26 Nov 2021

Dollar Strength

One theory of currency prices says that in the long run the value of a currency is inversely proportional to the amount of currency in existence. The idea is that the price of a foreign currency moves with the general price level, which itself is determined by the money supply. As central banks boost the money supply, the currency falls. On this theory, the dollar should be lagging badly. In fact, the dollar has been strong, and seems to be getting stronger as equity and bond markets show increasing signs of nervousness (e.g. in terms of a spike up in the MOVE index, measuring the cost of bond options).

Turkey is an unusual country. Its president, Erdogan, is convinced that high interest rates causes inflation. This idea seems to be linked to Modern Monetary Theory. I don’t know enough to explain this, but it’s not a widely accepted theory, and the Turkish Lira is under a lot of pressure, and this pressure has spilled over into other emerging market currencies, the most liquid of which is the Mexican Peso.

Increasingly, I believe that sentiment is a major influence on all securities and commodities markets, and once traders have convinced themselves that a trend has been established it will extend itself well beyond any justification in terms of fundamentals, at least in somem cases. I believe that the Lira may be a case in point.

Runs on a currency can have knock-on effects outside the markets. Turkey is not a stable place politically, and Erdogan’s position is not secure. The country is on the edge of the EU and has become a holding pen for migrants trying to escape chaos in the Middle East, where many countries are suffering from “civil unrest” and worse.

Currencies have been unusually stable over the last couple of decades. The Fed has provided swap lines and repo facilties to allow the world to run massive trade deficits and subsidies for as long as anyone can remember. China has manipulated its currency so it can manufacture all sorts of goods at a price which has destroyed manufacturing industry in much of the developed world, and has recycled the money back into the securities markets, especially sovereign bonds, of the importing countries. I am tempted to think about Stein’s Law, which states that if something cannot go on for ever it will come to a stop. I will end with a single word: “Evergrande.”

Funko

MacroValue wrote a piece on this stock, $FNKO:NSQ. It’s basically a manufucturer of toys, with a new sideline in NFTs. It’s trading at a P/E of 18, and has gone up this year by 85%. It’s possibly a recovery play, but my guess is that it’s a bit late to be joining the party. Insiders have mainly been selling.