Currency Currents - July 15, 2009

Key News
• China’s foreign-exchange reserves, the world’s biggest, topped $2 trillion for the first time. (Bloomberg)
• The German manufacturing sector’s work force decreased by 2.3 percent in the year to May, its sharpest decline in five years, government data showed Wednesday. (AP)
• UK unemployment climbed by a record 281,000 to hit 2.38 million in the three months to May, the highest level since October 1995. (Times)
• UK consumer price index fell to an annual 1.8% in June, from 2.2% in May.

Key Reports Due (WSJ):
8:30 a.m. June Consumer Price Index: Expected: +0.7%. Previous: +0.1%.
8:30 a.m. June Consumer Price Index, ex-food energy: Expected: +0.1%. Previous: +0.1%.
8:30 a.m. July Empire State Fed Manufacturing Survey: Expected: -4. Previous: -9.41.
9:15 a.m. June Industrial Production: Expected: -0.6%. Previous: -1.1%.
9:15 a.m. June Capacity Utiliztion: Expected: 67.9. Previous: 68.3.
10:30 a.m. Jul 10 US Energy Dept Oil Inventories
2:00 p.m. Federal Reserve FOMC Minutes

Quotable

“Bankers know that history is inflationary and that money is the last thing a wise man will hoard.”
Will Durant

FX Trading – A weak dollar scenario…a policy prescription from Mr. Soros?
We do our best to build alternative plausible scenarios that are in competition to our current trading positions; we say our best because we know by virtue of taking a position, the bias already exists. One of the scenarios we laid out recently in a seminar was our view the dollar had the potential to become the carry trade currency (borrow dollar at low rates and reinvest in higher yielding asset classes) should the US government conclude a weak dollar is what’s needed to get “things moving again” and move back into an implicit weak dollar policy environment (yellow area in the chart below).

This would be an attempt to take us back to the midst of the last cycle, whereby dollar-based credit, enhanced by newly manufactured derivative securities, was pumped out to boost financial asset markets far and wide—thus the boom in the current account deficit (yellow area in the chart below).

Notice the subsequent improvement in the current account deficit in the chart above as the credit crunch has led Mr. US Consumer to spend less and save more (a nod to falling energy prices too).

As we said, the credit crunch was a game changer. Credit markets globally seized up, as you know. Thus, it became especially important the world reserve currency did not fall off the cliff. This we think sparked a change in the US government implicit weak dollar policy; we think it occurred in March of 2008, before the US dollar caught its huge rick aversion bid in July 2008 (red area in the first chart above).

Why March ’08? Keep in mind the Fed is the world’s de facto central bank. Despite all its ills, the Fed’s raw material for policy action is the dollar–the world reserve currency. A dollar crisis and a credit crisis would likely have plunged the world deep into depression.

Thus, the dollar garnered unrecognized support from mid-March (bottoming on the exact same day coincidently that Bear Stearns was rescued) to July ’08 before it soared on risk as everyone started deleveraging and hiding in US Treasuries at the same time (the big move in the dollar and bond prices in the chart below).

We refer to the Mar –Jul ‘08 as unrecognized and think the Saudi’s played a role i.e. stopped reallocating dollar for dollar oil revenue into another currency. Our market evidence/guess was based on our view that something must have changed because oil prices jumped 40% during that period, while the dollar rose 2%. It was an abrupt change in what was a very high and negative correlation between crude and the dollar as you can see in the chart below (rectangles).

So, now maybe the US government in its infinite wisdom as global stimulator of last resort has decided credit market have healed enough, and it’s time for dollar-based credit to be pumped out again…

Here is a possible policy prescription that seems to fit the script of Economic Czar Larry Summers…interestingly this script is from George Soros, writing in his book Alchemy of Finance, back in August of 1985:

“The new constellation is almost the exact opposite of the Imperial Circle [Soros’ term for the financial policies arranged during the Reagan administration]: a weak dollar and subdued economy are accompanied by lower budget and trade deficits and, most important, by lower interest rates. With the help of a weaker dollar, prices are going to rise somewhat faster than previously, rendering the change in real interest rates all the more pronounced. Declining real interest rates, together with a possible pickup in exports, will replace the budget deficit as the main driving force in the economy. Rising prices will help counteract the erosion of collateral values and prevent a self-reinforcing, deflationary process from taking hold. At the same time, the coordination of economic policies will keep the decline of the dollar within bounds, thereby eliminating the possibility of a self-reinforcing inflationary process. The outcome would be a greater degree of stability than we have experienced since the breakdown of Bretton Woods.”

