But one difference this time is now the dollar, rather than the yen, looks like the best funding currency, and the dollar is a deeper market, so the scale of potential damage is much greater.
The size of currencies has come up a couple of times during this event in terms of certain countries (like Iceland and Switzerland) simply not being big enough to bail out their banks if they needed to. This context though is new, to me, but of course also matters. There are greenbacks everywhere. Many countries use USD for all sorts of purposes and so the breadth or scale as Yves says stands to be much larger if things become disorderly with the dollar as compared to the yen or the euro for that matter.
The word disorderly as a benchmark for concern gets used all the time but without definition. Perhaps we will "know it when we see it." Ooof.
Here is a link to the Hugh Hendry investor's letter. John Mauldin posted in on Barry's site and I saw a link to it on Seeking Alpha as well. I mentioned Hendry several years ago after seeing him on CNBC Europe. He is always a good read, but a better listen for the Scottish accent, because he tends to come at things with a unique viewpoint. I tend not to focus on whether he is right about something so much as trying to see what I can learn from the viewpoint (agree or disagree) and whether there is some kernel to work into my viewpoint.
He warms up with this;
The ability of fractional reserve banking to leverage this liquidity many times over provided the monetary mo-jo to instigate ever higher commodity prices.
There are quite a few fractional zealots out there and while this subject may not be my wheelhouse and definitely not my passion this part of the model becoming warped has contributed to whatever history will ultimately say about this decade.
It is not clear to me that the current prices of popular risk assets are at levels that will prove to be ruinous should they drop but perhaps we are early on in a trajectory that will prove to be ruinous. This is possible but do keep in mind that iShares Emerging Markets made a high two years ago near $55 and today after (or in the middle of) a heroic run it is at $41. The PowerShares Commodity ETF (DBC) hit $45 in the summer of 2008 thanks to crude craziness and is now up a good amount to $25. Even the SPDR Gold Trust (GLD), which I own personally and for clients, at $112 is only up 13% from its 2007 high.
Any of these things could drop or collapse as some might say but it is not obvious that the pricing of these things is here today nuts; N V T S (History of the World Part I reference). Money has flowed in yes but the prices do not appear ruinous. No matter the best way to describe the price action of these things, if you now own more than you should the logical course of action is to shave the positions down. If the dollar starts a meaningful counter trend rally tomorrow it should be obvious that the things we are talking about here would likely get hit very hard.
Hendry later ties in a similar idea as Yves Smith about the dollar being used in so many global financial functions. Hendry differs a little, as I read it, saying that the dollar has already devalued. Well it is down a lot and I have opined before that with so many other countries having a stake in the dollar an implosion seems unlikely because so many participants would be motivated by self interest to step in. A continued slow erosion still seems very likely though which should result in higher interest rates here.
Toward the end he lands this self-deprecating jab; "you have to discount the solace I seek in finding people even more miserable than myself."
There are no easy answers here. I believe the simplest approach involves a view from 30,000 feet. The US faces some fundamental obstacles that other countries do not. I would focus on the "do not" crowd.
The picture is from the United Animal Friends 2010 calendar that my wife and her friend Gayle put together. They are for sale at the UAF website and there are a lot of great pictures. I hope you can check it out.