Author Topic: Fairfax Letter March 2014  (Read 47659 times)

gary17

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Re: Fairfax Letter March 2014
« Reply #140 on: March 13, 2014, 09:46:00 PM »
this is a question that i've been thinking about

it seems like because the chinese government has artificially kept the chinese yuan low relative to the US dollar, over the years it had to buy US dollars (i.e., sell Chinese yuan) to keep the Yuan low....  the US dollars that they have been buying = the foreign reserve in $US.....  and all this fund belongs to the Chinese central bank...   

So in theory, if the yuan were to collapse - they could just start buying Yuan and sell US dollars....  the reserve, at $3.3 trillion US is mostly in the form of US government bonds ... so they'd start selling the bonds.... which would increase the yield on the bonds... (?)   

so our current quantitative easing is about 85B at the peak per month... so  3300B would be a 3 year QE program if that's where the Chinese government wants to start inject the money back into their economy.....     

is it this simple?

Gary

Quote
Official international reserves assets allow a central bank to purchase the domestic currency, which is considered a liability for the central bank (since it prints the money or fiat currency as IOUs). Thus, the quantity of foreign exchange reserves can change as a central bank implements monetary policy,[2] but this dynamic should be analyzed generally in the context of the level of capital mobility, the exchange rate regime and other factors. This is known as Trilemma or Impossible trinity. Hence, in a world of perfect capital mobility, a country with fixed exchange rate would not be able to execute an independent monetary policy.
A central bank that implements a fixed exchange rate policy may face a situation where supply and demand would tend to push the value of the currency lower or higher (an increase in demand for the currency would tend to push its value higher, and a decrease lower) and thus the central bank would have to use reserves to maintain its fixed exchange rate. Under perfect capital mobility, the change in reserves is a temporary measure, since the fixed exchange rate attaches the domestic monetary policy to that of the country of the base currency. Hence, in the long term, the monetary policy has to be adjusted in order to be compatible with that of the country of the base currency. Without that, the country will experience outflows or inflows of capital. Fixed pegs were usually used as a form of monetary policy, since attaching the domestic currency to a currency of a country with lower levels of inflation should usually assure convergence of prices.
In a pure flexible exchange rate regime or floating exchange rate regime, the central bank does not intervene in the exchange rate dynamics; hence the exchange rate is determined by the market. Theoretically, in this case reserves are not necessary. Other instruments of monetary policy are generally used, such as interest rates in the context of an inflation targeting regime. Milton Friedman was a strong advocate of flexible exchange rates, since he considered that independent monetary (and in some cases fiscal) policy and openness of the capital account are more valuable than a fixed exchange rate. Also, he valued the role of exchange rate as a price. As a matter of fact, he believed that sometimes it could be less painful and thus desirable to adjust only one price (the exchange rate) than the whole set of prices of goods and wages of the economy, that are less flexible.[3]


wisdom

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Re: Fairfax Letter March 2014
« Reply #141 on: March 13, 2014, 10:58:31 PM »
If the Chinese govt sells treasuries - the prices on treasuries would drop and a large amount of the reserves could disappear.

In addition, the spike in interest rates would kill any recovery that is taking place across the world.

With the total amount of debt outstanding any increase in interest rates would be damaging to any recovery.

wisdom

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Re: Fairfax Letter March 2014
« Reply #142 on: March 13, 2014, 11:23:46 PM »
http://www.bloombergview.com/articles/2014-02-17/china-digs-itself-deeper-into-dollar-trap

the dollar trap - why the Chinese reserves in US treasuries are trapped

Cardboard

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Re: Fairfax Letter March 2014
« Reply #143 on: March 14, 2014, 08:42:02 AM »
Ericopoly,

Did you buy straight IWM puts in your non-margin accounts, like retirement accounts, where you can't short to hedge? I guess in these you would not have to worry about the early taxation issue that you mentioned.