All good in print, but managing the dollar is still equivalent to herding cats. But, we can see the attraction this would have for those who reside in hallowed halls of government:

• Pump up consumer wealth effect with rising collateral values
• Generate some inflation in a world now threatened by deflation
• Keep the Chinese happy with a lower but stable dollar
• Rising exports continue to balance growth keeps the current account in check

This view may be all wet, but maybe it’s plausible enough to consider. Stay tuned.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Black Swan Currency Currents - July 15, 2009

Currency Currents

Key News
• Mexico Faces ‘Unsustainable’ Gap, Morgan Stanley Says (Bloomberg)
• Bank of Canada Survey Says Companies See Best Sales Prospects Since 1999 (Bloomberg)
• Dow Climbs 2.3% In Broad Rally (WSJ)

Key Reports Due (WSJ):
7:45 a.m. ICSC Chain Store Sales Index For July 11 Previous: +0.1%.
8:30 a.m. June Producer Price Index: Expected: +0.1%. Previous: +0.2%.
8:30 a.m. June Producer Price Index,ex-food & energy: Expected: 0%. Previous: -0.1%.
8:30 a.m. June Retail Sales: Expected: +0.4%. Previous: +0.5%.
8:30 a.m. June Retail Sales, ex-autos: Expected: +0.6%. Previous: +0.5%.
8:55 a.m. Redbook Retail Sales Index For July 11: Previous: -4.2%.
10:00 a.m. May Business Inventories: Expected: -0.8%. Previous: -1.1%.
4:30 p.m. Jul 10 API Oil Industry Report
5:00 p.m. ABC/Wash Post Consumer Conf For July 11: Previous: -52.

Quotable

“And none will hear the postman’s knock
Without a quickening of the heart.
For who can bear to feel himself forgotten?.”

W.H. Auden

FX Trading – Earnings, Stocks and Dollars
First-quarter earnings season, characterized by low-ball estimates and less-bad-than-expected results, helped drive a sharp rally in stock markets and risk appetite.

Second-quarter earnings season began last week. Expectations were rather dismal coming in, but that could already be changing.

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Stocks are stronger as this week gets going, as is risk appetite, because the market is expecting record-setting numbers out of Goldman Sachs today. (I have no comment on Goldman Sachs.) We’ll simply have to watch and see what this earnings season morphs into.

A concern I have, watching stocks and the dollar of late, is that even while there’s been a steady hit to risk-appetite (stocks) over the last month the US dollar has gone directionless. Typically we’d expect the buck to mirror inversely the move in stocks.

That hasn’t happened. Are investors really that frightened by the greenback?

It will be interesting to see how the buck behaves if stocks strengthen for an extended period of time. A tangible breakdown in the US dollar Index on renewed risk-taking could offer an indication of just how bearish investors are on the dollar.

John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com

Black Swan Currency Currents - July 14, 2009

Currency Currents - July 13, 2009

Key News
• The last time stocks in developing countries got this expensive was in October 2007, just before the MSCI Emerging Markets Index began a 12-month tumble that erased half its value. (Bloomberg)

• Russia’s economy may shrink between 8 percent and 8.5 percent this year. (Bloomberg)
• China’s central bank pledged to do more to guide loan growth as a record expansion in credit adds to the risks of asset bubbles and bad debts.

Key Reports Due (WSJ):
2:00 p.m. June Federal Budget Balance: Previous: -$189.65B.

Quotable

“This new American economy, [Larry] Summers hopes, will be ‘more export-oriented’ and ‘less consumption-oriented’; ‘more environmentally oriented’ and ‘less energy-production-oriented’; ‘more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented’; and, finally, ‘more middle-class-oriented’ and ‘less oriented to income growth that is disproportionate towards a very small share of the population’. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.”

Financial Times

FX Trading – Dollar Doom Crowd Memory Hole!

If you’ve followed the newsletter crowd much at all, many love to talk about the dollar, but few really risk their well-being trying to make money for real people trading it (it’s a beautiful thing being a guru with impunity).

This cocky crowd of gurus, often wrong but never in doubt, was till recently forever pontificating on the sole cause of future dollar doom, heck it’s the soaring current account deficit they said; there is no way out. Of course now that the current account deficit is improving rapidly on the back of global rebalancing, these same newsletter clowns continue to find new doom and gloom theories to latch unto (maybe to sell more newsletters?), as their old current account deficit doom and gloom theme slips down the proverbial memory hole.

Below is a chart showing the rapid improvement in the US current account deficit—the May reading was the smallest since December 1999. US consumers are buying less and saving more, which is the primary reason for improvement (no doubt the decline in energy prices has helped too). And interestingly, US exports even increased in May, as imports declined…hmmm!

So does this mean the dollar will automatically rebound? Not necessarily. We have never been believers you can trade the dollar in any reliable time frame from the current account stats alone.

But what we think it does say is that US-based dollar credit (read dollar supply) is receding from the global economy faster than Uncle Sam can throw it back in. If you consider the considerable fall in the pace of global derivative production and the private deleveraging still taking place and the seemingly increased pace of US savings, then our view/guess (held for many months) the US current account will go positive at some point, because of this structural change in the global economy, is inching up the probability scale.

If the CA deficit improves here, it has to worsen somewhere, in a world where global trade and capital flows must balance. Of course you know our story by now: the current account surplus/export model countries take the brunt of readjustment. This readjustment does not have to be as painful if export-driven countries can fire up domestic demand—it’s not impossible.

But interestingly if current trends to continue, it will likely lead to a more balanced world, one where maybe Larry Summers (Quotable above) views a chance of playing out i.e. as former current account surplus country domestic demand increases, US export demand increases, allowing the US to become more “export oriented” and less “consumption oriented” (already happening) and more “bio- and software- and civil-engineering-oriented” [which is the stuff a growing emerging world would demand from the US] and less “financial-engineering-oriented.” Not a bad scenario for the US dollar after all.

For the doom and gloom crowd it’s a farcical view—we realize that. It just doesn’t create urgency and doesn’t play into what buyers want—validation of their current views. But, if you have to make money trading, instead of just talking about the dollar, it might be a view to keep in mind instead of letting it slip down the memory hole.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Black Swan Currency Currents - July 13, 2009

Currency Currents - July 10, 2009

Key News
• China’s overseas sales slid 21.4 percent in June from a year earlier, the customs bureau said today on its Web site, after a record 26.4 percent drop in May. (Bloomberg)
• The cost of borrowing longer-term U.S. dollars in the London interbank market continued to fall Friday, with the key three-month rate reaching its lowest since the advent of British Bankers’ Association Libor fixings back in 1986. (WSJ)
• Producer prices fell at a record pace in Japan 6.6 percent. (Bloomberg)

Key Reports Due (WSJ):
10:00 a.m. May Trade Balance: Expected: -$30.0B. Previous: -$29.16B.
10:00 a.m. June Import Prices: Expected: +1.9%. Previous: +1.3%.
10:00 a.m. Mid-July Reuters/U Mich Sentiment Index: Previous: 69.

Quotable

“All war is based on deception.”

Sun Tzu

FX Trading – China Panic!
China is dead in the water without exports. They are in panic mode. That is why they are flooding their economy with massive amounts of capital and suppressing any hint of decent everywhere. That is why they have chased out the major financial news outlets, and forced them to take all cues from the state. But no matter how many bridges they build, excess capacity they expand, stock market propping they do, dollar reserve currency jawboning they employ, or internet sites they shut down, it doesn’t change the fact that exports have crumbled and until Mr. US Consumer starts buying again, it will get worse instead of better. The brunt of global rebalancing is upon, as it is for all those so dependent on exports.

Our piece earlier this week warning of falling BRICs is based on China as the major disappointment that could trigger another major run out of emerging markets. And that means the dollar (likely yen too—more on that from our special guest below) catches a major risk bid.

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————————————————————————————————————Given that China seems to be the corporate earnings touchstone, the impact of disappointment would most likely rippled through the earnings forecasts of all those companies who believe that stimulating infrastructure, property, and stock markets, is the same as stimulating either domestic demand or exports. We think analysts will learn that GDP growth and the real stuff that makes an economy work can at times be two completely different animals. That new realization would likely hammer US stocks in its wake—green shoots morph to brown weeds.

Bottom line: we think there is only you need to know about what’s happening in China, and it is this…

What is interesting is that these are OFFICIAL statistics! It makes one wonder—a skeptical mind that is.

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com

Black Swan Currency Currents - July 10, 2009

A guest piece today from Yves Lamoureux, Investment Advisor, Blackmont Capital Inc.

Systematic desensitization from reality…..

Economic discourse has hardly changed. What was not seen and forecasted is rarely challenged today. The same dead heads speak and we listen. It becomes increasingly difficult for the average man to keep his critical thinking at this important juncture. Herd mentality is strong and responsible for herd thinking. We on the other hand kept our deflation cap on and never changed optics unless we had to.

Recent optimism is misplaced. Never has an economy rebounded vigorously in a low rate environment. Put another way around, there is no more magic bullets. The scale of the excess is going to be matched by the length of the adjustment. We simply love the unwinding theme since early 2007 and part of that strategy has been to be long yen. Here is an excerpt from “Why financial air raids are about to start “written in March 2007.

I believe one way of being naturally short stocks is to be long “things.” Preferably Oil, Gold & Yen. In our essay we pointed at the carry trade as culprit. There are of course more problems to come. This is what we will find out in the “price discovery”. The Yen will take time to unwind. Especially given how fashionable it had become for Japanese investors buying Uridashis. At the point of recognition we will still have another 50% move to unwind the trade. It is exactly at the time of maximum anxiety that investors will repatriate funds invested overseas. This could become an enormous problem for all markets. Confidence cycle analysis points down to 2011.

We believe today that we are close to that recognition point which will mark that half way point in the great unwinding. As a rule this suggests more painful corrections ahead. You will notice from the graphs the great tendency of the yen to lead stocks (charts below). It did it before and looks to be doing it again. We recently broke very critical level and this does not bode well for the market. It is a signal of more deflation ahead.

Japanese yen – US $

Dow Jones Industrial Average:

Climbing a wall of worry would actually be a good feeling .People seem empowered by talk of greenshoots and this mass hysteria can only lead to trouble. Systematic desensitization is a type of behavioral therapy used in psychology to help overcome phobias. The phobia of risk in the stock market is gone. We can only thank the master puppeteer for that.

Yves Lamoureux, Investment Advisor, Blackmont Capital Inc.

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CI Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

Currency Currents - July 09, 2009

Key News
• The Dollar: It’s an Overhang, not a Hangover One person’s perspective at the Council on Foreign Relations blog.
• Bank of England Keeps Purchase Plan at $202 Billion, Leaves Rate Unchanged (Bloomberg)

Key Reports Due (WSJ):
8:30 a.m. Initial Jobless Claims For July 4 Week: Expected: -4K. Previous: -16K.
10:00 a.m. May Wholesale Trade: Expected: -1%. Previous: -1.4%.
10:00 a.m. DJ-BTMU Business Barometer For June 26: Previous: +0.1%.
N/A June Chain-Store Sales

Quotable

“Money is the barometer of a society’s virtue.”

Ayn Rand

FX Trading – Random Thoughts: Stimulus, Confidence, T-Notes, Dollar (yen)

It’s Thursday, the currencies are retracing again so we figured what better time than now to throw together some random thoughts on the markets, news and whatever else. Enjoy!

Stimulus in the Headlines

Bloomberg.com is guiltiest here, as they seem to have a strict model used in formulating their headlines and stories. Anyway, it’s starting to get annoying when everything “positive” coming out of China is credited to the government’s “stimulus”. Sure, some items have been directly or indirectly influenced by the stimulus, but to the extreme degree with which it is painted by reporters?

Car sales, corporate earnings, share prices, commodity demand, manufacturing gains … all “undoubtedly” boosted by stimulus. But what about loan growth? The number of loans issued in June jumped fivefold from the year before. This 2009 lending surge is certainly a big reason for much economic activity. Tie it back to stimulus if you’d like, but be sure to tie the subsequent asset bubble back to stimulus too. In fairness, Bloomberg did cover this too, but it is there emphasis on the consensus that irks us a times. But maybe this is part and parcel to why the consensus view consistently gathers such momentum.

Australia: What’s in the water Down Under?

Whatever the Australians are drinking is either really refreshing … or it’s making them crazy. I say this because yesterday was a release of consumer sentiment. After a nearly unprecedented jump in sentiment last month, the most recent estimate climbed another 9.3%. The last two months represent the largest two-month increase since this survey began back in 1975; this 23.2% two-month rise far outpaced the next biggest 18.8% two-month rise back in 1992.

