and debt in USD.

    As to your question: As mentioned we believe hedging or lightening up makes us currently more comfortable.

  3. Edward.Aton

    Isn’t there restrictions on foreigners purchasing Thai real estate?

  4. Chris MacIntosh

    Foreigners cannot in principle own any land. Foreigners typically buy into a resort or condo style complex where the structures are held in Thai companies, or on 99 year leases. These are just two ways. There are many more and I would have to write a long article on it.

    The most common is for a developer to simply build a bunch of crappy condos and put the entire thing into a Thai holding co and then sell of units to Farangs.

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