Adding More Positions

Increased the long equities by 5% (mostly Asian ETFs particularly Singapore):

 

Still modestly long equities approx. net 10%, gross 35%

Longs in:

Asian ETFs - 10%

Pharma - 5%

Telecom - 2.5%

Agriculture - 2.5%

Oil, Gas, Industrials - 5%

Tech - 5%

 

Mar 11 AUD 2%

Mar 11 CAD 2%

Mar 11 Gold 2% 

Dec 11 Corn 1%

 

Forward PE's on the individual longs are approximately 11x.

ETF PE's are a bit higher, however, this trade is more about currency devaluation rather than valuation per se.

To the extent there is a correction, will be adding to the long equity side and possibly the FX side.

 

Still expecting EUR to test 1.329-ish level.

 

Bernanke's Defense of Debt Monetization (ie, Quantitive Easing)

All in all the Fed Chairman's speech is supportive of a weak dollar policy prominent among U.S. government officials, but hitherto unexpressed explicitly....bottom line - keep exposure to fx of resource rich countries and keep long Non-U.S. equities vs short U.S. equities...

Although commentators do not appear surprised by the contents of Bernanke's Frankfurt speech (full text in the link below), I was shocked to read what can only be described as a rather open attack on surplus countries seeking stable exchange rates, and an ode to a weaker dollar.

To start, he states that U.S. debt monetization is "appropriate" because it is a "stimulus" measure as though this were a fact, even though the stated aims of asset inflation are unproven and it is unpredictable as to where the excess liquidity from this exercise will end up (ie, will it end up driving commodity prices higher?).

Additionally, there is a direct reference to the monetization's effect on the U.S. dollar, I believe for the first time:  

"The resulting increase in emerging market interest rates relative to those in the advanced economies would naturally lead to increased capital flows from advanced to emerging economies and, consequently, to currency appreciation in emerging market economies."

However, even though the U.S. is reducing interest rates and thereby lowering the value of its currency, the fault all lies with emerging market countries (ie, China):

"An important driver of the rapid capital inflows to some emerging markets is incomplete adjustment of exchange rates in those economies, which leads investors to anticipate additional returns arising from expected exchange rate appreciation. The exchange rate adjustment is incomplete, in part, because the authorities in some emerging market economies have intervened in foreign exchange markets to prevent or slow the appreciation of their currencies."

Ok - so basically, printing money to buy government bonds to "stimulate" the U.S. economy is ok and not currency manipulation meant to drive down the value of the dollar while emerging market fx stabalization policies are currency manipulation....

Is there any wonder that there is dismay among foreign central bankers at this policy?

Finally, David Rosenberg of Gluskin Sheff has an interesting take, and points out that Bernanke's remarks are entering the political relm.....

So much for Fed independence, the money printing policy very much puts this in the political relm...

From David Rosenberg, Gluskin Sheff:
"Ben Bernanke delivered a speech today in Frankfurt where he pointed the finger at China as a source of global imblance (never mind that the U.S. dollar has collapsed 70% against the yen since I joined the business in the mid-80s and the bilateral trade deficit with Japan hasn't come down one ioata.  Maybe a good part of the imbalance is a U.S. tax code that massively promotes consumption at the expense of savings.)

As an aside, Mr. Bernanke's subtle approval of President Obama's fiscal policies in today's sermon is sure to draw the ire of the new GOP-dominated Congress."

Link to the Full Text of Bernanke's Speech in Frankfurt 19 November 2010

Russell Reynolds 2010 Asset & Wealth Management Trends Report

Interesting report on the state of the wealth management industry from Russell Reynolds, particularly the hedge fund portion of the report...

Interestingly, if the statement below is true, then investors should take heart and go all-in, risk-on...!  Personally, I do not buy it...

"Many investors see current market levels as temporary rather than indicative of a trend, liabilities now significantly outstrip assets and return assumptions far exceed reality. The inflation vs. deflation debate rages on. Indeed, the basis for allocating across a basket of non-correlated assets no longer is an investment cornerstone."

Russell Reynolds 2010 Asset & Wealth Management Trends Report

China vs Corn & Beans

I am not at all sure how China can curb the market price of corn.  Yes, they can control the price of corn that their farmers pay through price controls, however, if they need to import corn to satisfy demand, they the Chinese government would lose money subsidizing it by paying a higher price for imports and receiving a lower price from domestic consumers...


Once there is more clarity on the Ireland situation, I would say that corn, and perhaps beans should resume their upward trends - unless China stops buying, produces more, I cannot comprehend how this would not be so considering the supply situation... 

From Bloomberg:

Corn and soybeans fell to five-week lows in Chicago on concern that demand may wane as China, the biggest consumer of commodities, moves to limit speculation and inflation.

China is drafting measures to curb excessive price gains, Premier Wen Jiabao said yesterday, suggesting possible interest- rate increases and price controls. The Dalian exchange last week said it will curb “abnormal” trading to prevent price manipulation. The dollar has gained in two of the past three sessions, curbing demand for U.S. crops.

“Talk of China curbing speculation and a stronger dollar is working against the ags,” said Luke Chandler, global head of agricultural-markets research for Rabobank in London. “We still remain supportive of the grain markets. There’s just some momentum to the downside.”

The rest from Bloomberg:
Corn, Soybeans Slide to Five-Week Lows as China Moves to Limit Inflation

Adding Some Positions

Added 2% positions today in the following:

AUD

CAD

Gold

Still modestly long equities approx. net 5%, gross 25%

Longs in:

Asian ETFs - 5%

Pharma - 5%

Telecom - 2.5%

Agriculture - 2.5%

Oil, Gas, Industrials - 5%

Tech - 5%

Forward PE's on the individual longs are approximately 11x.

ETF PE's are a bit higher, however, this trade is more about currency devaluation rather than valuation per se.

To the extent there is a correction, will be adding to the long equity side and possibly the FX side.

Missed the EUR correction, but would expect a rebound off the 100 day average of 1.3238....

From the Wall Street Journal Blog, an open letter to Ben Bernanke....

Should there ever be a QE3, 4, etc., perhaps we may look back on this letter as the first "cry from the wilderness".  Also, note the signatories...and the robotic reply from the Fed bureaucracy...

"The following is the text of an open letter to Federal Reserve Chairman Ben Bernanke signed by several economists, along with investors and political strategists, most of them close to Republicans:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued.  We do not believe such a plan is necessary or advisable under current circumstances.  The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in the Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.”  In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems."

From the Wall Street Journal Blog:
Open Letter to Ben Bernanke

Nothing is as Permanent as Things Called "Temporary" (Nassim Taleb)

In this video, Nassim Taleb's clear articulation of the effects of the U.S. government's policies regarding money printing and those affected by it are rather blunt and clearly welcome. 

His visible agitation throughout this interview, when discussing former Fed officials, his views on the morality of U.S. fiscal and monetary policy and also recalling his experiences with inflation in Lebanon is telling...

In my conversations with Latin Americans who have moved to the U.S., I hear similar views regarding monetary policy and 'stability'...they wonder how the U.S., which when they emigrated was considered the beacon of stability, could have fiscal and monetary policies reminiscent of the countries they fled...