Dude, ANALYZE THIS

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Jan 24, 2006 8:33 pm

This is just for fun and I think you might be up to it:



Bretton Woods Two is actually a Nash equilibrium. In game theory, the

Nash equilibrium (named after John Nash) is a kind of optimal strategy for

games involving two or more players, whereby the players reach an

outcome to mutual advantage (or often as not mutual disadvantage). If

there is a set of strategies for a game with the property that no player can

benefit by changing his strategy while (if) the other players keep their

strategies unchanged, then that set of strategies and the corresponding

payoffs constitute a Nash equilibrium.



Foreign nations, but primarily Asian nations, take our electronic dollars

and send us "stuff." On our side of the equilibrium, American consumers

agree to not save very much and borrow against our rising housing values

to hold up our end of the bargain. We have been very good at holding up

our part of the bargain.



They agree to keep prices down. If they tried to get rid of their dollars,

their currencies would rise in value against the dollar, and thus the cost

of their stuff to us. This would make them less competitive against each

other. So, to keep their factories going, they keep their currencies low in

a competitive devaluation.



If there was one "Super-Asian" currency, there would be no incentive for

them to do so. But as it stands, you have a dozen or more countries

buying large amounts of US debt in a form of vendor financing. This

happens when Asian company A sells us $10,000,000 of widgets. They

need local currency to pay their bills, so they trade their dollars into their

central banks for local currency (either directly or indirectly through

intermediaries). The central banks then manage the value of their

respective currencies.



But now they have dollars, and need to do something with them. They

could buy stocks or real estate or anything denominated in dollars, but

central banks prefer US debt. This has also had the effect of holding down

our interest rates on the long end of the yield curve. This in turn keeps

mortgage rates low which helps power home values and cash-out

refinancing.



Under Bretton Woods 1, Nixon could end the agreement by closing the

gold window. Under Bretton Woods 2, foreign central banks have us in

their gripping hand. For now, they have no incentive to change the rules,

as it would hurt them to do so. Who would buy their widgets and keep

their factories going and employment rising? But at some point, as a

small but growing number of foreign central bankers have pointed out,

the deal is going to have to change. You can have too much if a good

thing, especially if you have to swallow a trillion of them a year.



What is so uncomfortable about this situation is that we will not know

when the equilibrium equations will change until they have already

changed. As Martin Barnes of Bank Credit Analyst puts it, "Of course,

there is a limit to how high the US current account deficit can get.

Unfortunately, we will only know that limit has been reached when

markets start to riot. The dollar's strength argues against any near-term

problem, but markets can be fickle, and we cannot rule out a marked

reversal in sentiment toward the dollar. The crucial assumption is that

Asian central banks would then step in quickly to restore calm to the

markets."



It will take two things to happen for the trade deficit to reverse. First, the

dollar will have to go down, and secondly, the US consumer will have to

buy less and save more. We will look later at how likely it may be that

those two events happen this year.



But in 2006, I think Bretton Woods 2 remains the global paradigm. I am

still long-term bearish on the dollar, but do not think the dollar as

measured against Asian currencies will see anything like a major

correction this year. You will see small moves in the Chinese yuan as the

Chinese government allows the yuan to rise just enough to placate US

protectionists, and that may give some room for other nations to slowly

shift as well. But the 30% or so correction in the trade weighted dollar

that is needed to bring the current account into something closer to

balance? I do not think it is in the cards this year.



The dollar has been strong for several reasons this year. The Fed has

been raising rates, which is dollar bullish. The government had a one year

deal which allowed companies to repatriate dollars held offshore. By the

middle of last year, everyone and their brother were bearish on the dollar.

If there is no one on the other side of the trade, then a correction is due,

and we got it. For the record, I am still long-term bearish on the dollar,

but as I note below, this correction could take a long time.



Finally, for those who want to play the currency market, I think being long

the yen against the euro is the way to go.





Jan 24, 2006 8:55 pm

Skee,


Meat for the mind.  You have given me nourishment.  Thanks. 

Jan 24, 2006 9:20 pm

I don't know what the breakdown is of how much home equity is actually used to purchase products from China, Most people I know have purchased cars, boats and other goods (timber and home improvement materials for remodeling)  that I don't necessarilly attribute to Chinese production (what do I know about the macro trend though). 


