currency advice, anyone?

[jk]

if risk assets are being repriced because of a renewed recognition that, yes, there is such a thing as risk, then where do you hide?

the sell-off this last week in precious metals revealed some element of speculation in those markets [surprise!]. and pm's are more for poom-time, of course.

so cash? [i.e. tbills and money markets] or FOREIGN cash? [i.e. fxe, fxy, gim, etc] i've been raising my own cash position for a while, and am now 13.5% in u.s. dollar-based cash, and 17.3% foreign currencies/foreign short-duration bonds. so, leaving aside the exposures of other types of investment, i'm grappling with the question of whether to shift even further away from u.s. dollar cash into other countries' fiat paper.

thoughts?

[Finster]

Re: currency advice, anyone?

if risk assets are being repriced because of a renewed recognition that, yes, there is such a thing as risk, then where do you hide?

the sell-off this last week in precious metals revealed some element of speculation in those markets [surprise!]. and pm's are more for poom-time, of course.

so cash? [i.e. tbills and money markets] or FOREIGN cash? [i.e. fxe, fxy, gim, etc] i've been raising my own cash position for a while, and am now 13.5% in u.s. dollar-based cash, and 17.3% foreign currencies/foreign short-duration bonds. so, leaving aside the exposures of other types of investment, i'm grappling with the question of whether to shift even further away from u.s. dollar cash into other countries' fiat paper.

thoughts?

Probably cash benefits initially as liquidity dries up. Treasuries, as cash derivatives, benefit too. But once the Fed turns from fighting inflation to economic weakness, then hard money will get the upper hand.

Most investors IMO are best off focusing their attention on just two forms of money: their own coin of the realm, and hard money. Americans thus would be looking at dollars and hard money (gold, silver, and to a lesser extent platinum and copper). If you happen to live in a country where the domestic currency outlook is better, you could hold more cash (soft money) and less hard. And vice versa. Only very sophisticated investors with very large portfolios (read: money center banks, hedge funds ... ;) ) need to be playing in the forex markets. If you're particularly concerned about the dollar vis-a-vis other currencies, you could put some money into an international bond fund or two.

Anything can happen next. Maybe even this will turn out to be a hiccup and the bull continues. But my guess is that a tectonic shift has occured and that the liquidity tide will be flowing out for a while. I haven't made radical changes, but did pare down to my core stock positions and buck up on cash and Treasuries. Definitely not selling gold, though, and if prices fall much further may even add further to positions. It will be hard to pinpoint the exact moment hard money will again begin to outperform soft, so take the Boy Scout Motto and Always Be Prepared ...

...

[Jim Nickerson]

Re: currency advice, anyone?

Probably cash benefits initially as liquidity dries up. Treasuries, as cash derivatives, benefit too. But once the Fed turns from fighting inflation to economic weakness, then hard money will get the upper hand.

Most investors IMO are best off focusing their attention on just two forms of money: their own coin of the realm, and hard money. Americans thus would be looking at dollars and hard money (gold, silver, and to a lesser extent platinum and copper). If you happen to live in a country where the domestic currency outlook is better, you could hold more cash (soft money) and less hard. And vice versa. Only very sophisticated investors with very large portfolios (read: money center banks, hedge funds ... ;) ) need to be playing in the forex markets. If you're particularly concerned about the dollar vis-a-vis other currencies, you could put some money into an international bond fund or two.

Anything can happen next. Maybe even this will turn out to be a hiccup and the bull continues. But my guess is that a tectonic shift has occured and that the liquidity tide will be flowing out for a while. I haven't made radical changes, but did pare down to my core stock positions and buck up on cash and Treasuries. Definitely not selling gold, though, and if prices fall much further may even add further to positions. It will be hard to pinpoint the exact moment hard money will again begin to outperform soft, so take the Boy Scout Motto and Always Be Prepared ......

But my sense is that this week marked a shift in the liquidity cycle..
http://www.itulip.com/forums/showthread.php?t=1031 post # 2

Finster,

If anyone asked me what happened this past week, I would say equities and PM's declined, oil hung in there, and Bonds went up. If I were asked why, I could not give an answer that even I would consider plausible.

Something happened last week that you appreciated with regard to liquidity lessening. Can you perhaps share what you perceived happening?

Thanks.

[Finster]

Re: currency advice, anyone?

Finster,

If anyone asked me what happened this past week, I would say equities and PM's declined, oil hung in there, and Bonds went up. If I were asked why, I could not give an answer that even I would consider plausible.

Something happened last week that you appreciated with regard to liquidity lessening. Can you perhaps share what you perceived happening?

Thanks.

You otta know my answer by now, Jim! ;) Basically whenever everything seems to be going the same direction, you need to check your units. As I posted in the "Correlation’ rather than ‘contagion’" thread:

Neither "correlation" nor "contagion" really is adequate to explain what we've been seeing. That's because most of the movement this week is in only one asset class. Cash.

I've said it before and I'll say it again, because this one concept flummoxes even sophisticated commentators, as evidenced by the piece quoted at the top of this thread. Cash went up.

Why would we cast about for complex theories to explain some seemingly metaphysical connection between unrelated things, when one simple explanation will do? Occam's Razor: Cash went up.

Why would we acknowledge that cash is not a fixed reference point (e.g. we publish inflation stats, don't we?), and then when trying to explain the markets, act as if it were?

It really is that simple. Cash went up.

Of course, that doesn't tell us why cash went up. Currencies, particularly USD and JPY, are in rally mode because they've been the planet's most shorted assets. US consumers shorted dollars against houses. LBO firms shorted dollars against corporate capital. Hedge funds shorted yen against anything they could get their hands on.

When you get covering of literally trillions of something sold short, it goes up.

So how does that explain treasuries, being as they went up more than dollars themselves? They're dollar derivatives, a little like leveraged futures on dollars. As market participants, noting the retreating tide of liquidity, begin to anticipate a more friendly Fed (lower rates on the horizon), they also bid down market rates because these securities compete with banking system funds efficiently.

That leaves oil. This was the only real odd man out in the week's action. It requires a separate explanation - it gained in real terms. On the heels of a spate of cold weather in the northeast and with refineries gearing up for the summer driving season, crude inventories have been drawn down.

To sum up, cash went up, and oil went up. Of course, there is admittedly a bit of oversimplification here, as markets are a bit more complex than that. So let's put some numbers on it. Measured by the FDI, the USD rose an incredible 2.04% in a single week. It may not seem big, but that's a huge move in something so tied to everyday transactions. The JPY advanced even more, since it rose in comparison to the USD. Given the scale of the change in market value of the dollar alone, it explains nearly two thirds of the move in the US stock market and the change in the price of gold.

If this trend (of increasing currency value) were to extend over a sufficiently long period of time, it would begin to filter into consumer prices and wages, and we'd call it by the name "deflation". I think the distinction is somewhat artificial, because the only real difference is in whether it goes on long enough to be obvious in conventional inflation indicies. So far as I'm concerned, I'm content to just say we encountered a week in which we had an over 2% deflation.

[Jim Nickerson]

Re: currency advice, anyone?

Finster,

It was the "why" part that I wished to wring from the labyrinth of your noggin, and, at least for me, you "done good" with explaining it.

[Finster]

Currency advice, anyone?

Currency advice, anyone?

Yes.

Accumulate as much of it as possible.