With many economic gauges still flashing mixed signals. It’s believed that an improvement in national accounts is helping the cause. Additionally, two pieces of stimulus have been passed through Australia and now, in the wake of the second stimulus, it seems the handouts are having the desired effect. I’m just surprised I didn’t see a headline crediting the surge in confidence to China’s stimulus!

A 10-Year Auction for the Ages

Late in the trading day yesterday a 10-year Treasury Note auction went off extremely well. It was noted as one of the most successful auctions in several years. The bid-to-cover, if you’re interested was above three. In other words, there was more than three times as much demand than the amount eventually sold to bidders.

What’s it mean? Well, the kneejerk reaction was positive for the stock market. But stocks faded as the results set in. What this auction, plus the fact that 10-year yields are sharply off their June highs, means for the markets could be a precursor to renewed risk aversion. The June unemployment numbers aren’t sitting well. Perhaps that’s given many reason enough to reexamine several other factors and conclude that recovery may be much further away than the recent spurt of optimism led us to believe.

US Dollar: A whole lot of nothing going on.

The range-bound, choppiness, backing-and-filling, sideways stuff continues. Some of the currencies, as paired against the dollar, have broken somewhat key technical levels. But so far it’s been fairly near-term stuff. And a look at the US dollar index still reveals the big snooze-fest (of course the Japanese yen is the exception; maybe some Asian money hiding there on China risk?):

The longer the sideways price action the more powerful the breakout move is usually the rule from a technical perspective…stay tuned.

Regards,

John Ross Crooks, III
Black Swan Capital LLC
www.blackswantrading.com

www.blackswantrading.com

Black Swan Currency Currents - July 09, 2009

Currency Currents - July 8, 2009

Key News
• Policy makers on both sides of the Atlantic launched an effort to crack down on what they called speculation in oil markets, underscoring concerns that a sharp rise in oil prices could worsen the global economic downturn. (WSJ)
• A steep drop in exports and corporate investment led to a record economic contraction in the euro zone in the first quarter of 2009, the European Union’s statistics office said on Wednesday. (Reuters)
• Chinese authorities are detaining Rio Tinto Ltd’s top iron ore negotiator on suspicion of espionage and stealing state secrets, Australia said on Wednesday, threatening to strain already fraying ties.

Key Reports Due (WSJ):
7:00 a.m. July 1 Mortgage Refinance Applications: Previous: -30%.
10:30 a.m. July 2 U.S. Energy Dept Oil Inventories
3:00 p.m. May Consumer Credit: Expected: -$7.7B. Previous: -$15.7B.

Quotable

“We are the cause of all the values that you covet, we who perform the process of thinking, which is the process of defining identity and discovering causal connections. We taught you to know, to speak, to produce, to desire, to love. You who abandon reason-were it not for us who preserve it, you would not be able to fulfill or even to conceive your wishes. You would not be able to desire the clothes that had not been made, the automobile that had not been invented, the money that had not been devised, as exchange for goods that did not exist, the admiration that had not been experienced for men who had achieved nothing, the love that belongs and pertains only to those who preserve their capacity to think, to choose, to value.

“You-who leap like a savage out of the jungle of your feelings to the Fifth Avenue of our New York and proclaim that you want to keep the electric lights, but to destroy the generators-it is our wealth that you use while destroying us, it is our values that you use while damning us, it is our language that you use while denying the mind.”

Ayn Rand

FX Trading – Deflationary Spiral

Source: WSJ

Above is the yield curve. Notice how far rates in the low-end (left side) of the curve have fallen. This is good for banks but likely bad for us who want to borrow and not too good for those who depend on deposits for income. The spread between the long-end, where banks do lend, and the short-end, where they do borrow, is quite high. It is quite profitable to lend. But it is also quite profitable not to lend because the Fed is paying a nice little interest rate on reserves at the bank. So in effect, the banks can hold reserves and garner a risk free rate of interest from the Fed.

So, if you are a bank and have some bad paper still hanging around, and are still in need of personal healing, it likely makes more sense to grab the risk free rate and let the political chips fall where they may on lending…heck, the US administration has bigger fish to fry, like determining how to dole out socialized medicine to the highest politically connected bidders, fixing executive pay by nasty little bureaucrats who never met a payroll, and making sure there isn’t too much profit making in the oil market by those evil speculators who risk their hard earned private capital everyday to make a market liquid and don’t complain when they lose. Yes, the US government is far too busy to understand what motivates real profit-seeking players in the real world.

