Ed’s Daily Notes for February 18th   8 comments

Bloomberg: Emerging Markets at Risk From Carry Trade Unwinding, BofA Says

Normally, I don’t give bank analysts more than a passing thought, but this is one case where they get the logic right:

Emerging-market assets are at risk as the tapering of the Federal Reserve’s stimulus program will probably trigger a reversal of $2 trillion in carry trades, according to strategists at Bank of America Merrill Lynch.

Carry trades, where investors borrow in a country with low interest rates to fund purchases of higher-yielding assets elsewhere, helped developing nations raise foreign-exchange reserves by $2.7 trillion since the end of the third quarter of 2008, Hong Kong-based Ajay Singh Kapur and Ritesh Samadhiya at BofA wrote in a research report today. The capital inflows spurred economic growth and inflated prices, particularly those of bonds and property, they said.

The Fed trimmed its monthly debt buying this year by a total of $20 billion to $65 billion and has pledged to gradually reduce the purchases as the job market improves. The U.S. central bank has kept its benchmark interest rate in a range of near zero to 0.25 percent since 2008 and boosted the supply of dollars via its stimulus policy. That compares with borrowing costs of more than 13 percent in Argentina, 7.5 percent in Indonesia and 2.5 percent in Poland.

“As the Fed continues to taper its heterodox policy, we believe these large carry trades are likely to diminish, or be unwound,” the analysts wrote. “We believe carry-trade driven emerging-market asset prices remain at risk, are a global deflationary threat, could drive defensive asset bids, and competitive devaluations.”

This is why I added ProShares Short MSCI Emerging Markets (EUM) to my watchlist. It is a straight, unleveraged short.

Zero Hedge: “Soros Put” Hits Record As Billionaire’s Downside Hedge Rises By 154% in Q4 To $1.3 Billion

A curious finding emerged in the latest 13F by Soros Fund Management, the family office investment vehicle managing the personal wealth of George Soros.

…the “Soros put”, a legacy hedge position that the 83-year old has been rolling over every quarter since 2010, just rose to a record $1.3 billion or the notional equivalent of some 7.09 million SPY-equivalent shares. Since this was an increase of 154% Q/Q this has some people concerned that the author of ‘reflexivity’ and the founder of “open societies” may be anticipating some major market downside.

Then again, as the chart below shows, as a percentage of total AUM, the put position rose to 11.1% of his notional holdings.

Soros SPY Puts

Looking at the chart above, I naturally had to ask: What happened between the end of June and the end of Spetember?

SPX

It looks like Soros had the right idea, although the S&P 500 didn’t drop as much as he anticipated. We will see whether he gets the one from December right or not, although it is possible he already cashed it in.

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Posted February 18, 2014 by edmcgon in Federal Reserve, Market Analysis, News, Stocks

8 responses to “Ed’s Daily Notes for February 18th

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  1. Bank deposits confiscated: Cyprus a year ago, now UK. Can this happen in USA?
    http://www.nationofchange.org/danske-bank-locks-customers-out-their-accounts-1392650551
    In UK, HSBC, NYC-based bank disallows customers from withdrawing ‘large amounts’ without a ‘good reason’ and now Danske Bank has confirmed that more than 15,000 current accounts will be terminated within 48 hours. That means that up to 10,000 people might find their funds frozen in a bank account, unable to access them. Even customers who already started the transfer process to try to get their funds to another institution are finding they are ‘locked out.’

  2. Thanks zosa. That’s good to know. Please – I’d really appreciate you telling me other ‘news’ sources that are not really credible – better to stay away from unnecessary noise. How about this? https://www.commondreams.org/view/2013/03/28-5
    Think Cyprus Confiscation Scheme Can’t Happen Here? Think Again

  3. CuriousGeorge

    The last article you cited is another non-credible source. I actually read the FDIC/BOE joint report (did you?) and could not find any data that supported the wild claims reported in the article. The Dodd-Frank legisltion has ensured that shareholders will be first in line to absorb any losses incurred in winding up a failing bank, not taxpayers. Second in line for a haircut are unsecured creditors (bond holders), not depositors as the article would have you believe. Nowhere in the 12 page FDIC/BOE report does it mention depositors.

    The FDIC guarantees all deposits up to $250,000. No depositor has ever lost a penny of insured deposits since the FDIC was created in 1933.

    Both of the links you posted were to progressive sites. That should provide you a hint of what is not really credible.

  4. Thanks zosa. No – did not read the FDIC/BOE joint report. Will stay away from these progressive sites and the like. Truthout is another one -right? These sites have some well written articles that can challenge the inquisitive mind. Must learn how to separate the wheat from the chaff. Thanks again … and have a wonderful day!

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