Dollar Breaks Through Resistance

The dollar is once again showing signs of weakness after a brief respite. Until we can find a meaningful bottom in housing the Fed will continue to drop rates and the dollar will struggle to find its footing. If you can make a compelling argument for why the dollar should rebound in the near time I'd love the hear it. Until I am convinced otherwise I will continue to hedge against the increasing inflation risks that accompany a weak dollar. Commodities, TIPS, infrastructure assets and just about anything denominated in emerging market currencies is where I'll be at least for the near future.


The other inevitable effect of a weak dollar is the dollar's dethronement as the world's reserve currency. Slowly but surely it looks like the Euro is becoming the currency of choice for the world's reserves. Brad Setser however cautions us not to take the IMF data we rely on for these numbers to seriously:

I would caution against reading too much into the fall in the dollar's share of global reserves in the latest IMF COFER data release for two reasons:

First, most of the fall in q3 is explained by the rise in the dollar value of the world's existing holdings of euros and pounds. The euro rose from around 1.35 to a bit over 1.42 in the third quarter. The rise in the dollar value of the world's existing holdings of euros from currency moves explains at least $50b of the overall increase in euro holdings.

Second, the diversification that is taking place is coming from the world's advanced economies, not the world's emerging economies. After stripping out valuation gains, the advanced economies added $10.7b euros to their stockpile -- a far larger sum than the $3.1 billion increase in their dollar holdings. Either Japan diversified at the margin or a host of European countries continued to shift away from dollars. Those emerging economies that report data to the IMF, by contrast, bought three times as many dollars ($61.4b) as euros ($21.2b).

If emerging economies that do not report detailed data on the currency composition of their reserves acted like other emerging economies, dollar reserve growth remained very strong -- though not quite as strong as in q1 or q2. Central bank financing of the US hasn't ended.

So while the dollar hasn't fallen from grace just yet, we are surely testing the patience of many policymakers.

1 Gig Isn't What it Used to Be . . .

One gigabyte of computer storage (between 1 and 1.07 billion bytes depending on who you listen to) used to be a big deal (quite literally actually, see picture below). Nowadays flash disks do 1 Gig in about the size of your thumbnail and a single Blu-ray disc can hold 50 Gigs. Technological progress (in everything from transistor prices, processing speed, memory capacity, pixels per dollar etc.) is truly expanding in an exponential fashion. This is of course precisely what Intel co-founder Gordon Moore noted back in the 1960's when he noted that the number of transistors on integrated circuits was doubling every 2 years. The only limit to Moore's law will probably come when transistors reach the size of atoms, which could be in 15-20 years.


What does all this computing power mean? I love what Ray Kurzweil has to say:

"A $1000 of computing power is now somewhere between an insect and a mouse brain, it will intersect human intelligence in terms of capacity sometime in the 2020's . . . this is at an early stage, but you can show with the exponential growth in the amount of information about the brain and the exponential improvement in the resolution of brain scanning, we will succeed in reverse engineering the human brain sometime in the 2020's."

Scary huh?

Hat Tip: GagdetLite

It's Almost Election Season!

With primary season only a week away (yes, Iowa is on January 3rd!) I have begun doing a little more research on how the candidates are shaping up. I have been surprised with how little people know about the candidates when I bring up the election up in holiday conversation (I know, it is probably a faux pas). It seems that until the field has been whittled down a bit most people don't bother doing their research. So in an effort to kick start that effort, I have a linked to a quiz that helps voters identify the candidates that are the closest aligned to them on the big issues. It only takes 5 minutes and the candidates will probably surprise you! Just click the picture below:

Hat Tip: Swantz

Only Funny Because it's True

Hat Tip: Jim the Realtor

Looking for Oil?

Hmm. It looks like Saudi Arabia, Iran and Iraq control some 43% of proven oil reserves. . . maybe you should go ask them.

Hat Tip: Energy Bulletin

Is China Opening its Capital Accounts?

It seems China is going to take a different tack to avoid inflation:

Dec. 22 (Bloomberg) -- China will support international investment by companies next year as part of its effort to expand channels for such outbound ventures, said Wei Benhua, deputy director of the State Administration of Foreign Exchange.

China will also relax controls on individual overseas investment, Wei said today at a conference in Beijing.

``The move will help solve the problem of China's imbalance of international payments and the increase in currency reserves. It is also good timing for China to open its capital accounts,'' Sun Mingchun, an economist Lehman Brothers Holdings Inc. in Hong Kong, said today in a telephone interview.

A record trade surplus and inflows of speculative capital betting on faster yuan gains have pushed up China's foreign exchange reserves to about $1.4 trillion, fuelled asset bubbles and driven up inflation. China's top currency regulator, Hu Xiaolian, said Dec. 5 that China should expand channels for overseas investment and relax controls on capital outflows.

Relaxing controls on individual investment ``can help China's individual investors diversify risks from the local stock markets,'' Lehman's Sun said.

China Investment Corp., the country's sovereign wealth fund, may invest in China Petroleum & Chemical Corp. to help fund the oil company's investments abroad, China Business News reported yesterday, without saying where it got the information.

I am Long Antonio Cromartie

The Chargers have overcome a miserable 1-3 start to lock up the AFC West. One of the biggest stories of the year has been the rise of Antonio Cromartie, a second year defensive back who has really hit his stride. In his 11 starts he has ten interceptions, setting the single season interception mark for the Chargers. Perhaps more impressively, he has 3 more interceptions than any other player in the league and more interceptions than the entire Pittsburgh Steelers even though he has played 3 less games than everybody else. Part of that story is the amazing game Cromartie had against Peyton Manning, arguably one of the top 3 quarterbacks in the history of the NFL. In that game Cromartie had 3 interceptions in the first half, and had what is quite possibly the most athletic interception I have ever seen:


Despite being left off of the Pro Bowl ballot Cromartie was named to the Pro Bowl roster. All this from a guy who didn't play football for most of his last year in college due to a knee injury and as a result was largely unknown. Not too shabby . . . :

China Buys stake in Morgan Stanley

This time they bought a stake in JP Morgan after JP announced $9.4 billion worth of 4Q write-downs.

