Euro fall

[phil_Buffett]

the euro is going down very quick. i bought a lot of Long term us stocks at euro usd 1,40 so this is a nice boost to all my us Holdings, and i think a lot of european Investors here in the Forum also enjoy this Thing.

 

but now my question, what do you do now? i believe that the euro will fall further and maybe dip under 1. the us is much stronger than the euro These days.  do you hold your us Holdings without forex hedge now, or with forex hedge? or what do you do in this Situation?

 

would be interesting to hear thoughts. i maybe trim some us Holdings and expand more in the europeans.

[TwoCitiesCapital]

the euro is going down very quick. i bought a lot of Long term us stocks at euro usd 1,40 so this is a nice boost to all my us Holdings, and i think a lot of european Investors here in the Forum also enjoy this Thing.

 

but now my question, what do you do now? i believe that the euro will fall further and maybe dip under 1. the us is much stronger than the euro These days.  do you hold your us Holdings without forex hedge now, or with forex hedge? or what do you do in this Situation?

 

would be interesting to hear thoughts. i maybe trim some us Holdings and expand more in the europeans.

 

IIRC, the EURO at PPP is around $1.20. Obviously, currencies can stray from PPP for years at a time, and I think we'll likely see further depreciation in the near term, but the long-term story suggests that the Euro will rise from these levels. You've done pretty well for yourself being in US equities as a EURO denominated individual, but it might be time to start moving your exposure back to European equities for both currency and valuation reasons.

 

A strong dollar makes cheap non-US stocks even cheaper and the long term direction of the Euro is likely upwards if you believe PPP has any relevance, so I'm not hedging my currency exposure with my investments in Europe at this point.

[tombgrt]

Who knows? You are misleading yourself if you think you have any real idea. Look at those analysts thinking they were bold with their 1.16 predicition a few months ago.

 

The best remedy against high (or low) prices are high (or low) prices. So while the Euro is down because of XYZ, the now cheaper Euro will in time make problem XYZ at least partly go away. That in turn will lead to a swing to the other side etc etc. I think it's not worth worrying about too much over the longer term exactly because of this mechanism of automatic balancing.

 

I do think it should make more sense for US-based investors to take a closer look at some European companies but the forum is (understandably) biased towards US equities.

[original mungerville]

The dollar has come a long way very fast. I have a pretty negative view of things. The fact central bankers in Europe and Japan have to print so much money when the Fed stops printing - just to hold this whole ponzi scheme together - is not lost on me.

 

I was lucky to buy call options on the dollar index (via UUP) some months ago (but I also hold precious metals - which I guess in effect is buying precious metals in euros and yen and any other non-dollar currency for that matter). Who the hell knows how this ends or when - but my feeling is there is no free lunch out there, and the bill is going to be very costly.

 

I do think the dollar is likely to rally more (but who the hell knows). At this point, I recommend people at least own some precious metals (eg, at least 10% of your portfolio, 20% if you are a big bear like me) in physical form rather than only equities denominated in depreciating currencies. Its not going to matter at all until it really does. So I focus on this rather than currency fluctuations despite getting lucky with this recent dollar index bet.

[original mungerville]

I'm going to hold my call options on the dollar index (UUP) through this year - I am very negative on macro, my view is either precious metals rise or the US dollar rises (potentially importing deflation/weakness into the US from overseas - which would send the value of Prem Watsa's US deflation options upward, US bond yields down potentially, lower corporate profits, etc, etc).

 

But hey, this could happen in 2015 or it might take 3 more years.

[Hawks]

tombgrt

Agree with your last point re Euro companies. I own Vivendi, Philips, Sanofi. Any you own or would recommend?

[Guest JoelS]

OM - You may be right on the macro but I don't understand your positioning. In another thread you said that good businesses will retain their value over a longer period but you wanted to protect yourself in the - was it the "short to medium" term?. Isn't this the whole point of value investing - that we want to have time arbitrage on our side because we have no unique ability or edge in predicting the "short to medium" term? Correct me if i have misstated you.

 

I am not criticizing you, just trying to understand the thinking process. Holding such a high % in cash and precious metals seems risky, in the sense that if you are wrong, you could miss out on years of compounding. That said, your approach is contrarian.

[original mungerville]

Look, I hated the Greenspan era and shorted the Nasdaq in 2000, in September 2007 I shorted the S&P 500 predicting a collapse of the banking system (I was precluded from shorting financials due to conflicts of interest), I think the party is over once more for equities in real terms (but the timing is extremely difficult) and that the free lunch the central bankers have been providing financial markets with is about to get costly. My view is that this cost may be incurred via a drop in nominal prices of financial assets or a rise in precious metals and/or the US dollar - that may happen in 2015 or years from now, I don't know. Its not exactly the time to get overly bullish on equities. I own only 2-year call options (LEAPS) on Valeant at this point, which protects my downside to a degree.

[original mungerville]

I advocate gold for at least 10% of a portfolio at this point because we are no longer in a financial industry bubble, it has morphed to a central banking bubble - probably the largest of all-time. I see the potential (not necessarily an eventuality, but a significant potential) for a monetary crisis in the shorter to medium term (ie say next 5 years) maybe even starting in the next year or two.

 

Holding an asset like gold which doesn't earn any income is certainly OK relative to cash in many parts of the world at this point as deposit rates and bond rates have gone negative! So, in a relative sense, gold IS producing income at this point.