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gary17

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Re: Fairfax Letter March 2014
« Reply #144 on: March 14, 2014, 09:04:16 AM »

Interesting. On the other hand though the US government owns most of the treasuries.... I believe China owns a relatively small amount.

http://www.bloombergview.com/articles/2014-02-17/china-digs-itself-deeper-into-dollar-trap

the dollar trap - why the Chinese reserves in US treasuries are trapped

ERICOPOLY

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Re: Fairfax Letter March 2014
« Reply #145 on: March 14, 2014, 09:29:45 AM »
Ericopoly,

Did you buy straight IWM puts in your non-margin accounts, like retirement accounts, where you can't short to hedge? I guess in these you would not have to worry about the early taxation issue that you mentioned.

Cardboard


I don't manage any of the assets in my Roth IRA anymore (as of January).  I am leaving it for others to manage.

I have another 18.5 years until those Roth IRA assets are tax-free.

So, my intent focus is on making it another 18.5 years living solely off of my taxable funds.  I'm pretty sure it won't be an issue -- I can sustain my current rate of spend even if I don't make another dollar in returns again (I just need to match inflation and not lose money). 



Cardboard

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Re: Fairfax Letter March 2014
« Reply #146 on: March 14, 2014, 10:30:42 AM »
Hi Ericopoly,

Actually, my question was flawed: you are not using IWM to hedge at all your BAC position or essentially your long portfolio. IWM is a straight short with capped downside, while BAC is your long with capped downside using its own puts.

The other trades: sell BAC covered calls, sell SHLD puts (with high volatility and premium) are simply ways to raise cash to reduce the cost of the 2 "trades" above. The only risk left I guess, other than treading water, is for you to be forced to buy shares of SHLD or close the position at a loss. Do I now understand it all right?

That is actually brilliant and shows the power of concentrating in a few large caps: easy to hedge them with 100% correlated puts. Very useful in times like these. I can't do this with my portfolio with most being small caps that do not have options. So to get a similar "barbell" strategy I would have to short twice as much IWM as you are or find some other short/put strategy for my long exposure.

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ERICOPOLY

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Re: Fairfax Letter March 2014
« Reply #147 on: March 14, 2014, 10:39:42 AM »
Hi Ericopoly,

Actually, my question was flawed: you are not using IWM to hedge at all your BAC position or essentially your long portfolio. IWM is a straight short with capped downside, while BAC is your long with capped downside using its own puts.

The other trades: sell BAC covered calls, sell SHLD puts (with high volatility and premium) are simply ways to raise cash to reduce the cost of the 2 "trades" above. The only risk left I guess, other than treading water, is for you to be forced to buy shares of SHLD or close the position at a loss. Do I now understand it all right?

That is actually brilliant and shows the power of concentrating in a few large caps: easy to hedge them with 100% correlated puts. Very useful in times like these. I can't do this with my portfolio with most being small caps that do not have options. So to get a similar "barbell" strategy I would have to short twice as much IWM as you are or find some other short/put strategy for my long exposure.

Cardboard

Yep, I think you summarized it well. 

I am expecting income from dividends and expiring volatility that I have sold.  Instead, of trying to live on that income, I'm spending it all on hedges.  This way, I utilize the full value of my income rather than letting a large percentage of it get confiscated by the government taxation authorities.  I want unrealized deferred capital gains, not taxable income.

Phoenix01

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Re: Fairfax Letter March 2014
« Reply #148 on: March 14, 2014, 06:13:25 PM »

Yep, I think you summarized it well. 

I am expecting income from dividends and expiring volatility that I have sold.  Instead, of trying to live on that income, I'm spending it all on hedges.  This way, I utilize the full value of my income rather than letting a large percentage of it get confiscated by the government taxation authorities.  I want unrealized deferred capital gains, not taxable income.

That is the FFH strategy!

moody202

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Re: Fairfax Letter March 2014
« Reply #149 on: March 16, 2014, 12:30:40 PM »

Then all the BAC is hedged at $15 and $17 strike.  I've also written some SHLD puts.  I've closed out my C position and am contemplating the same for JPM. 

What is your JPM position?
Many shall be revived that now are fallen, and many fall that are now in honor.