Saturday, Feb 28, 2009
Currency collapse: someone thinking ahead
SCI: Stable Currency Index
I recently became a subscriber of EWI because their direct advice on surviving the looming financial collapse has impressed me (also Techieman recommended them). They have developed this Stable Currency Index. "The SCI blends four major currencies, each selected for stability, into a new, super-stable composite that hedges against extremes of any individual currency in the world." The countries are Switzerland, Singapore, New Zealand and USA. Currently it is only an index but they seem to be working on making it into an ETF and other investment vehicles. Shame about including the dollar though. Alternative to gold perhaps as a hedge against GBP collapse?
Posted by mountain goat @ 11:50 AM (1372 views) Add Comment
31 Comments
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1. mountain goat said...
Current SCI composition.
2. mark wadsworth said...
That's all well and good, but by definition, the more currencies you chuck in the pot, the more stable it becomes. IMHO the only sensible way to speculate on currencies is to assume that they all revert to the mean over six month to three year periods.
I was convinced at the end of December 2008 that GBP was oversold, and it certainly seems to have bottomed out for now. Meanwhile, CHF and JPY are looking very overbought.
3. stillthinking said...
That doesn't look like a choice for stability to me, that looks more like a speculative strategy. If you wanted stability you would choose currencies that are typically traded against each other, so as one goes down the other goes up. Yen/dollar springs to mind. Their breakdown only has one main currency, the dollar. Should the dollar fall I don't see NZD, for example, necessarily benefiting to provide an offset.
If you want to hedge against GBP collapse, then you would need to consider what GBP would collapse against. Probably that isn't against the dollar. Recent history would suggest that the brunt of any collapse would be against the yen (halved) as opposed to the dollar (~25%). You can find out the ratios for yourself.
Also, it is too late now to hedge against pound devaluation. Happened already. Probably it is oversold, I am sure we all hope so.
4. mountain goat said...
Appreciate your thoughts above. Personally I don't share your confidence in GBP holding its value into the quantitative easing future so I am interested in alternatives to try hedge loss in value of my savings.
5. stillthinking said...
Look at Norway and the Norwegian economy.
6. bellwether said...
Sterling is regarded as oversold at present although historically it has come close to parity with the dollar and wouldn't rule that out. While trading currencies is difficult and reliable guides to value almost non existent would be useful to have facilty to switch savings into a larger currency in the event of a further sterling collapse.
Would add there is really no save haven that can be relied on things are fluid and alter. Being generally on the right side of the overall trend is probably the best anyone can do. Capital is being decimated at present and cash is as good as anything, when the trend evetually alters shares will offer a once in a lifetime value opportunity.
7. bob1 said...
There is nothing really wrong with this hedge. It looks like it's based on geography more than anything else. Having said that, I don't think that it's much better than staying in Sterling (particularly if you are planning on buying a domestic asset like a house). The thing to remember is that every scrap of available information is already "priced in" so in effect every currency is neutral. You can't rely on expert predictions because they've used up all their knowledge on the current price. Also never forget transaction costs.
8. Sneaker said...
Be a little careful following EWI's forecasts. They are wonderful theoreticians but their timing can be weak. By all means pay attention to them but don't swallow the marketing-heavy prose whole. They made some pretty bad miscalls in the middle part of the decade and you'll find these aren't given the same prominence as the ones they got right, giving a reasonably skewed impression of their forecasting abilities.
What EWI would benefit from is, like say the Dines Letter, publishing a guide called "How to use our forecasts". A little caution certain helps their usefulness.
Their theories are, nonetheless, very well familiarising yourself with and then applying yourself.
9. str 2007 said...
bellwether
'' Capital is being decimated at present and cash is as good as anything, when the trend evetually alters shares will offer a once in a lifetime value opportunity.''
What is your opinion on the FTSE level when shares will offer this once in a lifetime buying opportunity ?
10. bellwether said...
Str 2007
I think the basic premises is that we are still in a primary bear market - Dow Theory seems to be good on this and maybe worth having a look at Wikipedia description of this. Quite common sense - no cup and handle formations or anything like that.
Beyond that there seems to be 2 schools of thought with this one.
One thinks we are cloes to the bottom of the market and the start of a new bull market will be this year. This seems convicing to me only if the engine is inflation ie central banks and govts get their wish.
The other theory seems to suggest that defflation will hang around a lot longer and markets will grind down until everyone is sick of equities and you buy companies for single digit forward earnings - forward earnings that have priced in worst case scenario.
I'm wish I knew which of these scenarios would play out. I guess I hope the later as it would produce the best bargins with real rather than inflationary growth prospects.
11. bellwether said...
Also on the trading platform I'm using CFDs rather than spead betting
I’ve got shorts on the market but covered them based on the possibility of a counter trend rally which a lot of prople seem to think is going to happen soon.
Equally I'm thinking a sudden breakdown of the market is a possibility, US Ind/transports broke Nov lows and Dow and S+P have now followed suit.
I’m thinking the direction for the next few weeks is likely to become clearer next week. I 'm hoping I pick up on it!
12. bob1 said...
str 2007
My comment: "The thing to remember is that every scrap of available information is already priced in", also applies to equities. Tomorrows price depends on tomorrows information.
Charting techniques that claim to predict future levels are in effect claiming to know things like Iran's nuclear plans, bird flue outbreaks or the next governments corporate tax strategies.
13. str 2007 said...
bellwether
Why are you using CFD's rather than spread betting given that gains on spread betting are tax free and CFD gains are taxable (that would be my main reason for using spread bets). Just wondered why you are choosing CFD's ?
bob1
Yes I haven't worked out how charting techniques can somehow predict 'outside events'. Maybe they can't and without the influence of an outside event they predict human behaviour.
14. str 2007 said...
bob1
Or indeed during the process of an outside event wave patterns also predict an outside event.
Bird Flu and other natural disasters aside maybe the human behaviour creates the other large catastrophic events that unfold during a crises and this is part of creating those waves.
15. bob1 said...
str 2007
yes, it's worth considering that wave patterns reflect human behavior and therefore might have some predictive capability. I suppose the spanner in the works (as you say) is the natural phenomena like earth quakes, fire, flood, disease, asteroid strikes, solar flares etc. These natural phenomena have a kinetic effect on humans, so it is reasonable to say that even human behavior is not predictable because it can be influenced by non human, randomly occurring natural phenomena. As you say, some of these non-human phenomena are influenced by human behavior (global warming) but most are not. The dinosaurs were wiped out by natural phenomena long before humans got a look in. Apparently they keep finding small hordes of gold and swiss francs besides the skeletons :)
16. bob1 said...
str: On a more mundane level I have several times witnessed a particular exercise involving technical analysts. It is usually outside technical analysts that are trying to sell something but sometimes an in house analyst is subjected to the game.
Basically a load of charts (from the past) are displayed on some screens. The charts are unmarked so it is not possible to know their date or even the market they belong to. The analyst is asked to study the charts and using their 'method', they are asked to predict the future. Not once have any of them got it right. Of course they might be crap analysts.
Don't get me wrong, I use indicators and charting tools every day. It is my belief that they mostly work because they impose discipline and good trade management. For what it is worth I think good trade management is bar far the most important factor.
17. str 2007 said...
bob1
And how would you summarize good trade management ?
18. bob1 said...
Str 2007
Trade management: It is important to develop some tools or a system that takes your emotions out of the equation once you are in a trade. I have a program that is automatically applied to my trades as soon as they are entered. This program combines several charting tools that do not predict the future,. What they do is impose an iron discipline that most humans are incapable of (me included). It is this discipline that can provide your advantage or 'edge' over other traders
If you can not develop these tools then always plan your exit strategy before you enter the trade. Do not make it up as you go along. Also never risk more than 3% of trading capital on any single trade
19. str 2007 said...
bob1
Not being a trader myself (as I'm sure you're aware) I had preiously read that 14 positions made the ideal portfolio (I don't know why exactly) your 3% implies 33-34 positions.
I'd also read that a 10% holding of Gold was prudent to cover other losses in the event of majopr problems (we've seen this recently and this would have played out correctly).
I guess you're going to say that with the correct method in place all other positions would have had a 10-15% sliding stop loss and 3% Gold holding would have been sufficient to cover this 10-15% loss rather than a 40% loss if the prtfolio had been held through the slide.
But obviously for that to have worked you must have had something other than cash (sterling) to go into with your liquidated stop losses.
I take it you run your own hedge fund or such like ?
20. bellwether said...
Bob1 I appreciate your experience in the markets but I have to date struggled to even come close to understanding the concept of efficient markets. What I see when I look at markets is an efficient reaction to certain data while often overlooking the the most important signals.
