Monday May 23, 2005 - 10:49:43 GMT
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Black Swan Capital - www.blackswantrading.com
Unwinding should be a $ driver
“The easiest way into Wall Street is by the Hall of Delusions, through which many have entered who forgot to return. That door stands always wide open. No legend of warning affronts the eye. There ought to be one, and it should read: “No Safe Conduct Here.”
Garet Garrett, Where the Money Grows
“Representatives will meet industry leaders in New York this week to discuss measures to reduce the risk of a financial crisis being triggered by a hedge fund collapse, or another sudden shock,” the Financial Times reported yesterday. “The [European] Commission said that, according to one survey, global assets managed by hedge funds have almost doubled over the past two years, from $800bn to $1,500bn.”
Yes, almost a doubling of “global assets managed by hedge funds.” Much of it, no doubt, has been parlayed into the global “relfation” or “carry” trade-- borrow dollars short and buy commodity dollars, commodities, emerging market bonds, corporate & Treasury bonds, stocks, or whatever suits the fancy—especially if done with leverage. It has been a good game since late 2001.
CHART: CRB vs. $ Index
Much of the global macro hedge fund money invested over the past two years seems predicated on three essential themes:
1) The Fed continues to provide excess global liquidity.
a. Belief system: The Fed can’t afford to jeopardize the wealth-induced asset bubbles it created because the US consumer will crater.
2) The dollar continues to fall in value
a. Belief system: The dollar is the only available policy tool that can balance and unbalanced global world; thus it must continue to fall.
3) China demand for commodities continues to grow unchecked
a. Belief system: The needs of 2 billion people will drive commodity demand in a straight line higher from now through eternity—supply will never catch-up with demand.
These themes and these beliefs are still valid for many players in the market. To them, what we have witnessed since the beginning of the year i.e. dollar rally, is simply a minor correction. Soon, the dollar will fall again. The Fed will soon signal it has done enough in siphoning punch from the proverbial bowl and announce no more rate hikes. And Chinese efforts to cool the Shanghai property market will work as planned. There will be no cascading liquidation of positions hammering collateral values that ripples through the rest of the economy.
We think the tide has already turned in the global macro environment. The themes that sustained a one-way bet against the dollar are fading fast. The fact that industry leaders are meeting to discuss the potential risks to the system from a major hedge fund collapse could be telling us something.
Black Swan Capital
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