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On FX and Worst Fears

Bruce Krasting's picture




 

On FX and Worst Fears

Courtesy of Bruce Krasting

Two market developments are worthy of note today (so far). Gold is up 2.5% (off a very cheap low) and USDYEN and EURYEN have made very significant 1.3% moves down.

Stuff like this scares me. It looks like acceleration in the flight to quality. The news backdrop is terrible and supports a panicky market outcome. My ability to look into the future has gone to zero.

For those that follow this blog for my read on FX, I cut out my short on the Euro and the long on USDYEN today. The outcome was (sort of) what I anticipated. I collected a few dimes on net. This was always a trading position, having lost my rudder on what might happen next, I’m just taking oars out of the water.

It’s been my experience that my “Worst Fears” on matters of global macro economic developments never come true. Some of my worst fears at the moment:

- A full-blown bank run in Europe. This is already happening. It is happening in cash by the billions at the bank teller windows and cash machines, it is happening by the hundreds of billion in electronic transfers. It can’t go on much longer.

There is a story/rumor going around that Euro denominated bills will soon be stamped with a single letter of country origin. This is what may happen in Greece. To stop the cash drain from the local banks, bills taken from a bank/ATM would have a red G on them. Any money transfers out of the country would similarly be flagged G (or temporarily blocked). Functionally a two tiered Euro will have been created.

If (when) this happens the bank run will explode in Spain, Portugal and Ireland. The precedent will have been set with Greece. The response by authorities will be more stamped money, this time with red S’s, P’s and I’s. Basically the whole ball of wax melts down.

In that scenario, what would the value of a EURUSD marked with a D for Germany or an F France be? My answer is that it would be far higher than the 1.2700 it is at the moment.

My point is that it is not entirely clear what it means to be short the Euro against another currency, currently. I want to be short the Euro that will be marked with the dreaded S, P, or I (or maybe one with red IT?), but I don’t want to be short the one with a D. 

Exchange controls of some form or another are not far away.  If there is a two tiered Euro being formed by events in Greece, then contracts, including FX contracts, will be settled with the Euros that are the strongest legs of the two tiered system. While there are long odds for this outcome, they are odds I do not want to play.

- If things keep up as they are in the financial markets, there will be another problem someplace that is not now on the radar. It could be in Eastern Europe, or even Russia. My bet is it comes from Asia, possibly China. There will be liquidity issues someplace.

This story by Izabella Kaminska talks about the potential for a problem (link).

- There are other things on my radar that could be trouble. One that could be a kick in the pants is a “failed” IPO for Facebook.

Nevertheless, I think this deal will be a huge success. It will be a monster IPO that raises record amounts of capital. More shares will be sold to the public than has been assumed. There is a big ‘Green Shoe” of additional shares that the underwriters have to offer if there is post issue market demand.

I expect that the stock will open at a big premium to the IPO price, and then rise some more. What I’m afraid of is the print at 3:30.

There is an aspect to this deal that is a bit troubling. Mark Zuckerberg has made it clear to the underwriters that he wants a good portion of the stock sold in the IPO to go retail investors who believe in Facebook. Those investors would not stand a chance of getting any stock in a normal IPO. Good for Marky.

But that is not how IPOs work. Deals get “hot” because retail investors want to own shares, and those investors typically have been excluded from getting shares at the IPO price. Retail is normally the force that gets an IPO a 10%+ pop at the opening.

But what if a fair chunk of the retail demand that is needed for the stock to catch a bid has already been filled?

This is a very big deal with some unusual features. It will be priced rich with lots of shares sold. If there is a pop tomorrow morning that results in the green shoe getting filled, and the flippers (like me) get out, it could lead to a disappointing day.

Who knows? We might have a $100b lead weight on our hands.

Note: The results for FB may get tainted by news from Europe or elsewhere. What’s the chance for bad news from Europe tomorrow? A Friday? High, is the answer.

 

 

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Thu, 05/17/2012 - 22:44 | 2438273 alien-IQ
alien-IQ's picture

I'm looking forward to FB options. Puts on that over-hyped pig are going to be glorious.

Thu, 05/17/2012 - 21:32 | 2438082 slewie-the-pi-rat
slewie-the-pi-rat's picture

Bruce have no fear, Sunday eurolehman night is but a couple of short days away and come Monday (and it will be this lehmaeaque weekend) Bill's MBS trade willl bear a bounty of fruit as the markets roar approval with the arrival of the eusa heidelbergsikorsky dispensing unlimited fiat from on high

Thu, 05/17/2012 - 23:14 | 2438348 DeadFred
DeadFred's picture

At which time the Chinese previously worried about sending the wrong signal by selling their USTs might say "Screw it!!" and dump their holdings. The would have good political cover for doing it. I wonder if this is as much the reason for Ben's uncharacteristic restraint as domestic politics. With all the FB hype I thought hard about a short term cashing out of my bear positions, but naw, there's way to many dark colored birds flying around looking for the right place to settle down. Thanks Bruce for putting the spotlight on a couple more of them.

Thu, 05/17/2012 - 21:33 | 2438079 walküre
walküre's picture

Bruce, it seems that you're lost and all over the map. If your confusion is indicative of the general sentiment in your neck of the woods, then the rest of us should get downright frightened.

Nobody has a clue what to do next. Nothing is working, none of the financial magic solutions are viable or sustainable. It's often suggested that TPTB have an agenda or a strategy. That some evil group is behind these acts and that masterminds pull the strings to move markets, nations and economies in their direction.

I used to entertain that notion for a bit myself but have since discovered that they're all just cooking with water and they're all putting their pants on each leg at a time. The only difference is that they have alot more money than I do and that money buys them some influence and power. But there is no such thing as "the one" group which controls world affairs and strives towards a New World Order for example. There are probably many groups and even if the members of each group had a consistent agenda, they are still human beings who have their own minds and their own plans. The wealthier these folk have become, the less they are inclined to trust one another.

Again, I say that nobody has a clue. Nobody even has a concept or model for leadership to change the course. Such is probably the downfall of humanity in the long run. We're not learning anything from history despite the many studies and museums out there. We're bound to repeat history over and over and over again because we are not really evolving. Beneath our loin cloths and inside our cage dwellings, we're still as primal as we were when the first man / woman discovered how to walk upright and how to make fire.

There is no grand plan and there is no solution because greed and other basic human instincts are simply not allowing any form of real sophisticated progress. We can't shake and overcome who we are even after thousands of years.

Thu, 05/17/2012 - 21:20 | 2438047 skepticCarl
skepticCarl's picture

My heart is a flutter, and my loins s are girded, waiting for the Bernank to come up with some sort of option-able rehypothecated debt swaps to bring stability and confidence to the European banks.

Thu, 05/17/2012 - 20:47 | 2437992 disabledvet
disabledvet's picture

go back to some type of "exchange rate mechanism" then? i don't think so. The border has already been flung open...the goods flow freely. Once the currency tanks the debt destruction would be of EPIC proportions. This is NOT an economic event at that point...if it ever was. Big meeting with the G-8 coming up in DC soon.

Thu, 05/17/2012 - 20:31 | 2437951 lasvegaspersona
lasvegaspersona's picture

I cannot believe the ECB would ever do that to its currency. Zee stabeeleetee is what it is all about and they have maintained that well. The ECB is not the Fed and the Euro is not the dollar. The Euro will survive even if not one country uses is internally. It has created a market for physical gold at market price which gives it value no matter how bad the Eurozone countries spend beyond their means. While the dollar is hyperinflating the Euro will just inflate enough to keep the banks alive. When the dollar fails, the Euro will still be promising gold...maybe at 10,000 Euros to the ounce...but it will still be standing because it will prove itself relatively stable.

Thu, 05/17/2012 - 20:21 | 2437932 Orly
Orly's picture

Bless you, Bruce.

Is this crazy or what?  To cut one's teeth on this 4X market over the past four years has been a godsend for me.  I love to learn and learning in the most competitive and complex environment possible is the best way to learn a trading craft.  Sometimes, my brain is on fire.

Am I making a killing?  No.  But am I getting pummelled?  Again, no.  Actually holding your own in this market is quite the edumaction.  It's enough to be- almost- proud.  :D

Thanks again for laying it out there.  I think you're one of the "profs" of the craft and I especially appreciate when you talk 4X, even when most of your readers would think it is as boring as painting grass.

I don't know about you but I'm still having a ball.

:D

Thu, 05/17/2012 - 19:57 | 2437872 ddtuttle
ddtuttle's picture

In a strange way, the fact that the bills are marked by country of origin is like there never was a euro, because people could always trade bills at different rates independent of any official rate.  It's like they never belived in the thing in the first place, or wanted some kind of an escape mechanism.

 

Thu, 05/17/2012 - 20:12 | 2437904 Cthonic
Cthonic's picture

^^ FTW

Thu, 05/17/2012 - 19:26 | 2437825 ZackAttack
ZackAttack's picture

Those stamped euro notes sound an awful lot like blocked deutschemarks in Weimar Germany.

