Tuesday, December 6, 2011

"Shorting Euros is a bad way to play the credit crisis"

From Macrofugue:
Whatever your views on the long-term viability of the Euro as a currency, it presents far less attractive & obvious shorting opportunity for hedging the European volatility than it may appear on the surface.
Examples of previous acute credit crises provide some guidance on future outcomes.  Let's take a look at what happened to the US dollar during the the credit crisis of 2008:

For a year, leading into the credit crisis, even as it became more and more obvious that markets & the economy were quickly converging on an acute credit-crisis & financial system failure, the dollar actually declined until forecast turned into reality.

When BSC & LEH actually fell, the reversal of USD fortune was remarkably swift.
A credit-crunch is also a liquidity crunch.  The supply of money contracts faster than the demand for it.  There is a rush to liquidate assets to pay short-term obligation.

This conspires to create an environment in which would be very painful to short the Euro during acute phases of a credit crunch....MORE
HT: Economic Musings

Also at EM:
Fairholme’s Loss Aversion & The Hidden “Clean” Banks