Stephanie Pomboy Sticks a Stiletto in the U.S. Dollar

The old boys network is looking a little green in the gills these days - too many ill advised risks, you know.

But one risk taker has hit the jackpot. Years ago Stephanie Pomboy left the cocoon that is ISI Group - perhaps the most profitable research shop on the street, pound for pound, and struck out on her own. At the time it raised eyebrows, but she has not looked back, and set a pretty high bar. How high can (ISI alum) Jason Trennert jump?

Pomboy's views can appear a bit flaky at first glance, no surprise considering her father is a notable gold bug. But she has been largely vindicated. Pomboy sat down with Barron's to resolve the most nagging Macro question that has been eating me...the dollar vs Treasuries.

Given today's price action, it appears Barron's was asking the right questions:

One thing that caught our eye in one of your recent notes was the steep decline of Treasury-buying by foreigners. What are the ramifications of that?

We are acting as though there are no consequences to basically running the money off the printing press and handing it to the Federal government to backstop financial markets or bail out homeowners or what not. There is no consequence to doing this, unless or until the rest of the world says to us, 'We don't like this game' and 'We don't want to have all the dollar claims we are holding debased by [Fed Chairman Ben Bernanke] running his printing press.' Barron's

So if foreign investors stop buying Treasuries, or even significantly pare their buying, that means higher rates in the U.S.?

That’s correct. But then [Bernanke] will start buying Treasuries to arrest the rise in interest rates. I’ve always had a very simplistic view about this: Either we are going to pay for our policy sins via higher interest rates or a weaker dollar. And for an economy that is as levered as the one in the U.S. is, the former choice is not an option. We can’t pay through higher interest rates; we barely got to 4.5%, 5% before the whole subprime crisis erupted. So a weaker dollar is the natural valve. But right now, we are enjoying some real competition in the ugly contest from the currencies of the European Union and the United Kingdom, and that will probably persist for a while because they are in pretty bad shape, and they are a little bit behind the curve relative to us.
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Brad Trent for Barron’s
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Could you elaborate on that choice between higher rates or a weaker dollar?

If we rely on foreign creditors to lend us the money to sustain our lifestyles—and that’s what we do—we need to compensate them for that risk of lending to us. As the economy weakens and our credit quality should theoretically be deteriorating, the only way we can really attract that same capital is by offering a higher interest rate or making our assets cheaper to them, in this case by having our currency be weaker. Barron’s Interview

Mr. Market is taking Stephanie’s lead, and sticking a stiletto heel in the dollar today. It appears Morgan Stanley’s call on Friday is a bit closer to coming true, given the current yield on the ten-year:

JPMorgan said government bonds will be the best place to be in 2009, calling for the 10-yr yield to see a measly 1.65%

Savor her Barron’s piece, she is less promotional than Meredith Whitney, and will probably be laying lower than Erin Callan in the months ahead. She is hardwired to favor hard assets given her DNA, but she is more than just another member of Wall Street’s lucky sperm club, and is making her money, EF Hutton-style.

Yes, she eaarrrned it.
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September 2007 CNBC Interview

Stephanie got it mostly right in this interview...her Asia/China trade was in the late innings, and Japan has been a “value trap” to some extent, but her slugging percentage is looking pretty good.

The Fed Effect
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Forecast: A Long, Cold Winter
Barrons

July 2002
Dick Pomboy
An Old Pro Reflects On The Bear Market And Golden Opportunities
Weeden & Co.

Another take on the dollar...must read

Has the dollar peaked?
CFR Blog - Setser

Watching the Dollar’s Weakness
WSJ

The Song of Love (Giorgio de Chirico)
Stephanie’s Art
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The content contained in this blog represents the opinions of underthecounter. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.

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