When the Dow hit 14,000 18 months ago it was clearly mispricing just about everything by gross margins and that I would say was obvious to people who could read the signs that the market were refusing to see eg banks already bust or housing flashing the mother of all warning lights in relation to credit stress and consumer spending for by that point 2 years.
21. bellwether said...
Str to be honest I have not even looking at spread betting probably just because I want to create the illusion for myself that what I am doing is not just gambling! Also having struck on cfd's i really like them, their scope and the way they feel like trading the real thing. Maybe its the same with spread bettting, I will check it out at some point.
I've never really worried about the tax side because if I'm making enough to be taxed I'll be delighted. CGT is only 18% now and there is an allowance of nearly 10k if you are single and double that if you're married and run the account jointly.
I'm a beginer but from painful experience would have to say that what Bob is saying about discipline seems bang on. I think almost all my bad trades have been either because of initial rashness, lack of planning or lack of discipline eg chasing a bad trade unable to accept the market isn't agreeing with me.
I have read quite a lot of Benjamin Graham Warren Buffet school of thought and it rings true. I think sucess comes from making the right call based on rational data over singificant periods of time - which is far easier of course if you have the trend right. I disagree on the market being efficient as above and equities are a good example of this I could list companies where there is a horrendous debt position and no real income ie effective insolvency and yet the market continues to attribute a value. At present there is still a belief in the market that the consumer will pull through and start spending like before when levels of debt are such that this would appear to be impossible.
22. bob1 said...
str 2007
No I only do one position at a time. This trade only risks 3% of my trading capital. All this means is that an unfortunate run of 'bad luck' can't knock you out of the game. I do not understand portfolios. The more you diversify, the more chance you have of breaking even minus trading costs. In my simple world a trade is either right or wrong
I do not run a hedge fund but I work for one. I am allowed to do my own thing because my trades are not part of the grand plan. I just trade for an immediate profit and hopefully this cancels out the losses made by the far more clever strategical parts of of my outfit. They know I hate them but I'm quick with my fists and make a profit so what are they going to do?
23. bellwether said...
Bob what are your thoughts on efficient markets given my comments?
24. bob1 said...
bellwether
the market reached 14000 because everyone knew that everyone else was buying so you couldn't fail to make a profit. Some people call this 'the greater fool theory' but in truth it's more seedy that that. Most participants are not spending their own money so they don't give a shit if it goes wrong (everyone knew it would eventually). What they do know is that if everyone (supposedly their competitors) colludes in buying non stop then they will earn a fortune until the music stiops at which time 'pigs get slaughtered'. Pigs is a charming industry nickname for pensioners, individual investors and outsiders etc. Have a look at a weekly chart of the DOW chart since 2002. Do you see how little volatility there is and how relentless but plodding the rise to 14000 was? This is not proper action. It was rigged.
25. bob1 said...
bellwether:
Markets are not efficient because of the distortions caused by collusion, trickery and sometimes political involvement etc. However they are 'eventually' but only momentarily efficient because market crashes and the like correct them to efficient levels. Academics prefer to ignore the thuggery that ruins tidy theories
26. bob1 said...
It's pub time. Good evening folks
27. str 2007 said...
bob1
Thanks for the insight, no doubt we will talk some more.
bellwether
On the Barclays Demo platform CFD's are the next tab to Spreadbets. They seem to work in almost the same way. But interested in your thoughts on CGT.
From my point of view the tax free element meant I didn't need to justify anything to anyone. (I hate keeping mileage records aswell)!
28. bellwether said...
Fair point Str2007, think the programme runs the account side for you automatically but also hate the justification element so will have a look at spread aspect given you are saying they look similar.
Incidentally I find what the platform does absolutely astonishing.
Pick the conversation up some other time Bob. Did my drinking last night.
29. Listeningpost said...
Any thoughts on the Indian Rupee or Chines Yuan as a Hedge against Sterling devaluation?
30. This comment has been removed as it was found to be in breach of our Blog Policies.
31. techieman said...
hey guys i feel i should comment on some of these points (since i have had an honourable mention) But as this is about to go off the screen (i was enjoying the spoils of war yesterday) perhaps i will await another post. Hopefully it wont need to be contrived. I agree with bits of what Bob and particularly sneaker say, but disagree with other bits. I will expand if and when there is an assured readership! Back to me tea and toast.