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Reply #15: Morgan Stanley (not Roach) comment: [View All]

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Ghost Dog Donating Member (1000+ posts) Send PM | Profile | Ignore Mon Jan-21-08 07:21 PM
Response to Reply #14
15. Morgan Stanley (not Roach) comment:
Edited on Mon Jan-21-08 07:38 PM by Ghost Dog
The dollars general weakness in the first trading days of the year suggests that investors, collectively, are not yet fearful enough for the Dollar Smile to work. Specifically, this descent in the dollar implies a general presumption that the US being the epicentre of the current global slowdown will suffer the most and that the rest of the world (RoW) will be relatively unhurt from such a slowdown in the US. In addition to this geographical dichotomy, risky assets may need to fall much more for fear to become the main driver of investment. We believe that the Dollar Smile will eventually start to work, when the RoW starts to slow, with a delay.


From yield differentials to the Dollar Smile

The dollar has been weak in the first two weeks of the year. This implies several opinions among investors. First, investors must have the view that the collateral damage from a US slowdown will be ring-fenced and the US will likely suffer the worst of the consequences while the RoW will largely be spared the downdraft in demand. Second, investors may be increasingly discouraged by the low yield premium on USD assets. Our measure of hedging costs for USD-based real money portfolio investors have changed drastically, providing less of a support for the dollar.

However, we believe that both of these opinions will change, allowing the dollar to rally this year against the EUR and the GBP. In turn, the JPY and CHF could rally against the strengthening dollar, for as long as the US is in a recession, which we believe will likely persist through 1H08. One by one, various parts of the RoW will start to show signs of a slowdown/deceleration. Even though we are of the view that this economic re-coupling will be tentative and partial, financial coupling will likely push investors back into fear mode and bond rather than equity flows will, perversely, support the dollar consistent with our Dollar Smile framework.

Back in September 2001, our proxy of hedging costs also breached the 0% threshold. Yet the dollar remained strong until the Bush administration imposed temporary tariffs on steel in February 2002. In our view, this episode in 2001/02 was a demonstration of the safe haven status of the USD. This is related, but distinct, from the discussion on whether the dollar is still the top reserve currency. The fact that three-quarters of all hedge funds worldwide, no matter where they are located, are dollar-based is important, as it suggests that when risk-taking is curtailed in general, the dollar will be bought. We remain comfortable with this view.

On economic and financial de-coupling

A key part of this discussion about the reliability of the Dollar Smile framework is whether the RoW can remain de-coupled from the US, both in economic and financial terms.

