Macro Tsimmis

intelligently hedged investment

SELL MSCI Australia Index (EWA)

Posted by intelledgement on Wed, 15 Aug 07

One thing is for sure: with each passing day, we are that much closer to selling everything and going short.

Which is not to say that it is imminent; we still think the most likely scenario is that the powers that be will contrive to keep the shell game going on for at least another year. The Chinese and others have massive stockpiles of US dollars and before they would see the Fed cut rates here, I think we will see an effort on the part of those dollar holders to repatriate them by chasing US equities and possibly real estate. A rate cut on top of the recent liquidity injections would accelerate the crash of the dollar, which would be considerably inconvenient for China for a couple of reasons. The first of these is the inhibiting effect inflation would have on the already-diminishing power of the US consumer to fuel Chinese economic expansion. The Chinese middle class is not yet ready to accept the baton, and in the interest of avoiding internal disruptions, the Chinese government is likely to prefer to buy them more time, particularly when all they have to spend are zombie dollars that will sooner or later be worth nothing anyway. The second incentive the Chinese have to heading off a Fed rate cut is the obvious one: it will speed up the devaluation of their massive holdings of dollars.

Nevertheless, while we continue to believe the odds favor those who would hold back the tide of financial ruin for the over-extended and deficit-ridden USA and our overvalued assets and markets, their success is not pre-ordained. The recent forced march injections of liquidity into the system by central banks around the globe is not a bullish sign. While it underlines that governments will do what they can to avoid market Armageddon, the fact that the powers-that-be are pushing those buttons here indicate that this is perceived as more than a normal, healthy, 10% correction. (The markets are not even down 10% off their highs yet.)

Accordingly, we are taking some money off the table here, in selling the EWA ETF, which is up on the year for us, but lagging most of our other ETF long positions. We are not immediately redeploying these funds, but if we get a chance to pick up some of the UltraShort Real Estate ProShares ETF (SRS) below $100, that would be awful tempting.

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