Global Currency

June 24, 2008

Interview with Robert Mundell in the WSJ:

If Mr. Mundell had his way, there wouldn’t be anything for politicians to say about exchange rates. They would be fixed – as they were under the Bretton Woods arrangement after World War II until 1971, when President Nixon took the U.S. off the postwar gold standard and effectively launched the era of floating exchange rates.

Even better, in his mind – and now we’re really talking long term – would be to have a global currency. This could take the form of a new money or a dominant existing one to which all others are fixed – probably the dollar. “As Paul Volcker says,” Mr. Mundell relates, “the global economy needs a global currency.”

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The idea of a global currency may sound crazy now, but it will probably happen one day. Since WWII, the USD has more or less been the global currency. The weakening USD is hugely disruptive to global trade and may force countries to action. My guess is that we’ll have the Amero by 2020, if not sooner.

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It’s Not Easy Being Less Rich

June 3, 2008

Rich people are having a hard time maintaining their lavish lifestyles in the face of the economic slowdown. The NYT article is both ridiculous and thought provoking. Excerpt:

NANCY CHEMTOB, a divorce lawyer in Manhattan, has found that her days have become crammed seeing clients, all worried about how an economic downturn will affect their marriages.

They seem to have nothing to fret about: their net worths range from $5 million to $1 billion. A blip in the markets shouldn’t send their chateau-size Park Avenue co-ops to foreclosure or exile them to Payless Shoes.

But Ms. Chemtob’s clients are concerned all the same, she said, because their incomes have shrunk, say, to $2 million a year from $8 million, and they know that their 2008 bonus checks are likely to be much less impressive.

One of her clients recently confessed that his net worth had decreased to $8 million from more than $20 million, and he thinks that his wife will leave him. He has hidden their fall in fortune by taking on debt to pay for her extravagant clothes and vacations.

The very wealthy can’t hide anything from their nutritionists and personal trainers, because they see the weight gain. Heather Bauer, a dietitian who works with many Wall Street executives who pay $600 to $800 a month for her services, says her clients have been eating and drinking more in the last six months. She sees results of this indulging each time they step on a scale, and in their journals that record what they’ve eaten.

ONE Wall Street executive, Ms. Bauer said, snacks on nuts in her office all day to manage the stress of potentially losing her position, while another confesses to inhaling four bowls of cereal at 10 p.m. Even their sex lives are suffering, Ms. Bauer said, because of the stress or because the weight gain makes them feel unattractive.


Bill Gross on Inflation

June 2, 2008


Buy Equities After Recapitalization

June 1, 2008

Interesting interview in this week’s Barron’s with Mohamed El-Erian of PIMCO:

The sovereign wealth funds have played a critical role; some $69 billion of pure capital came from such funds into the Western financial system. In the future they’ll be important providers of recapitalization because they know the sector [banking] well.

So what does this mean for investors?

If you are a bond holder, you want to be ahead of a recapitalization. If you are an equity holder, you always want to come in after. When people have been pushing the financial sector, they haven’t made the distinction between what is good for the bondholder and what is good for the equity holder. The equity holder wanted to buy emerging markets after they recapitalized in the late 1990s, U.S. corporate after they recapitalized in 2002 and 2003 on the back of Enron, Worldcom, etc. The timing is critical. For the bondholder, it’s the other way around because a recapitalization lowers risk and therefore brings in spreads. And the people who are diluted are the equity holders.

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This could be an important rule for owning equities in industries where the big players are “too big to fail.”