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  -)Dow) Futures plunge (-546) on U.S. recession fears UpInArms  Jan-21-08 05:37 PM   #0 
  - tomorrow is not going to be pretty  highnooner   Jan-21-08 05:56 PM   #1 
  - Looks like "Bloodbath on Wall Street" tomorrow.  Dr.Phool   Jan-21-08 06:02 PM   #2 
  - 'Wave of panic' as market slides  Sees Clearly   Jan-21-08 09:10 PM   #24 
     - "there are some great stocks at fantastic value"  Ghost Dog   Jan-22-08 02:28 AM   #55 
  - I think we're all going to feel the love.  phantom power   Jan-21-08 06:06 PM   #3 
  - I really feel leaden about posting the Stock Market Watch tomorrow.  ozymandius   Jan-21-08 06:34 PM   #4 
  - it's all feeling mighty weird  UpInArms   Jan-21-08 06:41 PM   #5 
  - That's just the thing: Ben's hands are tied. He cannot slash rates enough  ozymandius   Jan-21-08 06:50 PM   #7 
  - Oh PUHLEEZ! They're rushing to the dollar for safety?!?!...just peeked and  54anickel   Jan-22-08 05:03 AM   #57 
  - It will be a slow motion second by second train wreck.......  0007   Jan-21-08 06:45 PM   #6 
  - It's gonna be a real chore early in the morning.  Dr.Phool   Jan-21-08 06:51 PM   #8 
  - here's that Chopper Ben article: Will the cure be worse than the disease?  UpInArms   Jan-21-08 06:51 PM   #9 
  - In this age of super-short-term results, will the Fed take a longer-term stance?  Roland99   Jan-21-08 09:09 PM   #23 
     - wow  UpInArms   Jan-21-08 09:18 PM   #28 
        - BWA HA HA HA HA HA HA HA!!!  Roland99   Jan-21-08 09:43 PM   #42 
        - !!!  Yael   Jan-21-08 11:10 PM   #48 
  - keep up the good work  kineneb   Jan-21-08 06:59 PM   #10 
  - ....  AZDemDist6   Jan-21-08 07:02 PM   #12 
  - And like you, I'll be at school all day.  Finnfan   Jan-21-08 07:12 PM   #13 
  - Finnfan, looks like your end of January prediction is right on the money.  Radio_Lady   Jan-21-08 11:15 PM   #50 
  - Me, I'll be quite quiet tomorrow.  Ghost Dog   Jan-21-08 07:18 PM   #14 
  - Morgan Stanley (not Roach) comment:  Ghost Dog   Jan-21-08 07:21 PM   #15 
  - I have been watching this unfold over the last few weeks  debbierlus   Jan-21-08 08:54 PM   #18 
  - I almost never post in it, but I keep a tab open all day and check often  Yael   Jan-21-08 11:12 PM   #49 
  - 25+ Years of Insane Conservative Economic Policies  Phred42   Jan-21-08 06:59 PM   #11 
  - At 9:37 pm EST, Dow future is up 45 points  ckramer   Jan-21-08 08:38 PM   #16 
  - I suspect you are right.  pa28   Jan-21-08 09:07 PM   #21 
  - current DOW futures  RantinRavin   Jan-21-08 09:09 PM   #22 
  - Do you have a link for these numbers?  ckramer   Jan-21-08 09:19 PM   #29 
  - Where did you get that? Bloomberg's latest numbers are still dire...  Roland99   Jan-21-08 09:11 PM   #25 
     - check out this link  ckramer   Jan-21-08 09:16 PM   #27 
     - it's currently showing the "last" at 11691...  QuestionAll   Jan-21-08 09:21 PM   #32 
        - I don't know what that 11691 number means  ckramer   Jan-21-08 09:25 PM   #34 
           - that 11691 represents what the dow would have opened at at that moment.  QuestionAll   Jan-21-08 09:38 PM   #38 
     - i think that means that it's up 45 points from the lowest point- when he posted it...  QuestionAll   Jan-21-08 09:19 PM   #30 
  - There hasn't been a Bull Market in the U.S. since 1999. The Dow is lower than the day W took office  leveymg   Jan-21-08 08:46 PM   #17 
  - Ummm...the DOW is NOT lower  RantinRavin   Jan-21-08 09:07 PM   #20 
     - Depends what currency/commodity you valuate it in...  skids   Jan-21-08 09:29 PM   #35 
  - Recession??? Economic meltdown is closer to the truth...  whistle   Jan-21-08 08:59 PM   #19 
  - so THE BUCK STOPS HERE.... go go gop go go gop  happygoluckytoyou   Jan-21-08 09:14 PM   #26 
  - Now at 10:20 EST, Dow future is up 107 points  ckramer   Jan-21-08 09:21 PM   #31 
  - you are misreading the numbers.  QuestionAll   Jan-21-08 09:23 PM   #33 
  - Future closing number != the market closing number n/t  ckramer   Jan-21-08 09:32 PM   #36 
     - what?  QuestionAll   Jan-21-08 09:39 PM   #39 
        - Look at the oil future number - it's 87.90  ckramer   Jan-21-08 09:54 PM   #44 
           - the friday numbers aren't on that board.  QuestionAll   Jan-21-08 10:39 PM   #47 
  - looks down via Bloomberg  DemReadingDU   Jan-21-08 09:36 PM   #37 
     - it is down...ckramer is a little...confused.  QuestionAll   Jan-21-08 09:40 PM   #40 
     - I wouldn't trust these numbers from Bloomberg  ckramer   Jan-21-08 09:41 PM   #41 
        - You are misreading the numbers. You are looking at after hours future trades, not the index  Yael   Jan-21-08 11:16 PM   #51 
        - What real time are you talking about? It is 12:17 am EST  Yael   Jan-21-08 11:17 PM   #52 
  - Second day of down markets in Asia  FarCenter   Jan-21-08 09:51 PM   #43 
  - Panic sparks plunge in global markets  FarCenter   Jan-21-08 10:08 PM   #45 
  - I hate to reduce such a complex problem to one issue ....  Trajan   Jan-21-08 10:21 PM   #46 
  - But Shrub is sending us all $800. That should fix everything.  Yael   Jan-21-08 11:18 PM   #53 
  - If that happens to the market four or five times in near future then I will feel relief  nolabels   Jan-21-08 11:19 PM   #54 
  - Yes, the blowout of this bubble is absolutely necessary, the sooner the better,  Ghost Dog   Jan-22-08 02:50 AM   #56 
  - and damn the flippers all to hell, too  clspector   Jan-22-08 08:31 AM   #59 
  - EVERYBODY PANIC!1!!  AngryAmish   Jan-22-08 08:17 AM   #58 

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