Thus, the Fed has increased reserves by “$858 billion in the last 12-months ended May. But excess reserves on the books of depository institutions have increased by almost as much, $842 billion. So, in the 12 months ended May, 98% of the increase in reserves created by the Fed has simply ended up as idle reserves on the books of depository institutions,” according to Northern Trust very smart economist Paul Kasriel.

This leads to the following equation (our apologies to real economists and econometricians):

Deflation =Massive Government Stimulus (eating private stock of capital) + Increases Money Supply + Plunging Monetary Velocity + Huge Reserves + High Savings + Tight Lending Standards + Private Deleveraging of Bad Paper + Global Tax of Rising Commodities Prices + Rising Unemployment + Obliteration of the Export Model

Prices are falling just about EVERYWHERE in case the inflationist crowd hasn’t noticed. Of course our illustrious government has noticed, thus the talk of yet another stimulus to eat away at more private capital and continue to add leverage to solve a problem that was created by leverage.

So let’s keep regulating away the ability to make profit so the market won’t clear or keep thinking of ways to tax it away to hand over to the moochers or spend it away for political power and then wonder why we are entering a global deflationary spiral?

Who is John Galt?

Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
www.blackswantrading.com

Black Swan Currency Currents - July 08, 2009

Currency Currents - July 07, 2009

Key News
• Earnings Will Continue Slide as Conservative Consumers Fear for Their Jobs (Bloomberg)
• Banking Regulator Warns of Risks Posed by China’s Rapid Growth in Lending (Bloomberg)
• China Will Top Government Target of 8% Economic Growth This Year, BNP Says (Bloomberg)
• Manufacturing Orders Rise Most in Almost Two Years as Economic Slump Eases (Bloomberg)

Key Reports Due (WSJ):
7:45 a.m. ICSC Chain Store Sales Index For July 4: Previous: +1.6%.
8:55 a.m. Redbook Retail Sales Index For July 4: Previous: -4.4%.
4:30 p.m. July 3 API Oil Industry Report
5:00 p.m. ABC/Wash Post Consumer Conf For July 4: Previous: -51.

Quotable

“Slump, and the world slumps with you. Push, and you push alone.”

Laurence J. Peter

FX Trading – Financial Climate Change: Debatable?

Climate change — it’s taken on a meaning beyond the literal. It is “global warming” … it is carbon emissions … it is saving the planet … it is ridiculous.

For one, the attention this yet-to-be-proven phenomenon receives from non-scientists (read: politicians) is remarkable. And it makes me wonder: are they this devoted to preventing financial climate change too?

Perhaps they are.

We’ve noted our view several times in the pages of Currency Currents: the recent collapse by the global economy boils down in many ways to imbalances. The solution, as we see it, means balancing out those imbalances. But for that to happen it would require the financial climate undergo major change.

The market is doing its best to see this change through. But policy makers mostly seem determined to keep financial climate change on ice.

What’s the reason? Well, perhaps in this exceptionally globalized world the “leaders” seek to keep everyone on an even playing field (a perverse concept). After all, why should one country’s economy suffer while another’s succeeds? (Maybe because of a little thing called competition, but let’s not let free-market myopia impede economic togetherness.)

No, let’s instead do our best to keep market emissions from over-cooling the global economy. There are plenty of ways we can achieve this:

1) Stimulus! Stimulus! Stimulus!
2) Quantitative easing.
3) Deficit spending.
4) Lending facilities.
5) Pigeon-holing Central Banks.

I’m sure the list could be much longer, but does it even matter how much longer?

The point is, policy created to stimulate the economy and bring global dynamics back in line with pre-crisis mode only makes sense for some; let’s call it a convenient truth. The inconvenient truth in all this is being overlooked. Ironic, I know.

Looking just at the US in this financial climate change debate, the goal seems to be ‘restore confidence’ instead of ‘restore the economy’. Yes, yes … I know confidence can go a long way in propping up an economy; but if you simply try to rebuild on a bad foundation then you’re bound to run into troubles far sooner than if you put forth the effort to lay a new, more solid foundation. The aim with confidence restoration goes exactly to the point of restoring the old economy.

As far as the US is concerned, it seems to me we’ve been given an excellent opportunity to make real changes to the financial climate (or simply allow them to happen), with the ultimate goal of solidifying and improving our position in the international economy. It may mean additional short-term pain … but we should never waste a good crisis, I’m told.

If we continue to succumb to international peer pressure and try to take on the image of ‘global healer’, then we’ll watch our economic clout (and everything that follows) further deteriorate.