Morgan Stanley said Wednesday it is shoring up its capital with a $5 billion investment from China's sovereign wealth fund, after a $9.4 billion write-down related to mortgages pushed the bank into a deep loss for the fourth quarter.

The write-downs were primarily the result of a speculative trading bet that went bad, and their scale -- more than twice the size of the $3.7 billion hit the bank forecast on Nov. 7 -- raise questions about Chief Executive John Mack's consistent push to boost results by taking on more risk.

Mr. Mack's move to sell a stake of just under 10% to China Investment Corp. makes Morgan Stanley the latest damaged U.S. financial institution to seek help from cash-rich funds investing emerging-market government wealth.

CIC, officially launched on Sept. 29, is moving more quickly than expected to find higher returns for China's $200 billion of foreign exchange reserves. Just last month, Chairman Lou Jiwei said the fund would put its money mainly in index products and would set up an advisory board before plunging into big investments. In what has so far been a money loser, the fund paid $3 billion in May for just under 10% of private equity giant Blackstone Group, just before the leveraged buyout boom foundered amid a credit crunch.

I think one of the most intriguing side stories to the credit crunch is that at a time when much of Wall Street is looking for capital infusions Goldman Sachs is actually buying back its own shares at a rapid pace:
It looks like slowly but surely Goldman is planning on taking itself private.

Where Do Home Prices Go From Here?

The closest guess I have about home prices is what is assumed by the Chicago Mercantile Exchange (CME) housing futures market. Across the 10 major markets home prices are predicted to drop 8% in 2008 with no signs of stabilization. We are looking for home prices to form a bottom in 2009-2010. But, from there we don't expect significant appreciation. The bottom line is there is still no reason to be optimistic about home prices in the near term.


Hat Tip: Bespoke

Only Funny Because it's True

Country P/E Ratios and GDP Growth

Here is a telling chart courtesy of Bespoke. This ratio makes Sweden look expensive relative to China . . . who would have thought?

Don't Play Cat and Mouse with Big Ben

You can price in whatever you want but the Federal Reserve doesn't have to do anything. Ben Bernanke didn't actually say the previous sentence but he may as well have. After the Fed cut the fed funds and discount rates 25 bps today the market didn't react all that well. I guess Ben doesn't like being bullied around all that much:

Top 10 Things You May Not Have Known About the FOMC

10. The Fed exists to insure maximum employment, price stability and moderate long term rates. Their purpose is not to backstop speculators

9. 4.25% Funds rate very accommodative and historically low.

8. Between votes, Fed Governors make fun of BLS economists.

7. Overheard at FOMC meetings: “What would Greenspan do? Let’s do the opposite!”

6. Jealous that Jean Claude Trichet gets to hang out with Gisele Bundchen

5. Doesn’t give a rat’s ass what Cramer thinks.

4. "Then it's resolved, we print more money and we make more speeches . . ."

3. There is no Santa Clause -- just some guy with a beard named Ben.

2. Has been long Gold and short the Dollar since 2003.

and the #1 thing you may not have known about the FOMC:

1. “Hey, Wall Street: We’re not your Bitch anymore.”

A False Bottom in the Dollar?

I'm not big on currency speculation, but I do find it hard to believe that during the middle of a fed easing cycle and with massive concerns about the US housing market the dollar will form a meaningful bottom. That said, the dollar is up almost 2% off of its lows and is showing a little bit of life.


Hat Tip: Bespoke

How do I get Chuck Norris Approved?

Wow.

Global Food Prices on the Rise

We continue to receive validation from independent research that our firm's commitment to a secular overweight of commodities in general and agricultural commodities in particular is a sound asset allocation decision in light of the macroeconomic environment. My personal bet is that soybeans (pictured right), soymeal and soybean oil will be a particularly attractive place to park money over the next 6 months (and not just because of my personal edamame addiction). Here is the latest validation via Bloomberg:

Agricultural commodities may rise by as much as 50 percent next year because of crop shortages and demand from emerging Asian economies, Schroders Plc said.

Corn and palm oil will advance because of ``continued'' demand for ethanol and vegetable oils to make biofuels, while soybean and coffee may gain on smaller inventories, said Christopher Wyke, product manager at London-based Schroders, which manages $3 billion in commodities.

``The supply-demand balance for these commodities is very tight, which means they're vulnerable to any setbacks in production,'' he said in a telephone interview today. He declined to forecast prices.

Standard and Poor's GSCI Agriculture Index has advanced 32 percent this year as wheat rose to a record, while corn and soybeans climbed to multi-year highs. Commodities, which are outperforming stocks and bonds this year, may beat such asset classes in 2008 as the U.S. heads into a recession, Wyke said.

The UBS Bloomberg Constant Maturity Commodity Index of 28 futures contracts has returned 17 percent this year, compared with a 4.3 percent gain in the Standard & Poor's 500 Index of stocks. U.S. Treasuries have returned investors 8.9 percent, according to Merrill Lynch & Co. indexes.

On a side note, is anyone else feel relieved that oil is back under $88?

Web 2.0 Bubble?

Last week we posted a video of Peter Thiel saying that there is absolutely no bubble in technology. This week we offer the opposite view. We think you will enjoy this one . . .



Hat Tip: Ritholtz