Global Market Comments
February 13, 2024
Fiat Lux
Featured Trade:
(WHAT THE ECONOMIST BIG MAC INDEX IS TELLING US NOW),
(FXF), (FXE), (FXA), (CYB)
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Global Market Comments
November 31, 2023
Fiat Lux
Featured Trade:
(WHERE THE ECONOMIST BIG MAC INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (FXA), (FXE), (CYB)
(THE FALLING MARKET FOR KIDS)
Global Market Comments
July 5, 2019
Fiat Lux
Featured Trade:
(FRIDAY JULY 19 ZERMATT SWITZERLAND STRATEGY SEMINAR)
(WHERE THE ECONOMIST “BIG MAC” INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (FXA), (FXY), (CYB),
(WHY US BONDS LOVE CHINESE TARIFFS),
(TLT), (TBT), (SOYB), (BA), (GM)
My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its "Big Mac" index of international currency valuations.
Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.
The index counts the cost of McDonald's (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.
What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai baht are cheap.
I couldn't agree more with many of these conclusions. It's as if the august weekly publication was tapping The Diary of a Mad Hedge Fund Trader for ideas.
I am no longer the frequent consumer of Big Macs that I once was as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool than a speedy lunch.
The Big Mac in Yen is Definitely Not a Buy
Global Market Comments
July 17, 2018
Fiat Lux
(WHERE THE ECONOMIST "BIG MAC" INDEX FINDS CURRENCY VALUE),
(FXF), (FXE), (FXA), (FXY), (CYB),
(CATCHING UP WITH DOWNTON ABBEY),
(TESTIMONIAL)
My former employer, The Economist, once the ever tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its ?Big Mac? index of international currency valuations.
Although initially launched by an imaginative journalist as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.
The index counts the cost of McDonald?s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.
What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai Baht are cheap.
I couldn?t agree more with many of these conclusions. It?s as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas.
I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool, than a speedy lunch.
The Big Mac in Yen is Definitely Not a Buy
I?ve just spent the entire morning on the phone, and it?s clear that thousands of individuals, hedge funds and brokers have just been wiped out as a result of The Swiss National Bank?s surprise move to remove its cap against the Euro.
This is a black swan on steroids.
And it hasn?t just been Swiss franc positions that have been bedeviling traders. You can add to the list bonds, energy, and this week, financial stocks as well. All of a sudden, the world seems to have gone mad.
The great flaw in the management of big brokers and hedge funds is that they base their risk models on historic data. It is rare to see a foreign currency move more than 1% against the US dollar in a day. You might see that one-day a year.
Risk models, and margin requirements, are therefore based on this assumption. To bomb proof themselves, margin departments might require clients to post collateral assuming that a 2% or even a 3% move in a currency will happen tomorrow.
Even with an ultra conservative 3% margin requirement, a house would only be protected by a move in the underlying of 33%. Any move greater than that, the customer account is completely wiped out, leaving the broker on the hook for the balance of the loss if they can?t get clients to pony up more money.
Of course, US based brokers can always sue their former clients and get their money back that way. But that is a three-year process. Just ask anyone who went through the whole MF Global disaster.
As a former broker myself, I can tell you that clients wiped out by margin calls have a bad habit of disappearing, changing their names and moving to unpronounceable countries to bury the paper trail, or move beyond the reach of extradition treaties. So good luck with that one.
After speaking to several foreign exchange traders, it seems that the first tick after the SNB?s announcement was up a staggering 40% from the last print. The world had stop loss orders to sell Euros as market, and this was the fill they got.
It gets worse. Some brokers, particularly small, undercapitalized foreign ones, were only demanding 0.5% margin or less. These guys are toast, but it may take weeks to find out exactly who.
The news services this morning are ablaze with such losses. Citibank (C) has admitted to a $150 million hickey. Very conservative Interactive Brokers has fessed up to a $120 million hit. FXCM is thought to be out $225 million. All of a sudden, foreign exchange brokers everywhere are for sale at fire sale prices.
These aren?t just some interesting, entertaining and colorful market anecdotes that I?m providing you. The debacle is so severe that it has cast a black cloud over all asset classes.
