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Whoa, Look at the Euro!
For those of you thinking a life in Paris is glamorous, let me explain how I spent my typical glamorous morning: carefully going over the gas, rent, electricity, and grocery bills.
For those of you wondering, “How do I get to be an expert political analyst?” Well, that morning is kind of key. I’m paid in dollars, but I pay my bills in Euros. So “the falling Euro” is anything not an abstraction to me. If it really reaches parity with the dollar by the end of the year, as some predict, then I somehow managed, though the weirdest luck in the world, to move to a city I can afford to live in — this as opposed to Istanbul, which was too expensive for me — and my life gets a lot easier (by sheer dumb luck, as it happens, but I’ll say I predicted it, anyway. That’s how you get to be an expert analyst).
But I’ll be happy enough with being “a good enough analyst.” Things like European deflation, Syriza’s victory in Greece, consumer price indices in France, and Greek debt restructuring are very interesting to me. Enough so that I might bother to really care about the details — because it’s personal — and then, with a bit of marketing, I’ll be an informed expert.
The short term for me is that a fall in the Euro is good–for me. Long term? I want stability and prosperity in Europe, of course. Lots of details in between, but “paying my bills” is really why I’m looking at articles like this:
And thinking, “Yes, I’d like to know!”
Pretty much what I want. An improving Europe, a falling Euro. I’m someone who’s trying to pay her bills, not the WisdomTree Europe Hedged Equity Fund, but I figure — whoever they are — they’re also trying to pay their bills, and thus looking carefully at what’s happening in Europe.
The WisdomTree Europe Hedged Equity Fund HEDJ +0.85% has collected $2.2 billion in new investor money so far this year, the most of all 1,651 ETFs. Of that, a stunning $1.3 billion in new assets has poured in since the European Central Bank announced its massive bond-buying program Thursday. That figure amounts to 17% of the fund’s total assets under management.
Of course, they’re betting, as we all are, but some bets are more informed than others, and peoples’ bets tend to get better when self-interest is involved. So what I want to know is how to figure out what’s beyond all the nonsense self-promotion over there at “WisdomTree,” and what the wisdom part of it really is. I’m not inclined to say, “none at all,” because they too have a huge interest in getting this right, so I doubt they’re just totally guessing.
But I’m not massively impressed by the explanation they’re offering, which is that they have an insight called “Smart Beta.” Come on, Wisdom Tree. Assume I’m a Smart Alpha. But I congratulate the Smart Alphas in your marketing department who knew your customers well enough to think, “Smart Beta might sound good to people, as opposed to totally insulting, so let’s market-test that slogan.” I myself would have said, “Don’t even bother testing ‘Smart Beta,’ it’s ridiculous.” I would have been wrong. So clearly, yes, their Smart Alphas are smarter than me about marketing, and thus maybe they know more than me about lots of things.
If I could sit down with the folks at Wisdom Tree, I’d say, “Look, Smart Alpha to Smart Alpha: How are you really making this call? I know you’ve got reports you’re not sharing with people over there but — if they’ve got good arguments in them — I may use them to decide whether to pay some bills now, or wait a few more days and accept the late fees on the bills.”
Of course, I understand that it’s not in their interest to share those arguments with me, because then no one would have to pay them to think this through. It’s in their interest to pretend this is all totally incomprehensible. But I doubt it is. Bet we can figure it out.
What do you think they’re thinking? We’re all Smart Alphas here. My instinct says, “Yes, they’re right,” but my instinct would have been “You can’t advertise how smart you are with the slogan ‘Smart Beta,'” so my instincts are fallible. Hence “I’d like to know more.” If I figure it out just right, I can make money grow on a tree–or at least figure out whether it might be worth it to stall on paying a few bills.
Your thoughts? What’s the Euro going to do and why? What’s the best way to hedge this bet?
Published in General
CB – Enjoy! Always better to be on the upside of a currency devaluation war….. At least, while it lasts
Does the average French person think the Euro will exist in current form in 10 years? I just don’t see how it works without a single bond market. Maybe they see the ECB pushing Germany into a single market. Of course, I thought the Euro could not last when it started and here we are in 2015…..so what do I know
PS – I’m probably stating the obvious and I’m not familiar with this particular fund but I’m guessing they mean beta as in correlation to the market
The Chinese, Russians, and Obama will continue to see the US as the enemy and will continue to attack the dollar. This will help the Euro.
Also, Greece will pull out of the Euro only to find that nobody will take their worthless Drachmas. This will slap some sense into other countries contemplating leaving the Euro and they will fall in line behind Germany to keep the Euro strong (at least relative to the dollar).
I don’t have polling data on that, but I’d reckon, ” Yes, basically, but ‘in its current form,'” no. The polling data would be interesting, though.
Sure doesn’t sound like it to me. What do you make of Varoufakis?
I reckon no one there really wants out of the Euro, they’re just negotiating. If we change the assumption that “Greece is serious about wanting out,” does it change the picture? Reckon you’re basically right, though: everyone will fall in line behind Germany; the rest of the debate is “playing to the local crowd.”
Well, I have been dealing with the same phenomenon from the other side of the Grosser Teich. My employers pay me in Euros, so I’ve taken effectively a 21.8% pay cut since mid-summer 2014. I have had to raise my prices accordingly. The German press certainly seems worried about it, calling it “return of the Euro crisis”. Last time the Euro lost as much value as it has in the same period (about six months, let’s say), people started seriously talking about a return to the Mark. Let’s see how long it takes this time.
IT’S TIME TO PLAY…. GREECE…. THE…. WEAL!!!!
Beta is a bit of finance jargon that is somewhat useful for creating indexes of stocks. Wisdom tree has found a way of building indexes that might be better than the old way …hence smart beta.
The euro appears “destined ” for parity or lower they are stumbling along after the U.S. to find a way to make loose monetary policy compensate for bad fiscal policy such as too high marginal tax rates, too much social spending, too much regulation. I believe the U.S. will discover the need for good fiscal policy first and then one hope they will follow our lead … After exhausting all the other possibilities.
You’d lose that bet.
I know it’s popular to go all Nassim Taleb, black swan, no models really work, the only reason the winners are famous is survivor bias, yada yada. But this is (forgive me) obviously foolish: the fact that most hedge funds fail due to using lousy models doesn’t mean all of the survivors are. Since even Eugene Fama has recanted the EMH at this point, we’re better off assuming the smart money figured it out a long time ago—indeed, the Kelly Criterion has been around since the 1950s—and that the informational competition among traders—HFT, front-running, etc.—both matters and works, given a good-enough model.
Whenever I see the markets described as a casino, I laugh. If your memory is any good, you’re a lot better off at the blackjack table than the financial markets, unless maybe your name is “Goldman Sachs.”
Anyway, congratulations on being paid in the deliberately devalued currency that’s losing value slower than the deliberately devalued currency you spend.
Looking to strike it rich? Why not off to Padua then? Wealthy, happy Padua.
What does a croissant and a bagette cost these days at a “normal” boulangerie? A compact car? Share some prices!
Claire,
I’m shocked yes shocked that you have joined Soros and his evil arbitrage empire. Sure, sure, don’t deny it you were secretly hoping for the euro to take a beating. Why those cute little bureaucrat creatures in Brussels are losing sleep and you Ms Berlinski are living the high life in Paris. Shocking.
OK OK I’ll admit that every year at Pesach I short chametz on the Chicago board of trade. Hey with every Jew in the world selling their chametz all at once chametz takes an incredible beating. I clean up baby. Then as the sun goes down it’s a mad rush to beat the Rabbi and get an option on the up side. All the Jews buying their chametz back at once, why chametz just goes through the roof! Got to have nerves of steel for that one.
Regards,
Jim
Hasn’t the relative strength of the Euro to the Dolar always been a kind of fiction ginned up by those who wanted to see an alternative to the dollar? Isn’t this just a return to reality?
Poor idea to look at the price of a “normal baguette” in France the way you might at other things you’d put in a CPI basket. ParisParamus, you do know, deep down, why that particular price is never going to be a meaningful indicator of anything in France. “Normal” people will always be able to afford bread. There will never, ever be a French government that doesn’t fix the price of bread to make sure normal people feel its still abundant. Some historic memories last so long that no one can remember why it’s that way, but that one, I promise, will last forever. For the rest, there’s the consumer price index.
10 50L garbage bags will cost you 2.07 Euros today at Monoprix. The triple-thick kind, but in my household, you cannot skimp on garbage-bag quality. (Seven cats.)
The ECB has achieved exactly what they wanted. The idea being that a drop in the Euro will make European exports more attractive. I don’t think the ECB wants to achieve parity with the dollar, and I think they may have overshot their target a little bit. I am guessing that the ECB wants the exchange rate to trade in the 1.15 to 1.20 dollars = 1 euro range. Which probably means the ECB will cool on QE for now. However, a lot will depend on inflation numbers. The ECB’s main mandate is to target a 2% inflation rate, if inflation numbers stay low (as seems likely due to the plunge in oil prices) they will continue QE. If inflation surges to 3%-4% the ECB will end QE and begin to raise interest rates. Finally, as the Bank of England learned bond traders can make achieving a desired monetary policy difficult for central banks.
FTFY.
Claire
A few thoughts:
First, the Wisdom Tree fund you mention is an ETF (exchanged-traded fund), which means that it is meant to track a stock index. The biggest ETF in the world is SPY which tracks exactly the S&P 500 index in the US. There is nobody picking investments. The fund is set up to track the index.
Second, Wisdom Tree is not making a call on Europe. It is just offering an investment vehicle to people who are themselves making a call on Europe. For $1 of assets, WT gets paid the same whether the fund goes up or down. Their goal is to gather the most possible assets. Of course, good performance helps gather assets but good performance would have nothing to do with their skill since it is a passive vehicle (holdings are not selected individually, they are just whatever is in the index).
Third, this WT fund is currency hedged (hence its name), which means that it neutralizes the currency movement between the Euro and the dollar. If the Euro goes down 10% or 20%, it has no direct impact on the fund’s performance. Another prominent European ETF offered by Vanguard, VGK, does NOT hedge the currency and has not performed as well as HEDJ since January 1st because the Euro has weakened.
Good luck.
From Costco online 200 similar bags in the US run for 19.99. So it looks like things cost the same at least when it comes to garbage bags.
Now, which part of this bet are you saying I’d lose? I’m saying, “I bet it’s perfectly comprehensible, and that I bet I’d be able to figure it out.”
You seem to be saying, “It’s perfectly comprehensible.” So you seem to be betting against me being able to figure it out.
Are you quite sure you want to bet that way?
Nope. Easy though that is to think, France is just a little different from the US about the visible price of that commodity and the way it looks as if it might be rising against others. You can envision, can’t you, a normal American saying, “The cheap bread is more expensive today than the cheap potato chips,” right? And making a rational decision in favor of potato chips at the supermarket based on this? We have plenty of Americans who have convinced themselves they’re allergic to gluten, or for some other reason won’t even eat bread at all, so this is not beyond imagination.
That’s not something anyone running France will ever think. Good historic reasons for that. The price of bread in particular here is a different thing. Not talking about agricultural subsidies or food prices generally. Talking about bread.
This is a subtle point. Is it perfectly comprehensible once you know the assumptions implicit in the model and the mathematics underlying it? By definition, yes, since the people running the fund came up with it and might even be putting their own money into it. But this strikes me as begging the question, because by that definition, all of physics and mathematics is comprehensible. So this is not the definition I have in mind. Rather, I would say: it’s unlikely that, presented with an actionable formal description of the model, you or I would be able to accurately judge whether the model was a good one to follow by any means other than trying it.
This isn’t really a particularly strong claim: one of the tools used is almost certainly nonlinear partial differential equations, and these are known to be chaotic past the third moment, which is why it takes whole banks of supercomputers to solve even relatively simplified approximations of them. That is, even knowing the equations and their boundary conditions doesn’t do you any good as far as predicting what values they’ll take on even after a very few iterations. So the way this works in practice is these guys back-test their model. The big question is whether they back-test it with enough data, over enough time, for the model not to be overfitted to a set of unique conditions, e.g. back-testing only post-Great-Depression.
Yes, but only because I’m not betting that way against you uniquely, by many orders of magnitude. :-)
I take this to mean that you feel the difference between the French Revolution’s effect on bread availability, including pricing, and the Great Depression’s in the US is a difference of kind rather than of degree. I might agree with that—if only because I do believe a difference of degree can become a difference of kind. I’m only unsure of whether this particular difference rises to that level or not. It might.
So let me ask you this: if it were politically possible to end all farm subsidies tomorrow, would you do it?
I’m conservative and thus not inclined to “end anything tomorrow,” on the grounds that what was built slowly is best dismembered slowly. But yes, I’d very much like to end all those subsidies. And yes, there’s a difference in the way France views bread, in particular, that amounts to a degree in kind. The price of related bread-like products may go up here, or food generally, but political leaders here won’t ever forget what’s said to have happened to the one who last made light of the price of bread. She wasn’t just voted out. (Whether she said it or not, that’s definitely what people believe she said.)
Now that’s more reasonable. And that’s the kind of question I’d want to ask them. Since you brought up Goldmann Sachs, I’ve seen evidence, for example, in the form of of their analyses of Turkey, that’s told me, “They’re in over their heads here. They’re using flawed data. No matter how good the model, it won’t work if this is the data they’re feeding it.” When that massive corruption scandal broke, my phone started ringing with panicked investors who were asking me, “What on earth is going on?” I had to explain to them things that of course they should have known about the political risk, but didn’t. It’s hard to convince Americans that they’re being held hostage by a dervish conspiracy.