And if you need to tie this back to currencies, it’s basically the underlying view of why so many investors remain negative on the US dollar. Yes, the buck has lost a lot in the last eight years, but, on a relative basis, the US has a whole lot left that can still be lost; that potential doesn’t bode well for the dollar.

We’ve been expecting a major wave of risk to change the intermediate-term prospects for the US currency, bringing more safe-haven capital into the US. Whether or not this occurs remains to be seen. Even if we’re proven right and the dollar catches a bid over the next 3-6 months, what’s stopping the dollar from rolling over again into a long-term downward spiral.

Perhaps we should spend less time trying to prevent financial climate change.

Regards,

John Ross Crooks, III
Black Swan Capital LLC
www.blackswantrading.com
www.blackswantrading.com

Black Swan Currency Currents - July 07, 2009

Currency Currents - July 06, 2009

Key News
• The death toll in violent clashes in China’s northwestern Xinjiang region rose sharply Monday, with the government saying that 140 had been killed in what appears to be one of the deadliest episodes of unrest in China in decades. (WSJ)
• Indian stock markets plunged Monday on concerns of a ballooning fiscal deficit. (AP)
• South African house prices fell the most in 23 years last month. (Bloomberg)

Key Reports Due (WSJ):
10:00 a.m. June ISM Non-Manufacturing Index: Expected: 46. Previous: 44.

Quotable

“But Ireland, devastated by the financial crisis and suddenly anxious to cling to its rich European nurse, is unlikely to hold out much longer [they surprised the elites with a no vote on the last Lisbon Treaty referendum] and will—sometime this fall—hold another referendum in which it will most likely come up with the “right” answer. All referendums in the EU are like this: “no” votes are temporary; “yes” votes are permanent.”

Peter Hitchens

FX Trading – Beware of Falling BRICS

The BRIC countries which include Brazil, Russia, India, and China are talked about as if they are some monolithic grouping that will carry the world out of the great depression we seem to be now mired. But monolithic this group is not. And more importantly, their collective demand is not enough to do the trick even if they were a real block moving together.

China and Indian are not the best of friends, to say the least. And many analysts believe a border (shooting) skirmish at minimum may be in the offing soon, beside the fact these two are already vying for strategic control in Asia. Russia’s a one-trick energy pony; granted a very valuable pony it is, but if crude takes another breather it could spark major social unrest in the country and would definitely add to financial riskiness given Mr. Putin’s edicts for more bank lending in the midst of money running from the country already.

Brazil seems for real and is trying to hook its wagon more tightly to China, and move away from the Great Satan to the north. But, should China have an accident, even this relationship can fray (China’s exports continue to plunge and import demand is still on the wane so not sure how much longer they will keep buying Brazilian commodities anyway). Interesting too we noticed some international money was leaving Brazil last week too.

Add to this, the little “incident” China reported this morning (they have already chased a bunch of news agencies out so we have to wait for official reports) regarding violent clash in the northwestern region and you have the makings for some falling BRICs and the realization by the market of some important things:

1) BRICs are not a cohesive group
2) They never generated the demand expected even though they have gone straight up for the last four months
3) They are highly correlated with crude oil and other commodities
4) The dollar often moves in opposite direction to the BRICs

Black Swan Capital LLC
www.blackswantrading.com
www.blackswantrading.com

Black Swan Currency Currents - July 06, 2009

Currency Currents - July 2, 2009

Key News
• Ruble Bonds Exceed Dollar Sales for First Time Since ‘06 as Currency Rises (Bloomberg)
• Sweden’s Central Bank Unexpectedly Cuts Key Interest Rate to Record 0.25% (Bloomberg)
• Crisis Won’t End Until Balance Sheets Get Real (Bloomberg)
• Consumer credit down a massive 33% in Spain (Credit Writedowns)
• Italy’s deficit rose to 9.3 percent of gross domestic product in the first three months of 2009. (Bloomberg)

Key Reports Due (WSJ):
8:30 a.m. June 27 Weekly Jobless Claims: Expected: 619K. Previous: 627K.
8:30 a.m. June Non-Farm Payrolls: Expected: -350K. Previous: -345K.
8:30 a.m. June Unemployment Rate: Expected: 9.6%. Previous: 9.4%.
10:00 a.m. June 20 DJ-BTMU Economic Barometer: Previous: -0.4%.
10:00 a.m. May Factory Orders: Expected: +1.2%. Previous: +0.7%.
10:30 a.m. June 19 EIA Natural Gas Inventories
4:30 p.m. June 22 Money Supply

Quotable

“Mistakes, scandals, and failures no longer signal catastrophe. The crucial thing is that they be made credible, and that the public be made aware of the efforts being expended in that direction. The ”marketing” immunity of governments is similar to that of the major brands of washing powder.”

