The Second Easiest Trade in the World

The second easiest trade in the world might just be keeping a few investors around the world up at night.

I say second easiest, because there is one other macro trade that seems to be more popular than being short the U.S. Dollar. But if there ever was a way to make a guaranteed profit, it would appear to be shorting the Dollar.

After all, the U.S. is, as we all know—putting it in precise macroeconomic terms, based on our horrible trade deficit, bloated budget deficit, broken Social Security system, not to mention our decrepit Medicare/Medicaid/Health Care funding system—totally screwed.

And hasn’t the Oracle of Omaha—Warren Buffett—shorted twenty billion Dollars for his own account? Even Bill Gates, who probably never shorted anything in his life, except maybe Lotus and Netscape and Borland and Novell and Quarterdeck and Software Publishing and…well, he’s probably never shorted a currency before, but even Bill Gates is short the Dollar.

So, if Bill Gates and Warren Buffett—two of the smartest men in the world, let alone the smartest guys in a particular room—are both short the Dollar, how could a big, swinging London-based currency trader lose by putting on that trade?

Well, one way he could lose is this: what if everything the smartest guys in the world already know about the Dollar is priced into it? And what if the Euro—the alternative currency of choice—is overvalued? And what if that imbalance starts to correct itself?

I mean, it’s not as if Europe is rip-roaring along, adding value to the world’s economic well-being.

Germany is stuck in no-growth-land, Italy is officially in recession, and France is a basket case. Half a dozen U.S. companies have missed numbers in recent weeks, and blamed Europe. Drug companies are removing research and development from Germany, and IBM is shutting down high-cost operations all over the continent.

I’m no currency guru, and I don’t particularly admire the fiscal policies of the United States. But what’s so great about Europe? And why does everybody want to own its currency?

I know what some of you are thinking: buy gold. But I’m not a gold bug. My friends who actually are gold bugs tend to be nervous, excitable people who think Alan Greenspan ranks right up there with funeral directors and variable annuity salesmen.

They refer darkly to “The Powers That Be” and watch every tick in Federal money flows as proof of a vast conspiracy to manipulate the price of Amazon.com’s stock price in order to benefit Alan Greenspan’s personal account.

I’m not making that up, by the way—I know people who think Greenspan times his various pronouncements to affect the market, for his own benefit. Last year a guy complained Greenspan had made negative comments about the economy just before option-expiration Friday. He was long Lucent call options, and they expired worthless.

He blamed Alan Greenspan.

I don’t particulary care who runs the Fed, and as far as I can tell gold and silver just sit there and impart no particular value except what other investors ascribe to the desirability of owning gold and silver at any given moment.

So call me an agnostic when it comes to the world’s monetary plight.

But I’d be willing to bet the ranks of the Dollar atheists far outweigh the Dollar believers right now. As I said, it’s probably been the second easiest trade in the world, up until now.

The easiest? Oh, that would be the “market-neutral” convertible arb trade. Which, as we now know, is blowing up all around us.

Just today, The Times of London is reporting some ugly data from the London hedge fund world:

GLG in recent weeks had demands for more than $500m (£270m) from investors wanting to pull out of its $4 billion market-neutral fund…Cheyne is thought to be down by at least 10% in its credit fund after the downgrading of debt at General Motors and Ford. Ferox, another of London’s most successful funds, is thought to be down nearly 20%. Bailey Coates, Polygon, Rubicon, Vega, Moore Capital and Brevan Howard are all nursing heavy losses of about 5% each in April. Makes you wonder, if that stuff was the easiest trade in the world, how the second-easiest trade is going to work out.

Jeff Matthews I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations.