Thread: Playing the I fund

1.7% increase EAFE today. About +.35 cents? Any FV due? I haven't been around because of .........never mnd.


It looks like yesterday shouls have been even bigger than it was. Closer to .70 cents?

6/08/06 I Fund was -3.63% (real) +1.04% (FV) = -2.59% or -.49
6/09/06 I Fund is +1.70% (real) -1.04% (FV) = +.66% or +.12

Originally Posted by roguewave

For those who may not know or understand, this arrangement has been in place for a very long time(approx. 2 decades) and is now beginning to unwind. Yes, this will affect the Nikkei in a very negative way. In todays financial market environment, those individuals who think they can predict longer then a week's time frame, what will occur in these "markets" are so clueless that anyone listening to them would do well to run from them. Good luck.

http://www.moneyweek.com/file/13563/...rade-ends.html

I read the article very closely and while he offers some general information that gives food for thought, his conclusions are lacking substance. I was also more than a little disappointed the Daily Reckoning saw fit to send it out via email the other day.

One of the biggest assumptions in his article relates to condition (4) of 6 that he feels represents the nightmare scenario associated with the Yen/dollar carry trade. Condition (4) assumes interest rates are falling in the U.S. He immediately goes into each of the conditions and states his case, but when he comes to condition (4) he alters his position and implies a ‘pause’ in interest rates versus ‘falling rates’. So, what is it? A pause or will interest rates be falling in this nightmare scenario? He lost a little credibility with me on that one.

In reality, the interest rate spread between the two currencies would indeed cause an ‘unwinding’ of those carry positions if the spreads narrowed to the extent profitability was eroded. But what would be the mechanics of this ‘unwinding’? Essentially, to reverse these positions the hedge funds would have to SELL the U.S. Treasuries and repay the loan in Yen. The Yen loan would be paid back in Yen. In other words, the dollar (Treasury) is sold and the Yen is purchased for the loan payback. The dollar (Treasuries) becomes weaker and the Yen becomes stronger. When these Treasures become weaker they tend to drive interest rates higher NOT LOWER. Someone might ask, “Yes, but won’t the increase in Treasury rates draw that foreign money back?” The answer is sometimes, but not always. The reason being that in a dollar bear market investors become increasingly leary of buying back too soon and feel that if they wait a little longer they can get a better deal when interest rates are higher. This waiting causes even more bearish dollar signals and they begin feeding off each others bearish signals causing a further decline in the dollar and even higher interest rates. This is what happened in the early eighties and it is upon us again.

Another assumption the author makes is that the fantastic rise in commodities is a result of the carry trade. The assumption being that Yen were borrowed at very low interest rates to purchase base and precious metals. He totally ignores the fact that China and other countries are smack dab in the middle of industrializing their nations and expanding their infrastructures. Our era of industrializaton was spread out over 50 years or so. China and India will accomplish the same feat in a fifth of that amount of time because of the technological advances. Someone might ask, “What does that have to do with the I-Fund…China isn’t one of the represented countries on the I-Fund sheet?” No, but they trade with those that do. Japan and others are providing China with the needed technology to expand their infrastructure.

There are three reasons the I-Fund is the place to park our TSP funds:

• The dollar is doomed along with common equities.
• The industrialization and internal growth of Asian economies and the positive ripple effect to their regional trading partners.
• The Asians are SAVERS. All real economic growth is based on SAVINGS not consumption.

Originally Posted by Wimpy

I read the article very closely and while he offers some general information that gives food for thought, his conclusions are lacking substance. I was also more than a little disappointed the Daily Reckoning saw fit to send it out via email the other day.

One of the biggest assumptions in his article relates to condition (4) of 6 that he feels represents the nightmare scenario associated with the Yen/dollar carry trade. Condition (4) assumes interest rates are falling in the U.S. He immediately goes into each of the conditions and states his case, but when he comes to condition (4) he alters his position and implies a ‘pause’ in interest rates versus ‘falling rates’. So, what is it? A pause or will interest rates be falling in this nightmare scenario? He lost a little credibility with me on that one.

In reality, the interest rate spread between the two currencies would indeed cause an ‘unwinding’ of those carry positions if the spreads narrowed to the extent profitability was eroded. But what would be the mechanics of this ‘unwinding’? Essentially, to reverse these positions the hedge funds would have to SELL the U.S. Treasuries and repay the loan in Yen. The Yen loan would be paid back in Yen. In other words, the dollar (Treasury) is sold and the Yen is purchased for the loan payback. The dollar (Treasuries) becomes weaker and the Yen becomes stronger. When these Treasures become weaker they tend to drive interest rates higher NOT LOWER. Someone might ask, “Yes, but won’t the increase in Treasury rates draw that foreign money back?” The answer is sometimes, but not always. The reason being that in a dollar bear market investors become increasingly leary of buying back too soon and feel that if they wait a little longer they can get a better deal when interest rates are higher. This waiting causes even more bearish dollar signals and they begin feeding off each others bearish signals causing a further decline in the dollar and even higher interest rates. This is what happened in the early eighties and it is upon us again.

Another assumption the author makes is that the fantastic rise in commodities is a result of the carry trade. The assumption being that Yen were borrowed at very low interest rates to purchase base and precious metals. He totally ignores the fact that China and other countries are smack dab in the middle of industrializing their nations and expanding their infrastructures. Our era of industrializaton was spread out over 50 years or so. China and India will accomplish the same feat in a fifth of that amount of time because of the technological advances. Someone might ask, “What does that have to do with the I-Fund…China isn’t one of the represented countries on the I-Fund sheet?” No, but they trade with those that do. Japan and others are providing China with the needed technology to expand their infrastructure.

There are three reasons the I-Fund is the place to park our TSP funds:

• The dollar is doomed along with common equities.
• The industrialization and internal growth of Asian economies and the positive ripple effect to their regional trading partners.
• The Asians are SAVERS. All real economic growth is based on SAVINGS not consumption.

Wimpy, enjoy reading your comments. Enjoy the read, he's a fomer London banker. Also, link on to site and read his comments about the derivative process, I think you will find them quite informative. This lending and borrowing practice has been in place for a couple of decades and has pretty much fostered the growth of many a equity markets over this time frame. Another words, this arrangement has been a structural component of International world finance that has facilitated many a perceptions. It appears that there is a coordinated effort by many CB's to end this practice by raising interest rates. The reverse of this process is already being felt worldwide. The CB's created the playground for the hedgies, it now appears that the CB's are going to destroy it. This will affect the I fund. Good luck.


The Yen Carry Trade is DOOMED!

http://www.gold-eagle.com/editorials...man060806.html

Great article Wimpy. (and good follow-up insight by Roguewave regarding the I-fund). I don't believe, however, that this is the end of the I-fund. I do believe that CB's, in response to whatever agreements have been reached at the G7 meetings are raising rates in order to curb incipient inflation by reducing "excess" liquidity. This could get out of control if they miscalculate. But I don't believe they want to eliminate all growth in the emerging markets. I am of the opinion that the dollar will keep going down later this year for structural reasons in the U.S., and that there will be good, if not great opportunities to make more money in the I-fund (in relative terms) once the correction is finished.

Asian Economy
Apr 9, 2005

SPEAKING FREELY
Oil for dollars, and dollars for US deficit
By Richard Benson

The Asians remain shocked and in disbelief. Just when Japan, China, Taiwan and Hong Kong had accumulated enough dollars to buy oil to keep them warm for many winters, it's all over. In broad daylight, the Americans and the Organization of Petroleum Exporting Countries (OPEC) cheered as the price of oil popped up from US$30 a barrel to more than $50.

Indeed, this jump in the price of oil increases the world's daily oil consumption bill of 84 million barrels a day to $4.2 billion, from $2.5 billion (or $1.5 trillion a year from $900 billion). The world now has to shell out an additional $600 billion a year of "lucky bucks" to oil-producing countries just to stay in motion.

The bigger shock, however, is in the devaluation of dollar holdings of US Treasury debt. The rise in oil prices guarantees that the value of the US dollar will be pushed down even further, and stay down. Now that China is the No 2 oil importer and Japan is No 3 - with the rest of Asia very thirsty for oil as well - you can understand why the Asians must find a way to protect themselves.

The US strategy for using oil to finance its deficit is, of course, brilliant. America's elected officials knew that at some point those independent foreign central banks would start getting edgy about buying more dollars to pay for the United States' war and deficits. The $650 billion trade deficit is breathing down the dollar's neck. So which central banks can the US continue to use as the fall guys to buy the dollar? Why not the Persian Gulf oil states - but where would they get the dollars to buy US Treasuries? Well, with the Chinese piling up dollars and growing like crazy, at some point the oil market had to tighten. It was only a matter of time before the Chinese would start bidding up the price of oil. The Asians, therefore, are hung out to dry when the price of oil rises because they have to spend more of their dollars on oil.

As the price of oil goes up, extra money floods into the Gulf kingdoms. With the US secretary of defense putting troops all over the ground in the Middle East, and those nimble aircraft carriers nearby and ready to deliver the "shock and awe of sudden democracy" to the Gulf monarchs, it's a sure bet that America's OPEC buddies will stash their newly found Asian lucky bucks into good old American Treasury notes.

With such a simple policy to fund its deficit for another year, it's no wonder the United States can get by without any brain power at the Treasury Department. In effect, the US and its Gulf Arab allies just pulled off the biggest central-bank heist in the history of the world. The price of oil just went up 60% or more, which really cuts down to size that $3.4 trillion of net foreign holdings of US financial assets. As a loyal American, one would like to cheer one's government's deft move to pick the pockets of our trading and financing partners. Moreover, the US gets the Arabs to fund a large share of our deficit, subsidize our interest rates, and help keep our taxes low for another year. Surely I can afford to buy another gas-guzzling sport-ute, get a rifle, and wave a flag.

The United States is extracting tribute on oil from the world. If the world wants Middle Eastern oil, it can pay for it through the Saudi branch of the US Treasury. Why do the heads of Saudi Arabia, Kuwait, Abu Dhabi, Bahrain, Qatar, etc, hold dollars? Because they want to keep the money and the power. The ruling family of Saudi Arabia controls 25% of the world oil reserves and is completely dependent on oil revenues for its survival. Tens of thousands of Saudi princes live off lavish royal stipends. Think of Arabia as a family firm. If the dollar goes down in value, the Saudi royal family still gets to keep hundreds of billions of dollars. But, if they don't buy dollars, why would the US keep them in power? It would simply not be in our interests to do so. Remember when Saddam Hussein talked about pricing Iraq's oil in euros? "Shock and awe" quietly followed. !!!!!!!!!!!!!!!!!!!!!!!!!!
----------------------------------------

This program of oil for dollars and dollars for the US Treasury deficit is the simple tribute that we, as the superpower, can expect. The United States is well paid for keeping the world's supply of black gold safe and available to all. Unlike the Vietnam era - when the US was trying to finance guns and butter - getting others to pay now for our guns allows us to milk the oil out of the sand and turn it into butter.

The next question will be how the Asians respond to a 60% hike in the price of oil. Please stay tuned.

Notice in the chart below there are some big, smart, anonymous dollar holders (such as hedge funds) located in the Caribbean. No one knows who they really are.

Major foreign holders of US Treasury securities (in billions of dollars)
Japan 702
Mainland China 194
England 163
Caribbean 93
Korea 68
Taiwan 59
Hong Kong 59
Total (including other countries with fewer holdings) 1,960

Originally Posted by JOVARN

Asian Economy
Apr 9, 2005

SPEAKING FREELY
Oil for dollars, and dollars for US deficit
By Richard Benson

The Asians remain shocked and in disbelief. Just when Japan, China, Taiwan and Hong Kong had accumulated enough dollars to buy oil to keep them warm for many winters, it's all over. In broad daylight, the Americans and the Organization of Petroleum Exporting Countries (OPEC) cheered as the price of oil popped up from US$30 a barrel to more than $50...