Nobody could possibly be that stupid, that ignorant of history, as to repeat that experiment in currency controls.

Thu, 05/17/2012 - 21:04 | 2438021 Buck Johnson
Buck Johnson's picture

Band news definitely will be coming out tomorrow, just you wait.  Also with all the fanfare from CNBC (it's crazy that one financial network would push Facebook a company and essentially are pumping it up).  This is going to be the worlds biggest pump and dump, just you wait.  Because to be honest with you, facebook won't last.  It will go like myspace and another one will come into being.

Thu, 05/17/2012 - 19:23 | 2437812 Big Ben
Big Ben's picture

Why would Greece want to stamp a "G" on its euros? To take a perfectly good euro and suddenly make it worth a lot less?

What Greece needs is the ability to print currency. It will not be allowed to print euros, so it will need to introduce its own currency to print.

I can see Greece passing a law that creates the New Drachma and making it legal tender for all euro-denominated debts (at a 1:1 ratio). Then it could pay off all Greek government debt using freshly printed NDs. This is that same thing that Abraham Lincoln did when he created the greenback. The US government could pay debts using greenbacks instead of gold, but it would not accept them in payment of taxes.

Thu, 05/17/2012 - 19:35 | 2437768 Widowmaker
Widowmaker's picture

Taxpayers get ready, you're about to bail out the fucking world of fraud.

The last 30 years of finance has been for naught, a stain on humanity.  Go back to die Schweiss, Krasting.

"NO ONE SAW IT COMING."

"WE SPARED THE BANKS BUT LOST AMERICA"

The goose is dead, moneychangers are next.

 

Thu, 05/17/2012 - 17:54 | 2437544 BeetleBailey
BeetleBailey's picture

Hey Bruce...join the club. Got pounded in my GBP/JPY long today......but held on (less than 1% margin used). Still, it looks ugly. Charts look like Tokyo won WWII. Several rookies I know got pole-axed (took the loss - then got cute, re-entered, and took more losses - ouch).

The BOJ will be screaming bloody murder, and much like the flight to the Franc mid summer of last, this to shall pass. I was short CHF's too back then - and ended up fine.

 

Thu, 05/17/2012 - 17:50 | 2437486 ebworthen
ebworthen's picture

What would the point of a two-tiered Euro be?

They may as well go to Drachmas in Greece and the Peseta in Spain.

People are taking out Euros because they know Greece will default and re-introduce the Drachma.

Labeling Euros with "G" would have the same effect as reverting to the Drachma without the benefits of default, especially if country specific designations of value were assigned.

It would be an open admission of abject failure, a finger in the dyke strategy that will make people run away rather than stick their fingers in the leaky walls of the Euro.

Thu, 05/17/2012 - 17:38 | 2437462 malikai
malikai's picture

My eurusd models are all over the place right now. Today was good but I don't think this is going to last either.

Thu, 05/17/2012 - 17:18 | 2437393 viator
viator's picture

Euros are already stamped...

Here is a comment I left on "A Fist Full of Euros"

in April

Viator on April 4, 2012 at 11:07 am said:

Did you just propose a solution in your essay? Why not let each nationality of Euro unpeg? The Greek Y Euro would be worth say 1/2 of the German X Euro. Other than that let circumstances remain as they are. The resulting devaluation of debt would have to be negotiated with shared haircuts.

N Austria
Z Belgium
G Cyprus
D Estonia
L Finland
U France
X Germany
Y Greece
T Ireland
S Italy
R Luxembourg*
F Malta
P Netherlands
M Portugal
E Slovakia
H Slovenia
V Spain
W Denmark*
K Sweden*
J United Kingdom*

* W, K and J have been reserved for EU members currently not participating in the euro. R reserved for Luxembourg which curent uses stockprinted originaly for other contries. (More variations could be created)

http://fistfulofeuros.net/afoe/what-wolfson-did-next/#comments

"Unlike euro coins, euro notes do not have a national side indicating which country issued them (which is not necessarily where they were printed). This information is instead encoded within the first character of each note's serial number.

The first character of the serial number is a letter which uniquely identifies the country that issues the note. The remaining 11 characters are numbers which, when calculated their digital root, give a checksum also particular to that country. Because of the arithmetic of the check-sum, consecutively issued banknotes are not numbered sequentially, but rather, "consecutive" banknotes are 9 digits apart.

