November 23, 2009

Blowing Bubbles

The Dollars demise is well documented, and there are many sound reasons to agree with the numerous bloggers/pundits who call for the demise of the Greenback, not the least of which is the massive accumulation of debt on the US balance sheet post Bear Sterns. The Dollar has fallen impressively vs. virtually all other fungible instruments, but one stands out in particular, and that would be the Japanese Yen.

I say this because the ascension of the yen ( ~ 89 to 1 US$) is not driven by inflationary prospects in Japan (Unlike Australia). Nor is it driven by assets or balance sheet ( like Canada or Norway).
In fact, Japan has none of these attributes, and it's a net exporter to boot.

No, what appears to be driving Yen appreciation is the "switch" from yen to dollar as the worlds funding currency. Translation, borrowers are switching from Yen to Dollar to fund the massive carry trades that every market commentator is crowing about.

So where does that leave the Yen? extremely overvalued and a huge problem for Japan's trade dependent economy.

Caveat Emptor.

November 7, 2009

Why Gordon Brown's Notion of Taxing Speculation is a Very Bad Idea

Nov. 7 (Bloomberg) -- U.K. Prime Minister Gordon Brown said the Group of 20 nations should consider measures such as taxing financial transactions to penalize excessive risk taking and limit the burden on taxpayers of bank failures.

“It cannot be acceptable that the benefits of success in this sector are reaped by the few but the costs of its failure are borne by all of us,” Brown told G-20 finance ministers and central bankers at a meeting today in St. Andrews, Scotland. Tighter capital rules and pooled bank resolution funds could also be considered, he said.

The idea of putting a tax on speculation is not new. However, it is arbitrary.

Speculation is guided by two notions - intent and perception.

Ones own perception of the risk of any investment guides our beliefs as to what degree we our speculating, when we risk capital. Those who observe (or participate through loan) to our allocation of capital assign their own degree of speculation, based upon external information and their own internal risk preferences.

If we could all agree on risk in the first place prices would only move when new material information became available. The continuous nature of Capital market asset pricing has proven that this is certainly not the case. Risk is perceptual and not static.

The financial leverage afforded a borrower and the cost of capital lent is guided by the lenders perception of the "riskiness" (substitute level of speculation) of the enterprise to which lent capital is being deployed.

And here is were Gordon Brown misses the point - Capital Markets already taxes speculation through lending rates and loan terms and conditions.

Either Gordon Brown does not understand this, or he is attempting to repair his governments own speculative balance sheet with popularist rhetoric.