That’s why this presentation was the most useful one (IMHO) at the conference at which it was presented. You can bet any amount of money you like that real traders, with real money on the line, are using this kind of technology to include online news and social media as inputs to their strategies. Anyone who isn’t is a fool.
Quite a dish…of course I meant the cake.
Regards,
Jim
Hmmm. HEDJ. An ETF set up to track the WTEHIP. Wisdom Tree Europe Hedged Equity Index.
OK. What’s that?
Index is composed of dividend paying companies, domiciled in Europe, traded in EUR, having at least a billion dollars (do they really mean EUR?) market capitalization, AND derive at least 50% of their revenue from countries OUTSIDE of Europe.
Ok. So this fund has no special insight about Europe beyond its ability to accurately track the underlying Index. Hence the Beta in the marketing. If the index goes up or down this fund is supposed to mimic that movement. That’s Beta. The quintessential example of the rising tide floating all boats. (And just the reverse on the ebb tides). Beta warriors look like heroes in up markets and can die like flies in down ones.
The Index it tracks is interesting in that it is composed of European companies that derive more than half their revenues from outside Europe.
That is how they “hedge”. Because the underlying companies have most of their earnings outside Europe, they should return more in environments where EUR is declining vs USD. The fund is “hedged” vs FX moves – if you want to call it that – from a US investor’s point of view. The additional return offsets the hit from getting your dividends and cap gains in a declining EUR. From your point of view in France, the underlying companies are just like you …. Getting paid in Dollars with expenses in EUR. So from your point of view the fund isn’t so much “hedged” as it is amplified.
EUR strong – The fund expects lower returns when the EUR is up vs USD. So you’d get hit twice. Lower returns from the fund …. and at the same time your regular USD wages would have to be translated into a stronger EUR.
EUR down – The fund expects higher returns when EUR declines vs USD. So, with this fund you’d be doubling down.
It was actually let them eat brioche, not cake…
Yep. And if only I’d really followed up on my instinct when I realized how powerful that could be. For about two weeks, I was thinking, “Sell this idea now, before everyone figures this out.” And then I got caught up in another project. But I really did predict this, and this I can prove by means of dated e-mails. Absolutely true and for sure that anyone who’s not doing this now is a fool. And they are not fools, for sure. When I said, “People should do this,” however, I bet they weren’t doing it, yet. The mistake as far as–“personal financial predictions” go–was my not pushing that idea hard and aggressively back when it would have been worth something. (My idea was actually better than this one as it’s presented here, I suspect, but I figure they’ve figured out what I had in mind already.)
The thing that tends to stand between me and making that kind of money is my tendency to “prioritizing writing about the most recent story to catch my eye” over “really making money from what I’m noticing.” But yes, I sure noticed that before most people did. I can prove that, but so what–I didn’t do anything with it. They did, so they earned it fair and square. I like writing, so it’s obviously worth more to me than that kind of money. Not in a snobby way, just in a “that’s how economists would see it” way, and they’d be right.
It’s actually very highly debated by historians, etc., and unclear whether she really said anything of the kind, but no doubt the memory of an unpleasant connection between peasants angry about the price of bread and the guillotine looms very large here. If anyone’s really interested in what actually happened, though, the historiography of the French Revolution alone is a fascinating subject–and the French Revolution worth a lot of time. If people want to read a very serious book by an outstanding historian–not a flashy one–I’d recommend Colin Lucas on the Structure of the Terror.
With you, basically, but I’m seeing no risk (or hope) of a surge in inflation. Basically, it’s in everyone’s interest for them to prove that yes, you can fix a fiscal problem with monetary policy, because no one can fix the fiscal problems. We have to rule out the politically impossible–the ECB can’t fix the fiscal problems; and those who could can’t couple it with their own monetary policy. New, weird territory, not a lot of data on this kind of situation, right? This must either be solved by monetary or fiscal policy. The many steps it would take to fix the fiscal problems can’t be taken safely, now–not without risking the kinds of problems the Coal & Steel treaty was meant to solve. And did solve, at some cost to democracy. So I’m basically with them: for now, this has to be held together with monetary policy. Can it be done? I hope so. It’s far too late undo whatever decisions resulted in this weird situation. 2% inflation is a ridiculously low target given what they’re trying to do, and 3-4 percent would be still be far too low.