Bill Ackman's HKD Revaluation Trade As Predicted By Deutsche Bank In 2010... And Why DB Thinks It Is Wrong

Tyler Durden's picture

Following recent disclosure that Bill Ackman's latest so-called 'slam dunk' idea is a bet on a revaluation of the Hong Kong dollar (as described here), it is interesting to see what someone like Deustche Bank's Mirza Baig thought precisely about the trade that Ackman is proposing as some unique concept (in 151 pages no less) as long ago as November 2010. To wit: "Public complaints against inflation are already loud, and may intensify if the reflationary tide swells further. This could turn up the heat on the authorities. Since 1983 when the current regime was adopted, Hong Kong has experienced CPI inflation as high as 12% and deflation as low as -6%. The current inflation rate of roughly 3% looks benign in this context. In 2008 when inflation crossed 5%, the public debate on monetary policy became more intense, but Hong Kong ultimately braced the peg. In short, we feel the situation will have to become far more extreme, and other policy tools prove ineffective before authorities capitulate and allow a revaluation of HKD. At present, the probability of this scenario is low, in our view. This is why we noted earlier that we expect the reval trade to attract more interest from offshore investors, and possibly reach blow-out levels by the middle of [2011]." And after highlighting the Ackman's trade from 10 months later, DB concludes that "[t]he more likely scenario is that Hong Kong will attempt to ride out the reflation tide with its current policy. The public would gradually move to using RMB for payments, and the HKD would fall into relative disuse. Once China’s capital account is sufficiently open (5-10 years later), Hong Kong would endorse the shift towards China through a formal peg vs. RMB at the then prevailing exchange rate  (i.e. without any revaluation)."

As for the merit of the actual trade, Ackman's point is that Asian, and specifically Hong Kong inflation will simply get out of control. Yet in that same case, is a simple bet on gold not more profitable? After all, when it comes to politically regulated markets, empirical evidence demonstrates that centrally planned monetary regimes will do everything but what is most logical (especially when it is far easier to simply intervene in the market at first: something the SNB demonstrated so well in the past year). How long have people been calling for China to reval the CNY? How has that worked out so far?

So while the Ackman trade will indeed be profitable in a very low probability binary outcome case, what will likely be just as profitable is a bet on that ultimate non-dilutable currency, whose primary driver incidentally are all those Hong Kong investors who are buying the yellow metal specifically due to the abovementioned concerns.

Ackman is suggesting that the market is mispricing the possibility of a revaluation. Well, what if the market is pricing the probabilities perfectly and instead has focused on capturing the central-planning inflation threat uncertainty by going long non-dilutable monetary equivalents which the government is unable to peg?

Which is not to say we think that Ackman is wrong: the truth is nobody can predict what Hong Kong authorities will decide to do. However, what is certain is that Deutsche Bank has been correct in its prediction of not only what will happen to the Hong Kong economy (and its currency), but also in anticipating the advent of the Ackman trade. It also suggests that the final outcome is very much a different one:

The more likely scenario is that Hong Kong will attempt to ride out the reflation tide with its current policy. The public would gradually move to using RMB for payments, and the HKD would fall into relative disuse. Once China’s capital account is sufficiently open (5-10 years later), Hong Kong would endorse the shift towards China through a formal peg vs. RMB at the then prevailing exchange rate  (i.e. without any revaluation).


There remains a risk that authorities are forced to act if the reflationary tide swells beyond control. We thus suggest positioning for higher HKD interest rates and a stronger currency via low-delta options. Specifically, we would be buyers of 1Y USD/HKD put with a strike at 7.40 for roughly 35bps, and pay rates via 2Y1Y swaptions. Note that recently swaption vols have come off, despite increased speculation on HKD regime shift. It seems the market believes in a currency revaluation, but has not considered that a regime shift will translate into higher interest rates as well.


Finally, we would strongly advise against fading the recent uptick in speculative pressure. We think Hong Kong’s reflationary tide is likely to swell further, and market speculation on a HKD revaluation will probably intensify. Trying to fight this trend (even with the right view on policy) risks incurring mark-to-market losses

Full Deutsche Bank presentation:


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lolmao500's picture

Anyone have any idea of who holds Italian bonds? What's the exposure to each bank/country? If Moodys downgrades Italy next month, it's gonna be hilarious. Italy is bankrupt and MUCH bigger than Greece...


Deutschbank could be going down if they hold too much toxic Italian debt... and the German people have had enough of bailouts.