The W, K and J codes have been reserved for the EU member states currently not participating in the euro, while the R prefix is reserved for a state within the Eurozone that, at present, does not issue euro banknotes.

Country codes are alphabetised according to the countries' names in the official language of each country, but reversed" http://en.wikipedia.org/wiki/Euro_banknotes

 

Thu, 05/17/2012 - 20:09 | 2437895 Cthonic
Cthonic's picture

There is a story/rumor going around that Euro denominated bills will soon be stamped with a single letter of country origin. This is what may happen in Greece. To stop the cash drain from the local banks, bills taken from a bank/ATM would have a red G on them. Any money transfers out of the country would similarly be flagged G (or temporarily blocked). Functionally a two tiered Euro will have been created.

There's no need to stamp the bills. Astute Germans and Austrians have been selectively removing their own countries' banknotes from circulation since at least 2008 if not earlier. I suspect by now that there is a full on boycott of Club Med euros-- get them from an ATM, spend or redeposit 'em!

Thu, 05/17/2012 - 18:12 | 2437613 Quisat_Sadarak
Quisat_Sadarak's picture

I propose stamping Euros:
'D' for Dead

The Euro was dead before it started. You can't have one group doing net productive work and the other group net freeloading. Eventually the working folks get pissed off and boot the freeloaders, or exit themselves thus ending the imbalance. This problem is as old as time.

There is no such thing as a free lunch. Never will be.

Thu, 05/17/2012 - 19:49 | 2437864 John_Coltrane
John_Coltrane's picture

"You can't have one group doing net productive work and the other group net freeloading."  Now you've written the most important truth there is.  This is really what "fairness" in all about (not forced income redistribution) and even Chimps understand this concept when is comes to food as experiments show.  Its buiilt into our DNA via evolution and normal survival of the fittest.  Its as fundamental as the second law of thermodynamics and inviolate as the increase in entropy in the universe. 

Hopefully, voters will express this concept in the fall by throwing the statists out.  Debt is the road to slavery. 

Thu, 05/17/2012 - 20:54 | 2438000 Unique Snowflake
Unique Snowflake's picture

If they'd given a couple of the the chimps uniforms and guns I doubt the experiments would have turned out the same. Welcome to fairness. Welcome to humanity. We didn't evolve from apes, who act fairly and communally, we de-volved from them.

Thu, 05/17/2012 - 17:39 | 2437470 covert
covert's picture

the euro has always been doomed.

http://expose2.wordpress.com

 

 

Thu, 05/17/2012 - 17:09 | 2437338 Gloomy
Gloomy's picture

"It’s been my experience that my “Worst Fears” on matters of global macro economic developments never come true."

This is how the "Boy Who Cried Wolf" game will be played by TPTB. Just when we are all conditioned that "Worst Fears" can't happen, they will.

Thu, 05/17/2012 - 17:12 | 2437364 Seer
Seer's picture

I somehow feel more at ease, not because of what you posted, but because you posted.  Long time no see/read!  Missed you!

Thu, 05/17/2012 - 17:16 | 2437332 citizen2084
citizen2084's picture

Thought there was already a central bank identifier on the EURO serial number to show country origin.  May have been another delusion...

 

peAce

EDIT - country identifier http://en.wikipedia.org/wiki/Euro_banknotes

Thu, 05/17/2012 - 17:28 | 2437425 NotApplicable
NotApplicable's picture

From reading that link, origin is meaningless, as different countries produce different denominations. The stamps are relevant to the country of circulation at the time the SHTF, though.

Thu, 05/17/2012 - 19:24 | 2437818 Widowmaker
Widowmaker's picture

Paper is fucking meaningless -- all of it (including its electron bitch sister, too).

Thu, 05/17/2012 - 18:07 | 2437594 TheFourthStooge-ing
TheFourthStooge-ing's picture

You were looking at the printer codes. There is also a code in the serial number which represents the country that issued the note. It's an easy mistake to make considering all of the other things going on with it (magnetic serial numbers, holograms, IR and UV indicators, etc.).

 

Thu, 05/17/2012 - 17:06 | 2437326 barliman
barliman's picture

 

Bruce,

The idea of the "marked euros" is truly hilarious. Especially given the opportunities it would provide to parties outside of Europe to 'counterfeit' their euros with a 'D'. (Now that I think of it, I have some euros laying around from old business trips ...)

If you live in Europe and you haven't taken your money out of the bank before this ... SHAME ON YOU.