This makes a lot of sense if the chinese are receiving a lot of $$'s from home equity though.  I would assume that their economy would recieve more $$$ from the excess consumer $$$'s (again assuming that the results of keeping long rates low produces enough purchases of their goods from home equity)than the potential interest lost to the opportunity cost of investing in long bonds as short term rates rise.  I just don't know enough about macro spending trends relative to home equity refinancing to comment intelligently on this.

Jan 24, 2006 10:30 pm

Not only can't I analyze this...I couldn't even finish reading it!

Jan 24, 2006 10:46 pm

I'm more prone to being bullish on oil and raw materials than bearish on the dollar, mainly because of my ignorance relative to currencies.  Buy what the Chinese are buying not what they are selling.

Jan 24, 2006 11:45 pm

my head hurts.......

Jan 25, 2006 12:11 am
joedabrkr:

my head hurts.......


You took the words right out of my mouth...it's like I'm burning in hell...or have stumbled into a mensa forum...

Jan 25, 2006 12:46 am
Indyone:
joedabrkr:

my head hurts.......


You took the words right out of my mouth...it's like I'm burning in hell...or have stumbled into a mensa forum...



roflmfao....i actually find it pretty interesting and thought provoking, but my damn head hurts!

Jan 25, 2006 8:46 am

I've always liked the one that says the Chinese are responsible for the housing boom and the rate inversion. here's the story



China's trade surplus has left it with a glut of US dollars that have
been used to purchase US Treasury instruments. This has had two primary
effects on the domestic economy, the first, and most obvious, is that
it has allowed the US to finance its current account deficit. The
second is that the excess currency used to purchase fixed income
instruments kept US long term rates (including mortgage rates)
artificially low. Large supply of dollars, relatively fixed supply of
instruments equals a decline in the price (read rate).



Such a policy cannot continue forever, something the Chinsese banks are
well aware of and something they have already taken steps to address.
Up until recently, the yuen was pegged to an absolute value with
respect to the US $,  8.29 if I recall correctly. Chinese bankers
bought or sold dollars/yuen to maintain that level. The level was
artificially low which contributed to the trade deficit and upwards
pressure in the yuen.



Secondly, rather than purchasing securities, China is looking to put
its surplus of dollars to work by purchasing tangible assets within the
US. The last deal was quashed but there are many more in the works.



Now with some of the pressure to employ dollars in the fixed income
markets released and the yuen allowed in small measure to seek its own
level, China has fewer extra dollars to worry about in the coming
months/years.



So what happens next? The Fed is pushing upwards with short term
interest rates, the Chinese are no longer holding the lid on long term
rates, so the yield curve unravels itself and all those people who
bought ARMs or Interest only mortgages find themselves out on the
street.



Housing prices reverse (I trade up to a bigger house), long term rates
rise to more favorable levels ( I move clients to longer average
durations), and I start looking around for refinery's, manufacturers,
raw materials producers that I can broker to China for those piles of
extra dollars.



On the other hand WTFDIK!






Jan 25, 2006 8:47 am
skeedaddy:

This is just for fun and I think you might be up to it:

Bretton Woods Two is actually a Nash equilibrium. In game theory,......



This is exactly the kind of line to discussion that when clients or potential clients start on I tell them that as an econ major I love it, I think it’s fascinating dinner conversation, but I’ve yet to see anyone use the conclusions reached in it to make money, especially for people at their level with specific financial goals to meet. For every well reasoned explanation for what the markets or a currency will do next, there’s an equally well reasoned and presented supposition that holds the opposite.  

Jan 25, 2006 9:13 am
mikebutler222:
skeedaddy:

This is just for fun and I think you might be up to it:

Bretton Woods Two is actually a Nash equilibrium. In game theory,......



This is exactly the kind of line to discussion that when clients or potential clients start on I tell them that as an econ major I love it, I think it’s fascinating dinner conversation, but I’ve yet to see anyone use the conclusions reached in it to make money, especially for people at their level with specific financial goals to meet. For every well reasoned explanation for what the markets or a currency will do next, there’s an equally well reasoned and presented supposition that holds the opposite.  



Yes and if you can figure out which one is right, you can make a big pile of money.  That's called "alpha" if I'm not mistaken....

Jan 25, 2006 9:40 am
joedabrkr:
Indyone:
joedabrkr:

my head hurts.......


You took the words right out of my mouth...it's like I'm burning in hell...or have stumbled into a mensa forum...



roflmfao....i actually find it pretty interesting and thought provoking, but my damn head hurts!


I'll agree that it IS interesting and thought-provoking, but it is so far above the majority of my client base, that if I started a discussion like that with them, they'd run screaming out the door.  I'll be the first to admit that I could spend a great deal of time studying this issue and still not feel like I could apply it profitably to my practice, so thus, I hire a lot of professional money managers to do the heavy lifting for me.


I know this thread was just started for fun, but it reminds me of one my my rules for business success...do what you do well and outsource the rest...

Jan 25, 2006 10:55 am
Indyone:
joedabrkr:
Indyone:
joedabrkr:

my head hurts.......


You took the words right out of my mouth...it's like I'm burning in hell...or have stumbled into a mensa forum...



roflmfao....i actually find it pretty interesting and thought provoking, but my damn head hurts!


I'll agree that it IS interesting and thought-provoking, but it is so far above the majority of my client base, that if I started a discussion like that with them, they'd run screaming out the door.  I'll be the first to admit that I could spend a great deal of time studying this issue and still not feel like I could apply it profitably to my practice, so thus, I hire a lot of professional money managers to do the heavy lifting for me.


I know this thread was just started for fun, but it reminds me of one my my rules for business success...do what you do well and outsource the rest...



so true......

Jan 25, 2006 11:11 am
joedabrkr:
mikebutler222:
skeedaddy:

This is just for fun and I think you might be up to it:

Bretton Woods Two is actually a Nash equilibrium. In game theory,......



This is exactly the kind of line to discussion that when clients or potential clients start on I tell them that as an econ major I love it, I think it’s fascinating dinner conversation, but I’ve yet to see anyone use the conclusions reached in it to make money, especially for people at their level with specific financial goals to meet. For every well reasoned explanation for what the markets or a currency will do next, there’s an equally well reasoned and presented supposition that holds the opposite.  



Yes and if you can figure out which one is right, you can make a big pile of money.  That's called "alpha" if I'm not mistaken....



Red, black, red, black. Is that investing? Harry Dents says it is 

Jan 25, 2006 12:04 pm

Man, some of you guys can get so anal around here.  Some one starts a thread here talking about something that is of interest to them and another guy has to step in and turn it into a "I hire managers v.s. pick stocks" discussion.  One of the great things about this board is that it gives a format for us all to discuss the things we wouldn't necessarily discuss with our clients and to find others who actually understand what the hell we're talking about (without eyes glazing over). 


Also, those who have made real serious money in the markets (Warren Buffet etc....) all make these kinds of analyses, why else would warren play the currency markets back in 2003 (if I remember correctly) and make a major bet against the dollar? 


So Mike do you think that the people who have really made money in the markets use multiple managers in an asset allocated fashion according to the principles of MPT? 


Do you think that Morgan Stanleys' analysts and investment strategy commitee are all in vain? 


MikeB, you seem to contradict yourself in that you believe that you can find money managers who will outperform the markets, yet also believe that it's in vain to try to predict outcomes.  My question for you is "how the hell do you think a money manager is supposed to outperform a benchmark"?  All investment decisions come from some criteria that is predictive in nature (like I've said before asset allocation is predicting that relative asset class relationships will remain similar to the past) since the rewards we seek will come tomorrow not today. 


Someone who says that it's in vain to make decisions based on current macro events and extrapolate a potential outcome to base decisions on is no more or less valid than the guy who says that past performance (yes, even coorellations is an element of performance) will equal future performance and slams people into an allocation model.


It's very possible for bonds and stocks and other asset classes to become highly coorelated for long periods of time.  In fact if what skeedaddy was saying ends up true, we could possibly see a long term trend of stocks and bonds coming into greater corellation.  Might happen might not, still interesting for me though.

Jan 25, 2006 12:17 pm
joedabrkr:

Yes and if you can figure out which one is right, you can make a big pile of money.  That's called "alpha" if I'm not mistaken....



In a world in which everyone is trying to outperform each other, doing what everyone else is doing is unlikely to work as a viable source of long term alpha. So betting with the consensus is unlikely to generate significant outperformance.

Jan 25, 2006 12:45 pm

dude:

<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />


Man, some of you guys can get so anal around here.  Some one starts a thread here talking about something that is of interest to them and another guy has to step in and turn it into a "I hire managers v.s. pick stocks" discussion. 



ugh, come on Dude, the entire thread was how do we take this possible event and turn it into an investment idea. Pardon me if I interrupt your parade to make a counter-point. Silly me, I thought that's what these boards were about. Who, exactly, is being anal here?


And, if you’re going to name the theme you dislike, I’d suggest you title it accurately. I’d say “Yeah, but you sound every bit as wise as the guy that disagrees 100% with you, so how can I invest on that concept with any conviction?” fits it. Abbreviate it to “Yeah, but”, if you like. It had nothing to do with hiring managers, it had to do with my doubts about top-down speculation driven investment strategies.


dude:

Do you think that Morgan Stanleys' analysts and investment strategy commitee are all in vain? 



Analysts that work bottom up? No. Strategists that work top down? Yes. Without a doubt imnsho the biggest frauds, the most overpaid nothings on Wall Street are top down strategists. Most firms employ several and they spend their days arguing with each other and hardly, if ever, produce actionable ideas. In fact, they make my point. Here’s a gaggle of educated, rational people making top-down assertions based on reasonable sounding themes and arguments and between them they couldn’t make a dime. There’s always an equally rational sounding counter theory. Therefore, I like gabbing about them here and at cocktail parties but the last thing I’m going to do is invest my client’s money and/or my career on something Roach or <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Metz utters…


dude:

MikeB, you seem to contradict yourself in that you believe that you can find money managers who will outperform the markets, yet also believe that it's in vain to try to predict outcomes.  My question for you is "how the hell do you think a money manager is supposed to outperform a benchmark"? 



There’s no contradiction at all. Your confusion comes from your desire to equate a manager’s selection of a stock based on, say, current cash flow and future profits based on current products or things in the pipeline with someone putting a finger in the air and saying “Ah, war is coming, I’m buying X and selling Y”. There’s just no comparison no matter how many times you suggest it.


 


 


 


dude:

 


All investment decisions come from some criteria that is predictive in nature (like I've said before asset allocation is predicting that relative asset class relationships will remain similar to the past) since the rewards we seek will come tomorrow not today. 



Here’s a slightly exaggerated example of what you’re trying to do. One guy is saying “gravity will be working tomorrow as it has since time began” and another is saying “based on what I’ve seen and what I sense, the Mets will win the World Series”. The problem is you’re trying to suggest they’re both making predictions with the same risk/reward parameters and certainty.


dude:

 


Might happen might not, still interesting for me though.



I said specifically it was interesting, and despite your hissy fit that I might decline to join in your POV, I haven’t denigrated anyone here. All I’ve said is I have yet, ever, to find someone whose skill is so surgical like that they could make money based on this sort of timing attempt. IINM, skeedaddy said the same thing reference timing.


Can we disagree without the name calling? Wasn't it you that asked for that?

Jan 25, 2006 1:05 pm
skeedaddy2:
joedabrkr:

Yes and if you can figure out which one is right, you can make a big pile of money.  That's called "alpha" if I'm not mistaken....



In a world in which everyone is trying to outperform each other, doing what everyone else is doing is unlikely to work as a viable source of long term alpha. So betting with the consensus is unlikely to generate significant outperformance.



Who said I was betting with the consensus?


Then again, isn't some technical analysis similar to betting on the consensus?  Just trying to get off the train before the consensus changes and the money starts to flow elsewhere?  Knowwhatimean?

Jan 25, 2006 1:08 pm

Sorry, I think he has entirely too much time on his hands.

Jan 25, 2006 2:28 pm

I'm just getting exhausted (my fingers are starting to hurt) arguing what seems to me to be differing definitions.  Whether some one does top down or bottom up analysis they both are attempting to extrapolate a future condition of a particular security, sector or asset class.  Of course they use differing methods.  Goal is the same though, to make $ tommorrow.  Whatever, I'm moving on.


Oil, water and material inputs (along with software, computer hardware and alternative energy) are the overweights in my portfolio.  'nuff said.