You see this in the sharply diminished trading volumes in all instruments, from stocks, to options, to futures contracts and exchange traded funds.
If you have just heard of a colleague or a counterparty who has just gone under, trading any of the recent straight line one way moves, guess what? You don?t go out and bet the ranch.
Your risk appetite has been diminished for weeks, if not months. In fact, you may not want to trade at all. This is not good for markets of any description.
I have been through many of these. The best thing to do is to shrink your book, hedge up what?s left, and put your more aggressive tendencies on hold. You may have noticed that the model portfolio for my Trade Alert service has just done exactly that.
Come back only when it?s safe to play, and the markets gets easy again.
Watch Out, They Can Bite
It was one of those moves that appeared so gigantic and so unreal that you had to blink, while checking the cables on the back of your computer and your broadband connection.
The Swiss franc has just skyrocketed by 17% against the dollar in one tick.
First the bad news: the rent on my summer chalet in Zermatt, Switzerland had just risen by 17%.
And the good news? Holders of the ProShares Ultra Short Euro ETF (EUO), which I have been pounding the table on for the past seven months, just instantly appreciated by nearly 10%.
In a market that rarely sees moves of more than 1% a day, 17% is positively earth shaking, if not unbelievable.
A quick scan of my Bloomberg revealed that the Swiss National Bank had eliminated its cap against the Euro. Until now, the central bank had been buying Euros and selling Swiss francs to keep its own currency from appreciating.
This was to subsidize domestic exports of machinery, watches, cheese, and chocolate with an artificially undervalued currency.
The SNB?s move essentially converts the country to a free float with its currency, hence the sudden revaluation. Switzerland has thus run up the white flag in the currency wars, the inevitable outcome for small countries in this game.
One wonders why the Swiss made the move. Their emergency action immediately knocked 10% off the value of the Swiss stock market (which is 40% banks), and 20% off some single names.
I was kind of pissed when I heard the news. Usually I get a heads up from someone in a remote mountain phone booth when something is up in Switzerland. Not this time. There wasn?t even any indication that they were thinking of such a desperate act. Even IMF Director, Christine Lagarde, confessed a total absence of advance notice.
Apparently, the Swiss knew that eliminating the cap would have such an enormous market impact that they could not risk any leaks whatsoever.
This removes the world?s largest buyer of Euro?s (FXE) from the market, so the beleaguered currency immediately went into free fall. The last time I checked, the (FXE) had hit a 12 year low at $114, and the (EUO) was pawing at an all time high.
My prediction of parity for the Euro against the greenback, made only a few weeks ago in my 2015 Annual Asset Review (click here) were greeted as the ravings of a Mad man. Now it looks entirely doable, sooner than later.
The Germans have to be thinking ?There but for the grace of God go I?. If the European Community?s largest member exited the Euro, which has been widely speculated, the new Deutschmark would instantly get hit with a 20% appreciation, then another, and another.
Your low end, entry level Mercedes would see its price jump from $40,000 to $80,000. Kiss the German economy goodbye. Political extremism to follow.
There was another big beneficiary of the Swiss action today. Gold (GLD) had its best day in years, at one point popping a gob smacking $40. After losing its way for years, the flight to safety bid finally found the barbarous relic.
It seems there is nowhere else to hide.
By the way, the rent on my Swiss chalet may not be going up that much. My landlord has already emailed me that whatever increase I suffer in the currency will be offset by a decline in the cost in local currency terms.
It seems that the almost complete disappearance of Russians from the European tourism market during the coming summer, thanks to the oil induced collapse of their economy, is emerging as a major drag on Alpine luxury rentals.
That?s the way it is in the currency world. What you make in one pocket, gets picked out of the other.
That Bratwurst is Suddenly More Expensive
My former employer, The Economist, once the ever tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its ?Big Mac? index of international currency valuations.
Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success. The index counts the cost of McDonald?s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.
What are its conclusions today? The Swiss franc (FXF), the Brazilian real, and the Euro (FXE) are overvalued, while the Hong Kong dollar, the Chinese Yuan (CYB), and the Thai Baht are cheap. I couldn?t agree more with many of these conclusions. It?s as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas. I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool, than a speedy lunch.