There is no longer a question of whether the euro survives - it does not. The only question now is do we see a slow parade of nations leaving the EU or does Germany leave the EU under Plan B like (wait for it) a blitzkrieg ??

What odds are you giving on Israel moving on Iran in the next seven days?

barliman

Thu, 05/17/2012 - 17:11 | 2437360 citizen2084
citizen2084's picture

Next 7 days:

IDF attack on IRAN?  I would offer 8-1 against...

IDF into Syria? This happening is the standard AKs vs QQ coin flip.

 

peAce

Thu, 05/17/2012 - 17:00 | 2437300 LMAO
LMAO's picture

"I’m just taking oars out of the water"

I tell you, you should start dipping those oars into the EUR/CHF ASAP, if you are looking for some great action.

Whadda-you-say..... why not boarding that roller-coaster for shits and giggles?

Riddle me this:

What's the price of playing dead in this "market"?

Thu, 05/17/2012 - 16:51 | 2437267 AmenRa
AmenRa's picture

rehypothecator

 

Then why don't they simply use the two letters that identify the country?  Ex: DE (Germany), FR (France), GR (Greece), IT (Italy), etc.

Thu, 05/17/2012 - 17:22 | 2437404 NotApplicable
NotApplicable's picture

What makes you think they can afford to double the number of letters?

Honestly, if that were possible, they wouldn't be in the predicament in the first place.

Thu, 05/17/2012 - 16:48 | 2437252 Gene Parmesan
Gene Parmesan's picture

The dreaded scarlet letters.

Thu, 05/17/2012 - 16:48 | 2437251 apberusdisvet
apberusdisvet's picture

 

 

My prediction:  pre-opening:                 $38

                       opening ramp to:          $63

                        close:                           $34

Thu, 05/17/2012 - 22:48 | 2438282 alien-IQ
alien-IQ's picture

and $14 by July...

Thu, 05/17/2012 - 18:03 | 2437579 RoadKill
RoadKill's picture

At 60+ will I be able to locate stock to short?

Thu, 05/17/2012 - 20:09 | 2437898 alex_g
alex_g's picture

No, needs to be marginable for you to do a "above board" short, as opposed to the usual sell and worry about borrowing or covering later...

Thu, 05/17/2012 - 17:21 | 2437401 NotApplicable
NotApplicable's picture

I have a hard time believing the professional Hopium crowd will let this baby drop on opening day, as it's the  only positive thing they've got left to pump.

Not to mention, it's another CIA Big-Brother tool, so there will be reprecussions to those will try to cash out too quickly.

Thu, 05/17/2012 - 16:30 | 2437153 rehypothecator
rehypothecator's picture

N.B. in the interest of clarity, some of the ones stamped with a G are from Greece and some of them are from Germany.  Although clear enough which is which from context, you might pick different letters, like H and/or D or something.

Thu, 05/17/2012 - 16:47 | 2437245 Bruce Krasting
Bruce Krasting's picture

Thanks. Total fuck up by me. I wrote this fast. I fixed it now so that G is Greece and now D is Germany. And now it might make some sense.

Sorry about that...

bk

Thu, 05/17/2012 - 17:24 | 2437409 TheFourthStooge-ing
TheFourthStooge-ing's picture

Bruce, wouldn't it make more sense to use the country code in the serial number of Euro notes than stamping them with red letters?

This could be implemented instantly without warning. Also, if this were indeed the course taken, imagine the consequences for Euro notes coded for Spain, Portugal, Ireland, and Italy.

 

Thu, 05/17/2012 - 16:34 | 2437175 Ahmeexnal
Ahmeexnal's picture

There would be no confusion, as euro notes from germany would be stamped with a swastika, and french euro notes would be stamped with a frog.

Thu, 05/17/2012 - 22:45 | 2438276 earnyermoney
earnyermoney's picture

And Portugal, Italy, Ireland, Greece and Spain could have a picture of a hog.

Thu, 05/17/2012 - 16:50 | 2437263 cossack55
cossack55's picture

Good one. Thanx for the laugh.

Thu, 05/17/2012 - 16:46 | 2437233 idea_hamster
idea_hamster's picture

"It’s been my experience that my “Worst Fears” on matters of global macro economic developments never come true."

Whew -- Good thing past performance is a guaranty of future outcomes!  Wait ... wut?

Thu, 05/17/2012 - 17:49 | 2437518 ebworthen
ebworthen's picture

Timing Bruce, timing.

Thu, 05/17/2012 - 16:56 | 2437284 semperfi
semperfi's picture

LMAO !!!

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