...The United States is extracting tribute on oil from the world. If the world wants Middle Eastern oil, it can pay for it through the Saudi branch of the US Treasury. Why do the heads of Saudi Arabia, Kuwait, Abu Dhabi, Bahrain, Qatar, etc, hold dollars? Because they want to keep the money and the power. The ruling family of Saudi Arabia controls 25% of the world oil reserves and is completely dependent on oil revenues for its survival. Tens of thousands of Saudi princes live off lavish royal stipends. Think of Arabia as a family firm. If the dollar goes down in value, the Saudi royal family still gets to keep hundreds of billions of dollars. But, if they don't buy dollars, why would the US keep them in power? It would simply not be in our interests to do so. Remember when Saddam Hussein talked about pricing Iraq's oil in euros? "Shock and awe" quietly followed. !!!!!!!!!!!!!!!!!!!!!!!!!!
----------------------------------------

This program of oil for dollars and dollars for the US Treasury deficit is the simple tribute that we, as the superpower, can expect. The United States is well paid for keeping the world's supply of black gold safe and available to all. Unlike the Vietnam era - when the US was trying to finance guns and butter - getting others to pay now for our guns allows us to milk the oil out of the sand and turn it into butter.

The next question will be how the Asians respond to a 60% hike in the price of oil. Please stay tuned.

Notice in the chart below there are some big, smart, anonymous dollar holders (such as hedge funds) located in the Caribbean. No one knows who they really are.

Major foreign holders of US Treasury securities (in billions of dollars)
Japan 702
Mainland China 194
England 163
Caribbean 93
Korea 68
Taiwan 59
Hong Kong 59
Total (including other countries with fewer holdings) 1,960

If Saudi Arabia is the last dollar stronghold we are pinning our hopes on, we might as well throw in the dollar towel right now.

Let’s take a look at these purported dollar underpinnings and see if they are up to the task.

• In the area of external loyalty, who led the 1973 oil embargo against the U.S.?
• In the area of internal loyalty, which country in the Middle East has two separate standing armies to keep watch on each other in case the other decides to revolt?
• In the area of internal military strength, which troops abandoned their positions to take cover behind U.S. lines during the Iraq-Kuwait conflict?
• Which country in the Middle East contains Islam’s two holiest cities, Medina and Mecca?
• Which country’s oil sheiks have already begun repositioning their money and building new homes in Switzerland? And, is Switzerland a practical powerbase for controlling an abandoned country with troops having questionable loyalty?
• With Iran calling the bluff of the U.S. over its uranium enrichment program, the landscape of the Middle East has changed forever. Especially now, since Iran’s closest enemey, has been thrown into a state of chaos…thanks to the U.S. government. Iran will now set its sights on ‘democratizing’ Saudi Arabia…and the U.S. will be hard pressed to intervene on such a ‘noble’ undertaking. Iran will have the support of China and Russia in U.N talks.
• Saudi produces roughly 25% of the world’s oil? Where does the rest of the world supply come from? And where are their loyalties? Who is wooing them as trading partners?
• The ‘Shock and Awe’ the U.S. government exercised in Iraq is turning into something much less impressive. The Iranian President is most underwhelmed at the moment.

I would say the Saudi Arabian underpinnings to the U.S. dollar are less than certain, at the moment, with not much hope of improving. If there is one country in the Middle East that is serving as a glaring contradiction to the U.S. ‘democratization’ of Iraq (if that is even a worthy pursuit), it is Saudi Arabia. With the dollar tsunami about to descend on Saudi Arabian shores, I'm not sure the levee will hold for more than a couple of seconds.

And 11 of the 19 WTC bombers were Saudis. And Saudi Arabia is an ally of the U.S.

Originally Posted by sugarandspice

And 11 of the 19 WTC bombers were Saudis. And Saudi Arabia is an ally of the U.S.

How did I ever forget to add that one to the list? It is indeed the most important point of them all. Thanks!

It's hard to keep track of her. It won't happen again. My apologies Wimpy. I'll gladly pay for a hambur........never mind.

Down .844 today.