Old Habits Are Hard to Avoid: Eurodollar Stresses, Chinese ATMs and a Little Voice Telling Met to Get Out…
I am going to attempt to be brief as not to bore too many readers. I have been spending the last few years fully immersed in networking and building a venture backed technology company. Every now and then something in the financial world happens that stirs up memories from 2007-2008. The last time I logged into a BBG terminal (FYI…BB journalists can independently confirm) was Feb 2011 and I am not following the markets. In fact, I have gone days without looking at the markets, but I have been trading more frequently as readers will know. For the record, I closed my shorts on GOLD and Treasuries on Friday. I am long: MS, C, INTC, MSFT, FIO, NTAP and ERIC. I took some profit in BSFT and will buy back in at a good technical entry point.
This was all nice, until I read this article. I have read it four times. I wanted to make sure I fully understood it. I even sent the article to four people with whom I talk about investing.
I found this article worrisome too. I am not a bear who cries wolf (how about that pun?) every week only to miss out on the ride, but I also think that hedging risk requires one to be conscious of the little things. What worries me about the Chinese ATM article is a letter I received in December 2007. I had a $100k line of credit on my house from a bank called IndyMac. My original mortgage company was Quicken, but they were quick to sell my loan. On a Saturday morning in early December 2007, I received a letter that said I could not draw against my $100K LOC. Why would that happen I thought and seven months later IndyMac was seized by Feds.
I have said before that the whole credit crisis and recovery is about (1) the expansion of credit and (2) the money multiplier. I am sure 99.99% of people who make policy in the US have no knowledge of what I just wrote. Anyone can make the economy better if you let credit expand without oversight circa 1994 and beyond. I wrote more about it here.
Back to the present, my thoughts are (1) it takes bubbles time to build and (2) when they collapse, the damage is hard to predict. For example I cite: the Yen Carry trade of 2003-2007, the August 2007 Quant event, the real estate bubble, the credit crisis, etc. When I read things like:
As carry trade asset prices come under pressure due to rising US real interest rates, investors are forced to sell Eurodollars to hedge higher financing costs and negative gamma exposure.
Talk to any good FX trader and they will tell you they spend the day managing the greeks and a lot of that is gamma hedging. To me, this all goes back to QE and who did it help? It might have saved the world, but it did not help the economy of the US and the Fed team has stated as much. That is the reason why the Fed is changing from duration to economic data that they have not been very good at predicting. Here are a few updated charts from FRED. Pretty much these charts tell you that QE has helped in land of FX and Equities — it has done nothing for the economy.
Things are not horrible in our economy, they are just not good. The banks are holding onto a lot of cash. Why? I think it has to do with Basel III and potential risk of having to capitalize unrealized losses. Few people really know because banks can have off balance sheet assets which raises the question of why have a balance sheet if things can be off balance sheet and then we come to the whole mark to market and London Whale drama. The point of my post is that little things are the indicators of big things. I remember a day in August 2008 about a month before Lehman went down. The equity futures were up a lot, but the credit markets were deteriorating at a frightening pace. I remember telling the PM I worked for that it was going to be an interesting day because I could only see reasons to be a seller of the long book, while shorting everything else in site. We are not there today, but it tends to happen much faster than people realize and I am inclined to take down my meager gross exposure. As for the trade to make money, I am working on that and prefer to keep the powder dry.