 

I agree with Buffett that over a 100 years, you want to be in equities not gold. Same for 50 years. However, in the next 5 years, I believe at least a portion of a portfolio should be allocated to gold. Equities will not do well in deflation, nor will they do as well as gold if we get a hyperinflation (I don't see strong inflation as an option, as I see that quickly turning to hyperinflation if it were to occur). Lets hope we continue to muddle through. My major concern is that the next US recession may happen and central banks will have no ammo left, or will have to do something completely insane such that the monetary system could break down. This is not a forecast, only a possibility.

[Cardboard]

Jeffrey Gundlach predicted $1,400 gold in 2015 today. He also said that the U.S. market does not like a high US$ (lowers multi-national earnings) and that the Fed while thinking of raising rates may not because of deflation fears.

 

This guy is more right than wrong IMO. Worth listening to.

 

Cardboard

[kab60]

the euro is going down very quick. i bought a lot of Long term us stocks at euro usd 1,40 so this is a nice boost to all my us Holdings, and i think a lot of european Investors here in the Forum also enjoy this Thing.

 

but now my question, what do you do now? i believe that the euro will fall further and maybe dip under 1. the us is much stronger than the euro These days.  do you hold your us Holdings without forex hedge now, or with forex hedge? or what do you do in this Situation?

 

would be interesting to hear thoughts. i maybe trim some us Holdings and expand more in the europeans.

 

I'm an European investor as well, and 75 percent of my investments are in USD, so I've been giving this some thought as well. With ECB starting QE and potentially rate hikes in the US, I expect the USD to move upwards, but I'm not going to base my investment decisions on that as nobody really knows how things will play out. I'd like to say that I didn't give currency movements any thought, but it has a substantial impact on my portfolio, so for now I'm done investing in US securities and just hold on to what I have while I look for investments in Europe, Korea and Canada instead. Still, I feel my logic might be flawed, because when I invested I only looked at the business fundamentals and not currency developments, whereas future currency movements affect my investment decisions today. There are plenty of US securities and positions I'd like to add to but I'm trying to find value elsewhere now.

[petec]

There are plenty of US securities and positions I'd like to add to.

 

There are?!  Please do tell!

[kab60]

There are plenty of US securities and positions I'd like to add to.

 

There are?!  Please do tell!

BAC, Y, DNOW, HOS, AIQ, NTELOS

[petec]

There are plenty of US securities and positions I'd like to add to.

 

There are?!  Please do tell!

BAC, Y, DNOW, HOS, AIQ, NTELOS

 

Thanks :)

[handycap5]

i have a different view than some other posters on this thread:

 

1) i do not believe that one should just ignore currency movements and rely on PPP figures to assume some sort of long-term mean reversion. there are lots of historical examples of sustained differences between PPP and FX rates. second, a sustained adverse FX change is the same thing as a permanent impairment.

2) the "best" owners of an earning stream in a given currency have their "liabilities" in the same currency. my bills come in USD, so I am generally a better owner of a USD stream than a foreign owner, all things being equal, and vice versa. That is because the common currency between assets and liabilities hedges out the risk. said another way, my hurdle rate should be higher for foreign earnings compared to domestic. many smart investors i admire were blithely looking-through potential currency changes in the past when evaluating their holdings because the inputs were "macro" forecasts. i think this is unwise.

3) because interest rates and currency rates are monetary policy tools, and we are in a period of unusually strong and sustained policy action, i think it is smart to not be naive about stated and reasonably predictable policy actions.  this is true, even if one is "long-term" oriented.

 

i welcome ideas from others, particularly those that don't agree with me...

[ni-co]

i have a different view than some other posters on this thread:

 

1) i do not believe that one should just ignore currency movements and rely on PPP figures to assume some sort of long-term mean reversion. there are lots of historical examples of sustained differences between PPP and FX rates. second, a sustained adverse FX change is the same thing as a permanent impairment.

2) the "best" owners of an earning stream in a given currency have their "liabilities" in the same currency. my bills come in USD, so I am generally a better owner of a USD stream than a foreign owner, all things being equal, and vice versa. That is because the common currency between assets and liabilities hedges out the risk. said another way, my hurdle rate should be higher for foreign earnings compared to domestic. many smart investors i admire were blithely looking-through potential currency changes in the past when evaluating their holdings because the inputs were "macro" forecasts. i think this is unwise.

3) because interest rates and currency rates are monetary policy tools, and we are in a period of unusually strong and sustained policy action, i think it is smart to not be naive about stated and reasonably predictable policy actions.  this is true, even if one is "long-term" oriented.

 

i welcome ideas from others, particularly those that don't agree with me...

 

I completely agree. People could ignore macro, currencies in particular, for the last few years because it didn't really make that much of a difference. There was very low volatility. This has changed in a significant way. As a European investor investing in the US I couldn't ignore EUR/USD but I felt very comfortable with it until last year because the euro didn't seem undervalued no matter how you looked at it. Now I'm forced to make macro decisions – ignoring macro is also a decision, that is to completely give up control.

 

Not only grew macro more important, I think it will be the main driver of nearly every market going forward for the next few years: unwinding carry trades and diverging policies by central banks are so large in size that they significantly overweigh what the "real" world economy is doing (which is close to nothing, momentarily).

 

If we're lucky we will be facing a highly volatile deleveraging phase that will lead to significantly slower growth for a decade or more, if we're not so lucky we will watch the world's central banks screwing up our fiat monetary system. What I simply can't imagine is the next 5 years looking like the last 5.