The Big Mac in Yen is Definitely Not a Buy
I have got a lot right in the markets lately, especially this year, when 90% of my Trade Alerts went well. But as they say in karate school in Japan, you can?t block all the punches. I certainly missed the opportunity of a lifetime to load up on the stocks of a certain country, which I am about to visit. I?ll give you a hint up front: think edelweiss.
Yes, you guessed it. The Swiss economy has been barely eked out any positive GDP growth ever since Europe began its meltdown a few years ago. Q1, 2013 saw a gain of 0.6%, bringing the year on year figure to a lackluster 1.1%.
While broad swaths of the economy are weak, chemicals, pharmaceuticals, precision instruments, watches and jewelry, the things the Swiss are best at, seem to be holding their own. But it makes America?s 2.5% rate look positively robust by comparison.
Switzerland is certainly a country with many attractions. It is home to world-class companies, like, Nestle, Roche, Novartis, and Swatch. It has perennially run a strong current account surplus. Its 347 banks control assets amounting to seven times the country?s GDP, and account for 40% of stock market capitalization (compared to 10% in the US).
Despite shunning membership in the European Community, it has developed a first class export industry. It is not all about watches, cheese, cowbells, and Swiss army knives.
None of this explains why the Swiss franc has been so weak. Since the August, 2011 peak, the Swiss Franc has plunged by a gut churning 28%, and has been one of the world?s weakest currencies against the greenback. Note that the ETF (FXF) is priced in the inverse to the cash market, meaning that it takes $1.05 to buy one Swiss franc. To give you some long-term perspective on this, the dollar is now 72% cheaper than when I first visited this alpine paradise 43 years ago, when it cost SF3.00 to purchase a buck.
As strong as the fundamentals are for Switzerland, they have nothing to do with the strength of the currency. It has long been the flight to safety currency of choice for Europeans. While a director of Swiss Bank Corporation, I personally saw gold bars imprinted with the German eagle secreted there by high-ranking Nazi?s and never reclaimed. This is one theory why the Germans didn?t invade Switzerland during WWII.
Later, asset-protecting investors believed that the Swiss Army?s formidable mountain redoubts could hold the Soviet army at bay. To this day, there are still formidable stockpiles of weapons in the basements of the big Swiss banks, and most of the senior staff double as army officers.
One reason the Swiss franc has been a speculative target is that the country has a Lilliputian GDP of $635 billion, only 4.1% of America?s.
In 2011, the country faced a major currency crisis, as fears of a dollar and euro collapse drove the Swiss franc to an unbelievable all time high of 70 centimes to the dollar. While I was there during the summer, the local newspapers were chock full of stories about factory closings and mass layoffs. The strong Swiss franc was rapidly driving the economy out of business. Much business decamped for Germany, where the cost of production was denominated in far cheaper euros.
In September, 2011 the Swiss National Bank took drastic action. It immediately devalued the Swiss franc against the euro by 10%, and then pegged it there, vowing to spend whatever it takes to maintain the cheaper rate. It took on all comers.
The bold strategy was a huge success, as you can see from the charts below. Some friends at the central bank tipped me off that action was imminent, enabling me to get my readers into the most successful Trade Alert since the inception of this service. Over the course of a weekend, they made close to 400% on Swiss franc puts.
Here comes my big miss. I didn?t execute the second half of the trade. Basic Macro Hedge Trading 101 tells us that weak currencies are always great for local stock markets. That was definitely the case in Switzerland, where the equity ETF (EWL) has since posted an eye popping 55% return. That makes it one of the top performing European bourses, despite its feeble economy.
Did I do the trade? Nope? Perhaps one 4X gain in Switzerland was enough?
As penance for my oversight, I shall be punished severely. When I visit Switzerland in a few weeks for a fresh round of high altitude climbing, the mountains will no doubt claim their share of blisters, cuts, and rope burns. A hangover or two as well may enter the picture, as well. Those guides drink like fish.
At least the fondue, r?sti potatoes, raclette, and schnapps will be cheaper.
