When investors step on the government's toes

Investors the world over specialize in spotting trends, or at least they try to, in order jump on the bandwagon before it gets away from them. Often the mere act of heavyweight investors joining a trend is enough to reinforce it, at least for a while. And during that time, at least, everyone on that bandwagon gains. But what happens when the trend happens to be one the government doesn't like? What happens if the government feels the speculators are causing damage to the state? What if it hints that it might curb their hands?

That's precisely the situation of tens of thousands of speculators who bet against the euro, the British pound and Greek and Spanish government bonds. They believe that the euro bloc is in deep trouble, that Germany and the other stronger members of the union will refuse to guarantee the debts of their feebler partners and the euro will weaken. Some hedge fund managers think their move against the euro is their "deal of a lifetime," after which they will be able to retire to their yachts.

But the governments don't like it. Two weeks ago some of the world's biggest hedge fund managers met for a cozy networking dinner. When the future of the euro came up for discussion some of them said they thought it would continue to weaken and that they'd bet against it.

The U.S. Department of Justice Antitrust Division subsequently began to probe whether the hedge funds were colluding illegally.

Such dinner parties are common, the euro was perhaps the seventh item on the agenda and it isn't clear what the violation of law is supposed to be. The charge of collusion seems preposterous. But the message is clear: Washington is telling the hedge funds not to gang up on the euro.

There have been broader hints, too. In recent weeks there have been reports that the Greek and Spanish secret services are trying to identify speculators who bet heavily against bonds issued by the governments. Luxembourg Prime Minister Jean-Claude Juncker, who is also head of the Euro Group of euro zone finance ministers, outdid them all when he called on the governments to show the "primacy of politics" over the markets and said that if speculators ignore Greece's measures to heal its economy Europe would have to make decisions that stop them.

He didn't elaborate on the actions that Europe might take except to say that "we have the instruments of torture in the basement" and would not hesitate to "display" them.

Far from the euro zone, Chinese Premier Wen Jiabao sent a similar message to his own country's speculators. In his annual address on Friday he vowed to crush real estate speculators and to curb unnecessary property development.

Governments don't only threaten, they often act. At the height of the global economic crisis, as banks tottered, a number of states imposed restrictions on short-selling, stopping investors from betting against the banks.

States have tools that they can use to control the markets: Budgets and interest rates are two examples, but if they don't do the trick a state under threat won't hesitate to break the rules.

It might bar the movement of capital by banning investors, local or foreign, from certain types of transactions, such as short-selling.

Measures of this type are considered last-ditch. But the International Monetary Fund itself, that bastion of financial conservatism, recently published a study showing that states that clapped restrictions on capital movements weathered financial crises better than states that refrained.

Governments can also intervene by buying or selling currency. In recent weeks the Swiss central bank has been doing just that. This weekend Japan's central bank said it would consider monetary-easing measures - a hint that it could start selling yens for the first time since 2005.

What does all this mean for investors? That's an easy one.

Before opening an investment position, consider whether it steps on governmental toes or bucks the central bank.

Just a short week or two ago the entire world was betting against the euro. The number of contracts that would cash in if the dollar were to climb was the highest since September 2008.

For just that reason nothing would gladden European governments more than a strong rally by the euro, hitting hedge funds and speculators where it hurts.

Here in Israel, meanwhile, thanks to the country's relative financial robustness there is no particular pressure on Israeli government bonds. That didn't stop the central bank from meddling in the markets, though. Bank of Israel Governor Stanley Fischer stepped into the currency market time and again, halting the appreciation of the shekel in its tracks. So far anyone who bet against Fischer, hoping the dollar would drop back to NIS 3.50, has lost money.

There's another thing besides the shekel-dollar exchange rate that's been bothering Fischer and the government in Jerusalem, and that's the increase in housing prices. Fischer has expressed his concern on a number of occasions, although he has also said that he did not feel that there was a bubble at work. But home prices are continuing their steep climb and there are those who view the Bank of Israel's directive to banks to increase the cost of borrowing for purchasing groups as an attempt to stop the increase.

If you're considering buying real estate for investment purposes, keep in mind that Fischer may be waiting for an opportunity to prick the bubble and deflate those home prices.