Mish's Global Economic Trend Analysis

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Quote of the Day: "Currencies Don’t Move Much. Without Leverage, No One Would Trade" Posted: 17 Jan 2015 04:57 PM PST While researching material for an article on winners and loses in the record Swiss franc move, I came across this quote as reported by Bloomberg. "Currencies don't move that much. So if you had no leverage, nobody would trade." Who said that? Drew Niv, FXCM's chief executive officer. The story progresses ... FXCM Risk Controls Bloomberg reports FXCM had 230,579 retail customers on Dec. 31. They traded $439 billion of currency in December, with an average of 595,126 trades a day. The company warned investors in a regulatory filing last March that its risk controls were imperfect. "Some of our methods for managing risk are discretionary by nature and are based on internally developed controls and observed historical market behavior," the company said in the regulatory filing. "These methods may not adequately prevent losses, particularly as they relate to extreme market movements." And what happened? FXCM Gets Rescue The Wall Street Journal reports Surge of Swiss Franc Triggers Hundreds of Millions in Losses with brokerage firm FXCM getting a rescue. Brokers around the world are crumbling in the wake of the Swiss National Bank's shock decision to remove the cap on its currency. Banks, brokers and individual investors were left with hundreds of millions of dollars in losses a day after an unexpected surge in the Swiss franc sent shock waves through markets. FXCM Inc., a major U.S. retail foreign-exchange broker, emerged as the biggest victim so far and had to be rescued by an emergency $300 million lifeline from investment firm Leucadia National Corp. Shares of FXCM, one of the largest retail currency brokers in the world, were suspended on the New York Stock Exchange on Friday after the company said client losses on Swiss franc trades threatened to put it in violation of regulatory capital rules. Citigroup Inc. and Deutsche Bank AG will each lose about $150 million on the franc's appreciation, said people familiar with the firms. Goldman Sachs Group Inc. said Friday that the franc's move will be immaterial to its earnings. Losses at Barclays PLC will be in the tens of millions of dollars, people familiar with the bank said. FXCM was among several firms that fought CFTC efforts to limit leverage at 10 to 1, saying in a March 2010 letter the proposal would have a "devastating impact on the retail [foreign-exchange] industry" and "drive it largely overseas." The letter was signed by FXCM Chief Executive Drew Niv and eight other brokerage CEOs. The limit eventually was set at 50 to 1, meaning an investor could borrow $50 for every dollar put in. Thank Central Banks The funniest story to date is without a doubt FXCM, but also consider It Only Takes One: Hedge Fund Manager Who Survived Five Debt Crises Wiped Out Overnight on Swiss Franc. And this is what it has come to: Central banks have so suppressed volatility, that hedge funds need to leverage to get suitable returns to justify their 20% fee on profits. And so they do. And this is the result. Hmmm. I sense another moral to the story here. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

It Only Takes One: Hedge Fund Manager Who Survived Five Debt Crises Wiped Out Overnight on Swiss Franc Posted: 17 Jan 2015 12:23 PM PST Someone asked me for a list of winners and losers and what the unexpected move by the Swiss National Bank meant in the long term for Switzerland. I will address that later today. First, consider one of the big losers who was wiped out overnight. Bloomberg reports Swiss Franc Trade Is Said to Wipe Out Everest's Main Fund. Marko Dimitrijevic, the hedge fund manager who survived at least five emerging market debt crises, is closing his largest hedge fund after losing virtually all its money this week when the Swiss National Bank unexpectedly let the franc trade freely against the euro, according to a person familiar with the firm. Everest Capital's Global Fund had about $830 million in assets as of the end of December, according to a client report. The Miami-based firm, which specializes in emerging markets, still manages seven funds with about $2.2 billion in assets. The global fund, the firm's oldest, was betting the Swiss franc would decline, said the person, who asked not to be named because the information is private. Armel Leslie, a spokesman for Everest Capital with Peppercomm, declined to comment on the losses. Calls to Dimitrijevic weren't returned. Last year, the main fund rose 14.1 percent, driven by Chinese equities and bets against currencies, including a wager that the Swiss franc would fall after citizens rejected a referendum that would require the central bank to hold at least 20 percent of its assets in gold, the investor report said. It Only Takes One When you speculate with leverage, you can turn from being a hero to a goat in 15 minutes. Poof. $830 million in assets turned to ashes overnight. Dimitrijevic grew assets over five crises, then lost it all on one bet, a recent one, speculating the wrong way on the Swiss Franc after Switzerland voted against a referendum on gold. Morals of the Story Don't borrow money in other currencies, especially long-term mortgages. Don't expect currency interventions to work forever. Don't believe statements made by central bankers. They are not the economic wizards they are made out to be, and they often lie when it suits their purpose. It only takes one wrong macro bet with leverage to make a fortune or wipe you out.  When you are speculating with other people's money, especially when you take in a 20% performance fee, there is a huge incentive to make leveraged bets. Points 1-3 above from Rabbit Hole Intervention Fails: Wild Moves in Swiss Franc as Switzerland Abandons Euro Peg; Morals of the Story Points four and five added to the above list today. My guess, and it is just that, is all of Dimitrijevic's funds will see huge withdrawals. People will be wondering, and rightly so, "What the hell else is he doing?" Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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