Tyler Durden's picture

The cross ownership of European bonds by European banks is the topic of a post tomorrow. And, as a reference, French banks are on top with $410 billion in exposure, followed by Germany with $165 billion.

lolmao500's picture

$410 billion in exposure! Damn! What about US banks exposure?

Tyler Durden's picture

$44... and US exposure to French banks: $246 billion.

lolmao500's picture

Thanks for that. And as always, you are doing a GREAT job... And I mean, a WONDERFUL job.

Mactheknife's picture

Of course you can just watch will clear it all up in about three minutes.

X.inf.capt's picture

just watched Clark and Dawes
If the worst European economy only owes 1 trillon, what does that mean to us ( the US) with 14 trillon debt, 1.5 trillon defect, plus all the unfunded liabilities?

tip e. canoe's picture

also noticed that there was nary a mention of merry ol' England once again.   in the footnotes of the latest LEAP report:

(9) So, adding private and public debt, the United Kingdom is the most indebted country in the world. Source: Arabian Money, 08/28/2011 

that source links to the Project Armegeddon study reported by ZH couple weeks back.   and yet the Pound Sterling and her spawn (CAD, AUD) remain some of the strongest currencies on the planet right now (especially after the Swissie's fall).    seems the Queen and her minions continue to prove themselves adept at using wool along with the smoke & mirrors. 

what's that saying:   the sun never sets on the British Empire?

Cojock's picture

We can still print sterling.

tip e. canoe's picture

true, but can you eat it? :)

Central Bankster's picture

So is the fed ready to backstop the European banks and the ECB (again?)?

Blorf's picture

So again we're going to have a massive deflation from asset collapses, followed by epic money printing and reflation? At least I've been warned this time.

I guess gold to 1480 after the implosion, followed by ramp to 4000. Then the next bubble will collapse again, gold will fall to 3000 then ramp to 8000 after more money printing.

Add to that, every single trade on the planet rests on upcoming Federal Reserve Politburo minutes, which will either cause every market to collapse or surge microseconds after they are released. May as well go to Vegas and bet it all on black. Maybe they'll comp me some drinks.

jonjon831983's picture

$44? Phew... I might have that in my wallet.
That $246 Billion doesn't sound good though.

X.inf.capt's picture

Hello, Tyler thank you for this site and allowing us to comment on it. Its been fun, even for a newbie like myself.
Question, how do you think this going to play out, and the timeframe?
Thank you for your time.

Twiggles's picture

Google translated:

Tyler! what should I buy with my (baby) E-trade account!

I jest; I too appreciate it.  popping my comment cherry

Western's picture

Obvious troll is obvious.

On topic: Hong Kong is great way to look at what exactly is happening in Chimerica. A deflationary environment of decreasing debt and USD, plus an increasing commodity price environment. What a fuck fest. Long gold and silver, and I'm looking into getting a RMB Visa in Canada.

Hongcouver is a very Chinese place after all.

prains's picture


chinawholesaler is trolling ALL your posts with ass cream for sale ads

on posts 1 - 2 days old, my bat is being repolished can i borrow yours

Libertarians for Prosperity's picture



I think you might find the following link helpful.  If you want to know how much debt a particular country has issued, and which closet it's hiding in, this is your link.....

Please review Table 9B, beginning on page A72.  By the time you get to page A104, you will see total Italian claims held by Germany and France. On page A105, you'll see aggregate Italian claims held by the US, too.  Notice how the US has far fewer direct claims against Italy compared to France and Germany, yet the US has far more "other" guarantees.  It seems like US holdings of Italian debt are the flip-flop opposite that of France and Germany.  

vote_libertarian_party's picture

Yes, what are 'guarantees'?



Unused Lines of Credit?

Huge dollars.  Not very clear.

kito's picture

Tyler, in case of default, do many of these banks have enough assets to sell off in order to keep them afloat? As per bloomberg, Leon black seems to thinks so and is prepping for fire sales.

xtop23's picture

 If you use BoA as a benchmark for asset liquidation I would venture to guess they do not have the capital necessary to float those obligations currently .

 Unless of course they use what Little Timmy is selling .

 Can you say leverage ?

max2205's picture

Yep your mortgage payments will eventually reach someone in China.

Just like it was supposed to.

Spitzer's picture

 Somebody in Asia actually realizes that raising the value of a currency reverses inflation ?

Thats quite something...

xtop23's picture

 It also has the nasty effect of killing a country's exports. 

 Ask the Swiss.

hedgeless_horseman's picture

In Hong Kong, the One Country-Two Systems political situation is doomed.  Eventually, the HKD will go away as the RMB takes over; it is already happening with more goods FOB anywhere in the mainland versus HK as a shipping point.  Also, very easy to get RMB in HK, and much preferred in many situations.

Spitzer's picture

You know nothing about basic economics. Germany and Japan have trade surpluses with China yet they have higher wages then the US.

Atomizer's picture

A small group had lofty goals in expanding rapidly to meet a 2012 illusion. Plans do backfire, denial will be sold under national security to protect the group who founded accelerated growth by means of half backed globalization programs & faltered foreign policy to engage poverty measures though wealth redistribution programs. Once Ponzi funding dries up, plan two will unfold. Poor Bloomberg blew thru his budget during the hyped 9/11 manufactured threats. Mr. Bloomberg needs for the unicorns to make a money drop on NYC. If not, riots will occur - LOL

Hayek on Keynes

If the progs don't follow these demands, you'll end up as dead souls....History repeats, someone always gets hurt.

The Bankers vs. the Public debacle showdown will only result in a means to an end.

Leaders of Men

Atomizer's picture

TPTB to peasants.. We will use all available resources to contain our derivative nest.

laomei's picture

what's that? a static peg to the dollar causes massive inflation? who'd have guessed.  China's been revaluing at a steady pace.  The entire impetus for doing so has been to force a move up in the value chain for manufacturing... you are already seeing the result.  Cheaper items are being moved to markets with cheaper labor as they become unprofitable and more advanced manufacturing is taking their place.  This is why you are not going to see some drastic shocking revaluation here... it must be gradual for it to not be damaging.  Of course, the endgame is that more and more of the better part of the pie is going to be eaten by China and there's basically nothing you can do about it.  


As for Hong Kong peg, it's getting closer to being done and over, RMB is the future and that's really all there is to it.  The USD is a joke and no one in their right mind would willingly hang onto it for very long.  It's not that the RMB is rising in value, the USD is falling.  It's one of the big reasons I have started billing my clients in RMB... billing in USD is pretty stupid when it's falling 2% per month.

the last bagholder's picture

Still waiting to hear back from my source in Hong Kong on this subject, but otherwise Ackman's trade is rock-solid; and actually, I've been mulling this exact trade since last year. The RMB is the key. Eventually, the HKMA will PEG to RMB from USD, on this Deutsche Bank and Ackman both agree, the only real question is how soon--and on this point Ackman's got it right.

Consider that PRC officials are openly talking of floating the RMB, and soon, as in 2013-soon. Bejing wants a creible, strong, currency as it transitions to a self-sustaining economy ASAP.

However, Ackerman's placing too little stock in how much Bejing and the RMB influence the HKMA, this is where Deutsche Bank is closer to the mark (but still off). The HKMA is no longer the independant free body it once was.... the HMKA is on Bejing's timetable now, not its own.

lolmao500's picture
You've got to be KIDDING ME!!! Bank Of America's Backdoor Bailout - Dumping Mortgage Trash Onto Taxpayers Via Fannie Mae

The official bailout of the financial system may be over, but the government is apparently far from finished propping up big banks, as evidenced by the news that Bank of America has struck a deal to dump a bunch of near-worthless home loans on U.S. taxpayers.

According to a report in The Wall Street Journal Bank of America has sold the rights to process and collect payments on 400,000 home loans to Fannie Mae, the government-controlled mortgage giant. The loans have an unpaid principal balance of $73 billion, but are being sold for $500 million, according to the report.

Doesn't sound like a bad deal for the government, unless that $500 million price tag will soon be too steep, which is what "a person familiar with the deal," told the Journal.

TwoHoot's picture

Finally! We have a market price folks!

Something less than a penny on the dollar, but still a real market price.

I am feeling warm and fuzzy all over. Mark to Market will look good on the big banks balance sheets... sort of ... maybe ... well, maybe not, ... naw, it won't look good at all. Bye Bye warm and fuzzy. Hello Gloom and Doom.



Cojock's picture

The right to process and collect payments in respect of the loans, is not the same thing as the sale of the loans.

defencev's picture

As someone who frequently visits HK I can say that the inflation is really bad over there and further peg to US simply cannot be justified. What I am going to do is to move more funds in HK dollar. If revalue bet does not work  , I will buy more gold (which I keep in HK anyway).

 The frequent argument that central planners cannot print gold is valid as long as one understands that if the price of gold plunges, nobody is equally there to have any obligations to do  anything about that.