Controversial views on currencies

1. Cheviot Asset Management Limited
Telephone +44 (0)20 7845 6150
Email info@cheviot.co.uk
cheviot.co.uk
Cheviot Asset Management, 90 Long Acre, London, WC2E 9RA
MMFs – Money Market Failings
On the back of recent changes to the US Money Market Fund (MMF) regulatory framework,
I felt that a refreshed consideration of global currency markets might be worthwhile. This
crucial tweaking of the rules was hidden in the middle of a long reform package in January
and relates to the providers of MMFs who can now freeze redemptions ‘in extremis’.
Quoting the legislation, Money Market Fund Managers can now "suspend redemptions to
allow for the orderly liquidation of fund assets."
The above may appear to be a minor footnote in light of the past year’s excitements, however the
further concentration of moral hazard implied by this change is not to be underestimated. The
MMF industry ‘manages’ trillions of Dollars of retiree and institutional cash in order to improve on
the rate of interest offered by a regular bank deposit. Banks and big money players are driven on
the back of this to the relative security and guaranteed liquidity of Treasuries and short-term
T-Bills. Yield, it appears, has once again become secondary to certainty. The core rationale for
owning MMFs is the dual concept of ‘risk free return’ and absolute liquidity. The disappearing
yield in 1 month T-Bills is a reflection of the potential breakdown of the MMF concept and
suggests that smart money is again heading for safe harbour.
This development is yet another reflection of currency markets and a global economy in flux.
Over the first weekend of February the World’s central banking community convened for a ‘secret’
(read: no media coverage) meeting in Australia, arranged by the Bank of International Settlements
to discuss the global economic crisis. Presuming that the meeting wasn’t convened specifically
to deal with the world’s notional $1.4 quadrillion derivative market (about which the B.I.S keeps
statistics) then surely it was to discuss the global currency market architecture. The world must
transition to new world currency order in accelerated fashion if we are to avoid the unimaginable
consequences of serial sovereign default. The result of these Central Bank and G-7 meetings,
whenever it crystallises, is likely to be as significant as the Bretton Woods accord of 1944.
Catalysing and accelerating the need for such an agreement to be rolled out is the re-emergence
of food price inflation in developing nations. Should food prices start to rally across the board,
then the likelihood of a full scale currency crisis will be increased substantially. Bearing in mind
that while we in developed countries spend around 10-15% of our income on food, in the
developing world that figure is nearer 50%. The relative lack of credit for farmers combined with
poor weather and reduced yields in grains-producing countries, has left the world perilously close
to potentially experiencing the twin horror of falling asset prices and rising food pricing. Wheat
futures are still down 70% from the high of 2008 and yet currently there is rioting in eastern India
due to the spiralling cost of basic foodstuffs. In our globalised world it seems highly unlikely that
this pressure on food pricing can be restricted to the Indian subcontinent for long. The great
concern from my viewpoint is that no agreement of substance will be put in place by governments
before the real purchasing power of irredeemable currencies is brought into question by rising
food costs. In such an environment the risk of contagious fiat currency organ-rejection by the
global population looms large.

2. Fuel to the paper-based fire (and Gold £
central to the Goldbug viewpoint)
should come on March 25th when
the CFTC are holding a public
hearing into the issue of
Speculative Position Limits in Gold
and Silver Futures and Options. A
visible and public debate about the
prop-book trading of the big
commercial banks, while unlikely to
lead to prosecution or even a
satisfactory judgement (it is
nonsensical to expect the fox to
show the farmer the trail of
feathers leading to his den) – may
well lead to substantial short-
covering in the interim. The
incipient breakout of Gold in non-
USD currencies, as shown in the Source: Bloomberg
graphs (right), is a reflection of
what looks to be the next stage of Gold €
a bull market for historical money
as opposed to its modern
manifestation. In God we Trust
may be approaching the end of its
shelf-life.
Ned Naylor-Leyland
February 2010
Source: Bloomberg
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