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Kelly: Weekend Could Show Who's Swimming Naked

Brian Kelly
Friday, 9 Apr 2010 | 10:15 AM ET

On Wednesday's Fast Money Halftime Report I said that a good 10-year auction would be the catalyst for us to reverse our short position in US Treasuries and initiate a long position — true to our word we did just that. The note auction was stellar and the macro news this week has been supportive of a flight to safety.

You Say RMB, I Say Yuan, We All Say Flexibility

In January on Fast Money, I talked about the high probability for a Yuan revaluation — my thesis then as now, is a revaluation is necessary economically and is politically beneficial to China. (Watch the video below.)

Next Big Market Shock: China?
Discussing whether China will revalue the Yuan, with Brian Kelly, Kanundrum Capital and the Fast Money team.

Economically, it appears China has lost control of their money supply. By pegging the Yuan to the US dollar the attempted monetary tightening has failed. The failure is a result of the Unholy Trinity described by Nobel Laureate Mundell — an undervalued Yuan has kept Chinese goods cheap, benefiting exporters. Since their customers are not impacted by domestic monetary policy these exporters are also immune to domestic monetary policy. The net result — exporters are flush with cash and money supply grows unchecked.

This week, the New York Times has reported that a revaluation may be days away — we would applaud this move, but are concerned it may be too little too late. In order to slow M2 growth to meet government targets the Chinese must slow the growth in M2 as much as it slowed after 9/11 and the Lehman bankruptcy. This would constitute a major shock to the system. The alternative is to live with persistently high and potentially uncontrollable inflation.

While we have been impressed by the communist nation's capitalistic maneuvers to date, we are concerned that the scale of the policy moves required may be beyond the scope of even the most ardent free market central banks. Using the US as an example, the slightest increase in rates set off the financial nightmare that began as the "sub-prime crisis." China's lending practices have been compared to the US during the 2000's and without the automatic stabilizers of the free market it is likely that tremendous imbalances exist.

In the word's of Warren Buffet...when the tide goes out we see who has been swimming naked.

Twelve Axes

In the Odyssey, Odysseus endures a decade of torment at sea until he finally washes ashore naked. In his final climatic scene he shoots an arrow through 12 axes and wins the heart of Penelope. Modern day Greece is currently experiencing its climatic scene. Greek bonds yields are at the highest levels since the birth of the Eurozone and chatter of credit lines disappearing have swept the marketplace. The market has finally awoken and realized that the so-called bailout was just a myth and now the heavy lifting must be done. Climatic scenes are dramatic and short and as the weekend approaches we expect that European finance ministers will be spending time working on a real rescue package.

On the extreme end of the risk spectrum investors can play a weekend rescue package in Greece by buying National Bank of Greece as we did yesterday. As a large holder of Greek government bonds, National Bank of Greece should benefit from any decline in bond yields as a result of a rescue. To be sure, this trade is not for the faint of heart.

The arrow has left the bow...will it hit the axes?

Brian Kelly is the founder of global investment firm Kanundrum Capital.

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Trader Disclosure:
Kanundrum Capital is long US Treasuries, National Bank of Greece (NBG)
Kelly is long National Bank of Greece

Trader disclosure: On April 9, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Terranova Owns (HES), (TER), (AXP), (YHOO), (APA),; Terranova Is Short (LCC), (XLY); Finerman's Firm Is Short (IYR), (IJR), (MDY), (SPY), (IWM): Finerman's Firm Is Long S&P Puts: Finerman Owns (AAPL), (USO); Finerman's Firm Owns (BAC), (BAC) Leap; Finerman Owns (BAC) Preferred, (BAC), (BAC) Calls; Finerman's Firm Owns (CASY); Finerman's Firm And Finerman Own (JPM); Finerman's Firm And Finerman Own (BBY); Finerman's Firm And Finerman Own (WFC) Preferred; Grasso Owns (LPX), (ASTM), (ABK), (AAPL), (BAC), (BGP), (C), (CVGI), (COST), (JPM), (NEM), (PRST), (WMT), (PFE), (BA), (T); Iuorio Owns (AAPL), (WMT), (FXA), (FXC); Iuorio Owns (SPY) Calls; Iuorio Owns (QQQQ) Calls; Iuorio Owns (USO) Puts; Iuorio Owns (GLD), (GLD) calls; Iuorio Owns (FXE) Puts; Jon Najarian Owns (PALM); Jon Najarian Owns (JPM) Preferred; Jon Najarian Owns (GOOG) Put Spreads, Owns (AAPL) Call Spreads; Kelly Owns (NBG), (FRE); Karabell Owns (FCX); Seymour Owns (AAPL), (AA), (BAC), (BP), (INTC), (MSFT)

For Tim Seymour
Seygem Asset Management Owns (POT)

For JoeTerranova
Terranova Works For (VRTS)
Terranova Is Chief Market Strategist Of Virtus Investment Partners, Ltd.
Virtus Investment Partners Owns More Than 1% Of (XLU)
Virtus Investment Partners Owns More Than 1% Of (IGE)
Virtus Investment Partners Owns More Than 1% Of (XLY)
Virtus Investment Partners Owns More Than 1% Of (DBV)
Virtus Investment Partners Owns More Than 1% Of (XLP)
Virtus Investment Partners Owns More Than 1% Of (XLB)
Virtus Investment Partners Owns More Than 1% Of (XLV)
Virtus Investment Partners Owns More Than 1% Of (XLI)

For Steve Grasso
Stuart Frankel And Its Partners Own (LPX)
Stuart Frankel And Its Partners Own (CUBA)
Stuart Frankel And Its Partners Own (CVGI)
Stuart Frankel And Its Partners Own (GERN)
Stuart Frankel And Its Partners Own (HSPO)
Stuart Frankel And Its Partners Own (MERC)
Stuart Frankel And Its Partners Own (NWS.A)
Stuart Frankel And Its Partners Own (NXST)
Stuart Frankel And Its Partners Own (NYX)
Stuart Frankel And Its Partners Own (PDE)
Stuart Frankel And Its Partners Own (PFE)
Stuart Frankel And Its Partners Own (PRST)
Stuart Frankel And Its Partners Own (RDC)
Stuart Frankel And Its Partners Own (TLM)
Stuart Frankel And Its Partners Own (XRX)
Stuart Frankel And Its Partners Own (SDS)
Stuart Frankel And Its Partners Are Short (QQQQ)
Stuart Frankel And Its Partners Are Short (CL)
Stuart Frankel And Its Partners Are Short (AAPL)

For Brian Kelly
Kanundrum Capital Owns (MS)
Kanundrum Capital Owns (FRE)
Kanundrum Capital Owns (FNM)
Kanundrum Capital Owns (VMC)
Kanundrum Capital Owns (POT)
Kanundrum Capital Owns (GOOG)
Kanundrum Capital Owns (NBG)
Kanundrum Capital Is Long Dollar
Kanundrum Capital Is Long Treasuries
Kanundrum Capital Is Short Euro
Kanundrum Capital Is Short Yen
Kanundrum Capital Is Short Franc

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