Yours truly had been traveling the whole month, and is now back. When we left off the last time, we said the Malaysian incumbent will stay in power, and the USD will strengthen into the final throes of the sovereign debt crisis:
We got what we wanted. But by all means this is not a rosy prediction. The Malaysian political risk probably doesn’t matter to most of us. It will just mean that political risk will make foreign investment into the country unattractive in the next two years.
The US dollar strength is the elephant in the room. A strong dollar will ensure massive losses among the many who had been happily selling USD:
1. by outright shorting USD against Asian currencies (ADXY Index on Bloomberg) and Latam currencies (LACI Index on Bloomberg)
2. by borrowing in USD and then selling these borrowed USD for local currencies to fund capital expenditure at home.
My advise to the corporates who had been happily borrowing in USD for interest cost savings is this savings will soon turn into losses. You are better off unwinding these USD borrowings, or converting them via cross currency swaps into your favorite local currency.
Our call for USD yields to bottom in 2012, is the same call as for USD to be strong:
Once yields goes up, people will start to bail out on their USD loans. Wait a minute. What about those who issued fixed rate loans and converted them to floating rate loans via swaps? Well, unless they are of pristine credit rating and banks are willing to hold a negative mark-to-market without collaterals, then tough luck. Even though 3m Libor is stuck at zero, their bankers will knock on their doors for collateral because the interest rate swap they used to convert their loans is underwater.
Those who get out early will see tomorrow. Those who didn’t will probably wished they had listened. Yours truly is still bearish gold against the mightly US dollar. The safe target to start accumulating coins again is probably when gold reaches 1100. That is a 40% drawdown from the high in 2011. It all depends on how capital flight away from Europe into America. If Merkel loses the elections in Sep, capital is better off investing outside austerity-stricken Europe.
Had wished to see cicadas during my month long stay. But all yours truly saw was a tiny fruit fly. The cicadas are interesting insects. It is said that they stay in the ground for 17 years before coming out in force:
The last time cicada Brood 2 was seen was in 1996. We had a nice rally in 1996 to the dot com bust. Perhaps, this time, we will have a nice rally again in the markets till the strong US dollar makes the American sovereign debt unsustainable. It is not much difference from Greece – they joined the Euro when EURUSD was 0.8. Thanks to the strong Euro, their debt doubled in real terms when EURUSD rallied to 1.6 in 2008. Who says the same cannot happen to America? But instead of taking a decade, it might just take us two to three years. Until then, the dip in the Dow is one to be bought.
Good luck in the markets.