The idea of course is risk on money flows into less risky currencies and stocks, i.e. it explained the rise of Euro and the market, and the fall together as well. I was not entirely convinced. This is because I had seen in the crisis which should have been a crystal example of this:
*vast enforced liquidation of stocks by hedge funds
*huge money flows into $
*huge money flows into JPY
*huge money flows out of Euro
Yet it wasn't even remotely a linear relationship. It looked to me like an occasional push from one to another. But why ? Well because perhaps EUR/USD, USD/JPY and EUR/JPY are more than instruments, they are pipes, conduits themselves for money flows, affected (and effected) by what they flow through, in this case US equities. A currency pair sets up a pipe, from one to another, but the flow itself is important, i.e. stocks cascading somewhere in value.
What was clear to me was the effect on equities, making value a consequence of these pipes. Was anybody investing then based on a belief on future income streams ? Actually I did in a small way. I bought some of the companies with the strongest balance sheets I had identified in 2007 as they went low. But is was easy to get cut up by this as well as the equity market became like forex, but it was illuminating.
© 2011 Guy Barry - All Rights Reserved.