Jean Baudrillard

FX Trading – Come On … Who Sells Dollars Ahead of July 4th?

By the looks of it, traders might actually be respecting the holiday commemorating US Independence. The dollar is positive on the day so far.

Over the last week or so the currencies have struggled to carve out any sustained direction – the moves have amounted mostly to a whole bunch of sideways chop.

But the upshot of range-trading is that it often sparks sustained moves, in one direction or another, that can more clearly be targeted for potential profit.

Which way will we come out of this? Obviously, that remains to be seen.

Technically, as I highlighted in Currency Currents on Tuesday, in an intermediate-term time frame currencies like the Australian dollar, British pound and euro might be expected to break out to the upside … as that was their previous direction before this period of sideways consolidation began.

So we wait and watch to see how these chart patterns develop. But keep in mind, the market’s consistent reliance on the newest data has the potential to trump these technical indicators.

The two big boys on the data front today: European Central Bank interest rate decision and US Nonfarm Payrolls for the month of June.

The US jobs report comes a day earlier than normal due to the US Independence Day holiday weekend starting tomorrow. The ADP employment report yesterday was worse than expected. Though ADP is never a perfect indicator for the following Nonfarm Payrolls report, it could reduce expectations for any optimism out of today’s release.

Perhaps that’s what currency traders are pricing in to the buck already today; it us up against all majors with exception of the yen — it is flat.

As for the ECB, they didn’t do anything different. The market reaction will again be based on the follow-up comments (8:30 eastern time) and how they’re parsed. Expect rhetoric regarding a deeper recession and slower recovery.

All in all, whether or not the dollar gains some extra steam today, or not, shouldn’t yet signal anything technical for the intermediate- and long-term direction; we’ll still be stuck in the sideways churn. But if the dollar does want to embark on a sustained move higher, it better make something happen soon.

Or as they say to baseball pitchers when they step up to the plate: help yourself out. Translation: a pitcher’s goal is to win the game; a quick burst of offense could help achieve that end. It’s high time for the dollar to produce some offense if it stands a fighting chance.

We’ll be back on Monday. Have an excellent Independence Day weekend!

Regards,

John Ross Crooks, III
Black Swan Capital LLC
www.blackswantrading.com

www.blackswantrading.com

Black Swan Currency Currents - July 02, 2009

Currency Currents - July 1 2009

Key News
• The official Chinese Purchasing Managers’ Index rose to a seasonally adjusted 53.2 in June from 53.1 in May, the Federation of Logistics and Purchasing said today in Beijing in an e-mailed statement. (Bloomberg)
• Sentiment among Japan’s largest manufacturers (Tankan) rose less than estimated in June.
• German machinery and factory equipment orders were down 48 percent on the year in May. Orders from inside Germany fell by 42 percent, while those from abroad were down 51 percent.
• India’s exports fell by 29 percent in May. (AP)

Key Reports Due (WSJ):
7:00 a.m. Jun 26 Mortgage Refinance Application Survey: Previous: +5.9%.
8:15 a.m. Jun ADP National Employment Report: Expected: -400K. Previous: -532K.
10:00 a.m. Jun ISM Mfg Index: Expected: 45. Previous: 42.8.
10:00 a.m. June Construction Spending: Expected: -1.0%. Previous: +0.8%.
10:00 a.m. May Pending Home Sales: Expected: -0.5%. Previous: +6.7%.
10:30 a.m. Jun 26 U.S. Energy Dept Oil Inventories

Quotable

“The real voyage of discovery consists not in seeking new landscapes but in having new eyes.”
Marcel Proust

FX Trading – Lot of “key days” yesterday or just more head fakes?
A key day reversal is defined by Stockcharts.com as “a one day chart pattern where prices sharply reverse during a trend. In an uptrend, prices open in new highs and then close below the previous day’s closing price. In a downtrend, prices open lower and then close higher. The wider the price range on the key reversal day and the heavier the volume, the greater the odds that a reversal is taking place.”

Crude Oil: