Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Todd Harrison: Is a Currency Crisis Knocking at the Door?

By

Global central banks begin a familiar dance.

PrintPRINT

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

There has been a lot of discussion lately about the emerging markets and the specter of contagion. When the S&P 500 (INDEXSP:.INX) drops 70 handles in five sessions, folks look to assign reason for the rhyme -- which is entirely different than whether or not there's something to it.

It's been seven years since we penned The Credit Card. I'm reminded of that column as we pieced together a series of events to form a mosaic of the financial dynamic as central and commercial banks responded to the "contained" sub-prime housing mess. We were early in our observations, but there was clear benefit in examining the "why" rather than simply accepting the "what."

Fast-forward to today's environment; following a powerful and persistent multi-year stock market rally, the collective perception surrounding a downside catalyst has been marginalized, if only because there have been so many false alarms. We touched on the complacency last week, including the depressed levels of volatility, and while the seed of fear has been planted (the VXO (INDEXCBOE:VXO) is up 50%), the process of price discovery continues.

To be sure, the next iteration of the financial crisis need not look like the last; it rarely does. Over the course of my 23-year career, I've traded through the Orange County crisis, an Asian Contagion, Y2K, the tech bubble and crash, the housing crisis, the banking crisis, and various peripheral events. While they were each unique in cause and effect, they shared common characteristics, including the psychological continuum of denial, migration, and panic.

Perhaps it's a stretch to read into the outsized rate hike in Turkey or the unexpected tag-along in South Africa; truth be told, it's too early to tell.

What I will say is that the market has enjoyed one of the strongest rallies in history, and very few people feel like we're at all-time highs, which is also reminiscent of last decade's pre-crisis environment. This, of course, begs the obvious if not scary question: If folks are freaking out after a 4% pullback, what awaits when a more meaningful downside ride perpetuates a negative wealth effect?

We have witnessed an insane amount of synthetic engineering, not just by financial institutions, but at the Federal Reserve, Bank of Japan, and ECB. My primary concern is that the unintended consequences of those actions will manifest into unforeseen catalysts, be it the continued devolution of social mood or something entirely more structural.

To borrow a quote from 2009, "As governments take on more risk -- as they price assets on behalf of the market and transfer debt from private to public -- the common denominator, or release valve, becomes the currency...and if we inject drugs that mask the symptoms rather than medicine to cure the underlying disease, the likelihood of a seismic readjustment increases in kind."

I'm not smart enough to know whether we're at the beginning that process or if this is yet another false alarm, but as always, we would be wise to see both sides -- particularly when so few people are.

One step at a time as we continue to find our way.

R.P.

Twitter: @todd_harrison

Follow Todd and over 30 professional traders as they share their ideas in real-time with a FREE 14 day trial to Buzz & Banter.

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE