Fiend's SuperBear Market Report


            *                       FIEND'S SUPERBEAR MARKET REPORT                     *

            *                              October 23, 2008                             *

            *                                                                           *

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                                           Fiend Commentary                             



                                       The Return of the Curmudgeon


                                           Curmudgeon’s Corner


            As most of you know, I have been a US $ bear for many years and positioned my

            own and client portfolios accordingly.  I felt that the structural problems

            of the U.S. (e.g. current account and trade deficits) combined with negative

            real interest rates and huge interest rate differentials would cause the $ to

            move lower against almost all currencies.  But I underestimated the amount of

            US $ carry trades that would be unwound in a financial crisis resulting in

            repatriation of US $s (much more then 2005 when corporations were allowed tax

            free repatriation of foreign profits).  I thought the carry trades were

            almost all in Japanese Yen, so it was no surprise to see the Yen surge higher

            against all currencies, including the $.  But the rapid rise in the US $

            index, collapse in the Euro and GBP was a total surprise.  There was much

            more $ denominated leverage in the system than I thought.  There was also the

            "flight to quality in crisis" effect that I greatly underestimated.  Both of

            these dynamics continue today, 6 weeks into the financial crisis!


            Over the past five days, the trade weighted US$ has jumped by +3.2% (it is up

            sharply again today) and is now trading at the highest level since February

            2007. The US $ index has surged from 81 to over 85.5  Against the Euro, the

            US$ has gained +5.8% (now trading at US$1.2802/€) and against Sterling it us

            up +6.3% (now trading at US$1.6268/£, a level not seen since September 2002).


            The US$ now has two big tailwinds:


            1) the continued unwind of the US$ carry-trade (i.e. deleveraging), and

            2) the big improvement in the US trade balance due to falling commodity

            prices (especially oil under $70).


            At the risk of stating the obvious, we are now clearly in a different

            investment environment. No longer is the world a place of rising inflation

            and commodities due to an ever-weakening US$.  Instead, we now have a rising

            US$ with increasing deflationary pressures and portfolios should be rotated

            to reflect this reality.


            We now recommend covering any US $ short positions and keeping the proceeds

            in $ cash accounts.  This major $ trend reversal has had very negative

            consequences for commodities, gold, emerging markets, and Asian equities.

            The prospects for a recovery in those asset classes is poor as long as the $

            stays strong.


            It is one thing to be wrong about the major trend, but worse to STAY WRONG!

            I'd rather be objective than stubborn, so I can have enough capital left to

            live another day.


            The Curmudgeon is a retired investment professional who believes most

            "professionals" are actually amateurs as they do not know how to prevent

            capital from being destroyed when positions go against them.  He believes

            that risk control is more important than being right about the markets.


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