EES: 3 Things stock investors need to know about FX
The stock market cap in the United States is about $22 Trillion. The amount of money in Managed Currency strategies is unknown, but it's very small, even by CTA standards. According to data based on CTAs listed with Barclay Hedge, there's about 19 Billion in Currency Strategies. That's a lot of money, but not a drop in the bucket when compared with equities. And remember that although money in equities isn't all 'managed' - all money in equities is an investment of some kind - because people don't need equities like they need FX. To contrast it with FX, all money in FX is NOT managed, to the contrary - most money in FX is hedged, or transactional. FX as an asset class per se is a growth emerging asset class, and may be the 'stock market' of the 21st century, what the stock market was to the 20th century. But at the moment, the idea of investing in FX as an asset class - is just in its infancy. The more problems associated with stocks, the more that will change. And while the Fed's been doing a great job propping the stock market, inflating assets artificially usually doesn't end well.
Here's the 3 most important things stock investors need to know about FX:
1) No one has to buy a stock. Businesses need FX. There's a huge difference.
2) Rich families, old money, always has FX in their portfolio. Yes, it's partly because of their international exposures, but Soros family office made a hefty mutli-billion profit on "Brexit Day."
3) Big Wall St. firms that everyone perceives as 'credible' - make huge profits in FX. In the case of many banks, not to name names - their FX profits have kept them alive. Some of these banks are being eaten alive like a cancer from the inside, with losses on complex derivatives that no one understands exept a few quants, unable to grow in an environment of ZIRP and NIRP (Negative Interest Rate Policy). In many cases, their FX profits have literally kept them afloat. And to put the icing on the FX cake, many of their FX profits can be flexible for their accounting departments to use them in times of need (i.e. "Currency Headwinds").