Currency Currents - August 28, 2009
Key News
• Copper advanced in London, heading for its longest winning streak in more than two years. (Bloomberg)
• Business and consumer confidence in the 16-nation euro zone increased again in August. (AP)
• Japan’s unemployment rate rose to a record 5.7 percent in July and deflation worsened. (Bloomberg)
• Britain’s economy shrank less than previously estimated during the second quarter of the year. (AP)
• Poland’s economy grew by 1.1 percent in the second quarter. (AP)
Quotable
“The evil that men do lives after them; The good is oft interred with their bones.”
Shakespeare
FX Trading – Who leads …
Somebody flipped the switch at 10:00 EST a.m. yesterday, as oil surged and the buck sank sharply:
Oil vs. US$ Index 60-min chart:
Same chart, we added S&P 500 Futures to the mix to show how incredibly tight this correlation was yesterday.
Risk appetite on display!
It’s a simple trade it seems: buy everything else and sell the dollar, as friend of mine pointed out yesterday. Only problem is we still aren’t always good at predicting the direction of everything else. It is nice to look at these charts in retrospect, and sound smart, but it is never easy in real time.
The move yesterday is not good for the dollar bull cause, not that you would even know there was a dollar bull cause. Which goes to the point: dollar sentiment is quite bearish. One would say bottoming type of bearishness. But Mr. Market is climbing the proverbial Wall of Worry; a powerful climb indeed.
We saw a technical analyst on TV yesterday making a good point: He said everyone is expecting a correction in the stock market, but it doesn’t have to correct yet when you consider how much it fell. He said there isn’t much resistance between here and 100 points higher on the S&P. You can see that in the chart below.
And incidentally a 100 point higher move would put the S&P just at a 50% retracement level from its October high to its March low—not unusual to see stocks retrace that much and still be considered a bounce in an ongoing bear market.
Thus, a blow-off rally in stocks could mean a test of the old lows for Mr. Greenie. Then, we would know dollar sentiment will be at bottoming levels for sure.
We are all stock traders now.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents August 27, 2009
Key News
• China Curbs on Overcapacity Show Government Confident of Economic Recovery (Bloomberg)
• Housing Data Point to Market Turnaround as Buyers Help Buoy U.S. Economy (Bloomberg)
• Eurozone lending to business squeezed (Financial Times)
Quotable
“Those who have been once intoxicated with power, and have derived any kind of emolument from it, even though but for one year, never can willingly abandon it. They may be distressed in the midst of all their power; but they will never look to anything but power for their relief.”
Edmund Burke
FX Trading – One Nation, Under Government
Here we are … always ripping on China for their notorious stimulus package that is the reason behind their economic good of the last four or five months, always lambasting the analysts who keep touting China’s recovery thanks to stimulus and lending. But maybe it’s time to turn inward for a closer look at the US recovery.
Sure, we haven’t neglected the US recovery, or lack thereof, in our daily writings … but we certainly haven’t jumped on the reasons for recovery like we have elsewhere. In fact, how real is the end of the US recession that everyone seems to be talking about?
Our analysis and expectations have been largely misaligned with the ebb and flow of risk appetite; our fundamental view simply has not warranted a steadily growing appetite for risk. Sure, the pace of declines in so many areas of the economy have slowed — we recognize that. But we see a structural shift as having taken place, one that won’t allow economic prosperity to rear its head for many quarters, at least.
But that hasn’t seemed to matter because major players – government officials, central bankers, etc. – have done a heck of a job restoring a modicum of confidence that any serious crisis is behind us. That may or may not be the case; but real risk of ongoing recession certainly is not behind us, and for now this point seems to be overlooked.
Obama’s recent decision to reappoint Ben Bernanke is a testament to the fact that Bernanke’s good with “post-crisis damage control,” as Stephen Roach put it. But is he a good central banker? Has he acted appropriately with monetary policy … on a consistent basis? Those are questions for another day. He apparently has what it takes, though, to remain calm and help ease investor tension.
The government, in all their society-stimulating ways, has played a large role in damping investor concerns. You know the story: stimulus spending, propping up banks, bailing out autos, etc. They tell us they’re making sure they fix this problem that so nastily shook us senseless last year. But how long do we believe them? How far can their promises take us?
After my Tuesday column a reader pointed out the lingering idea that deficits will ultimately wreak havoc on the US economy and dollar:
In the short term, an anticipated decline in the stock markets from a vastly over bought position may send the U.S.$ higher against its counterparts. However, those trillion $ deficits are frightening, especially to foreigners like myself who hold so many U.S. dollars. Until the U.S. can begin to get its financial house in order, those trillion dollar deficits certainly do not bode well for the U.S. dollar in the intermediate or longer term and threaten the future well-being of the entire country. Pardon my abruptness but in my lifetime I have seen the U.S. go from a wealthy creditor nation to an impoverished debtor ironically relying on its former enemy, communist China to bankroll it. Some would say that more prudent fiscal management must await a clear end to this Great Recession. However, with foreigners pulling the strings, the U.S. may not have the luxury of waiting that long.
All is not lost and some major market-induced transformations may be in the works despite outside efforts that seem counterproductive. Still, it’s hard to ignore the need for more prudent fiscal management when any additional efforts seem almost destined to create more problems than they solve.
Is it possible to rein in the seemingly out-of-control spending and cash dump that’s leaving heaping piles of liability all over our balance sheet? Yes, but it will be tough. A cut in spending just may mean a cut in government. Though Americans may be a little less confident in and thankful for the government when spirits become deflated and the real pace of recovery becomes evident.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents August 25, 2009
Key News
• Court Orders Federal Reserve to Disclose $2 Trillion Loan Program Details (Bloomberg)
• China Stocks Decline as Premier Warns Economy Faces Many `Uncertainties’ (Bloomberg)
Quotable
“Pleasure cannot be shared; like Pain, it can only be experienced or inflicted, and when we give pleasure to our Lovers or bestow Charity upon the Needy, we do so, not to gratify the object of our Benevolence, but only ourselves. For the Truth is that we are kind for the same reason as we are cruel, in order that we may enhance the sense of our own Power.”
Aldous Huxley
FX Trading – Rehashing Two Key Points
Quickly, a brief market update before I revisit two components vital to global recovery, as we see it.
Yesterday the European currencies struggled while the commodity dollars firmed up … that is until US stocks began rolling over late in the session to ultimately finish the day flat. The dollar strengthened.
The US dollar was stronger early this morning, giving it back now, while the British pound is the weakest of the pack. Many analysts noted the particularly dismal day that gold had yesterday after finishing last week on a strong note. Gold is trying to bounce back this morning. S&P 500 futures have pushed lower this morning but have fought back to even things out, bidding up a bit going into the open.
Overall, the price action is rather subdued thus far as we await the Case-Shiller Home Price Index at 9 am eastern … and then consumer confidence at 10 am. Which brings me to …
All Wet Without the Consumer
Frankly, and if you’ve been reading our stuff for a while you know, we’ve been fairly surprised at the sustained risk appetite and periods of optimism that have so steadily driven equity markets higher … and kept the US dollar smothered. There’s simply been a disconnect between our global fundamental analysis and market sentiment. Of course, varying time frames is a challenge in and of itself.
But still, we wonder how much recovery can happen without the US consumer. Consumption in the US has for some time made up an overwhelming portion of US GDP. And even though consumers have taken a hiatus, US GDP numbers are still as heavily dependent upon the consumer come out of hiding.
And there’s the rub, as they say – US consumers have taken on a mindset of savings and debt reduction. Certainly, with all the better-than-expected data that seems to be surfacing throughout the economy and driving risk appetite these days, consumer statistics cannot be included in such bright-eyed indicators.
A recent blog post I came across sums up some very key points quite well. An excerpt:
An increased savings rate will put pressure on consumption, which will in turn pressure GDP. In the following chart, notice how consumption as a percent of GDP remains above historical norms. Consumption would have to contract another $800 Billion for personal consumption expenditures as a percent of GDP to revert to historical levels.
“Everyone privately thinks this is an asset bubble driven purely by liquidity.”
The above is attributed to an executive at a Chinese investment bank. He seems to be on point. And it is likely the reason for the recent double digit percent declines in Chinese equities over the last few weeks.
This comes as no surprise to us – we’ve seen stimulus measures and excessive lending to be misdirected and misused. And after an extreme rise in stocks, more investors are beginning to awaken to the same idea.
What has come as sort of a surprise is the global market reaction to China’s stock market. For two reasons:
1) No doubt, China’s market is a major indicator of risk taking, but for some reason the money flowing out of China’s stocks hasn’t sparked similar risk aversion in other stock markets. The US markets made new highs yesterday.
2) The recognition of empty price gains should beg the question: are economic growth expectations warranted considering the excess liquidity dynamic? If not, then you would think China’s bearing on global trade would mean bad things for prices of natural resources and emerging market assets.
Interestingly enough, I pointed out to Jack yesterday investors’ feeling that emerging markets are becoming less risky, i.e. investors are willing to put up money for smaller potential yield on their capital. From Bloomberg:
Emerging market borrowing costs dropped to a seven-day low. The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries declined 3 basis points to 3.62 percentage points, the lowest level since Aug. 12, according to JPMorgan Chase & Co.’s EMBI+ Index.
So in the face of leaking optimism over China’s stock market strength and potentially over economic growth, investors in emerging markets have not blinked. It’s possible that global investors are turning their heads from China and focusing on whatever green shoots they can dig up elsewhere. But I wouldn’t be surprised to see global markets cave in to China if share prices don’t soon stabilize.
As far as the US dollar goes, we’ve yet to be validated on our long-term global macro forecast; risk appetite has kept the buck suppressed. But it could pay off royally to be open to potentially major US dollar strength in the coming days and weeks ahead.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Quotable
“Idealism is the noble toga that political gentlemen drape over their will to power.”
Aldous Huxley
Key News/Picture Day
• German services and French manufacturing unexpectedly expanded in August. (Bloomberg)
• Oil touched a year-high above $73 a barrel. (Reuters)
• Mexico’s economy shrank 10.3 percent in the second quarter. (AP)
• China plans to tighten capital requirements for banks. (Bloomberg)
• Federal Reserve Chairman Ben Bernanke flooded it with trillions of dollars to save the banks and free up credit for consumers and businesses. Looming in the future is a high-risk challenge for the economy’s rescuer-in-chief: He will have to mop up that money without disrupting a nascent recovery. (AP)
Zoom-zoom in the Monetary Base
…yet Commercial and Business loans have fallen….
S&P 500 divided by Gold…hmmm…it at least tells us the relative value of gold has risen dramatically compared to stocks, as we switched from the up with paper stock rally to the in with stuff commodities rally in 2000. And of course is the same image of the US dollar index over that time frame i.e. the bear market in the dollar (next chart)
Next Page….
Comp of S&P 500/Gold to US $ Index Weekly: Is SPU/Gold ratio leading the US$ Index? Was the risk bid rally in the US$ index an aberration, now on track to new lows as suggested by the SPU/Gold ratio? Or has the SPU/Gold ratio gone low enough? (see next chart below for the monthly view)
And last but not least…Inflation as measured by US CPI…2007 to 2008 was the first CPI year-over-year decline since 1954. How will “stuff” i.e. gold do in a deflationary environment? The deflation future may of course assume all the money in the monetary base chart above that has yet to make it to the real economy i.e. a decline in non-financial lending, doesn’t come rushing in.
The dollar is getting hit again this morning on the better than expected European Services news…commodity currencies up now, after being off overnight on China concern in the Asian session. High volatility in a narrow range for the currencies still makes this market a “dealers’ delight” as they know what the order book looks like.
A dollar index breakout, one way or another should be extremely powerful… The last one, or seemingly last one analyzed in real time proved to be another major head fake.
Currency Currents - August 11, 2009
Key News
• Ruble Falls in Longest Slump Since February on Record Drop in Russian GDP (Bloomberg)
• China’s Exports, Lending Fall, Adding Pressure to Maintain Stimulus Effort (Bloomberg)
• German Consumer Prices Post First Drop in 22 Years (Bloomberg)
• Troubled Assets May Still Pose Risk (New York Times)
Quotable
“We noticed that some loans didn’t go into the real economy.”
Zhang Jianguo, President, China Construction Bank Corp, in an interview on August 6 discussing the bank’s decision to cut second half lending by 70%
FX Trading – Credit Crunch to Linger … Longer?
Let’s reminisce on the credit crunch, shall we?
Liquidity dried up; demand went missing; the global economy’s gears all but stopped turning; national and international regimes went into savior mode.
Now, where do we stand?
If you’ve been playing along at home then you know there have been a steady handful of positive economic measures popping up in the US and around the world. In just the last few weeks some numbers on industrial production, business confidence, home sales, etc. have prompted some serious bottom-calling – the worst of the recession is behind us.
So it’s onwards and upwards from here, right?
Now is when I use the metaphor about counting chickens relative to when they hatch. Basically, there are still some things to keep a close eye on as players become more confident that recovery is really happening.
One market watcher recently noted a valid point about the stock market leading credit spreads. This was different from before, during the credit crunch, where concerns over credit led moves in share prices. Now it’s become a self-fulfilling trend towards risk taking – as share prices are climbing, confidence (tightening credit spreads) is following close behind.
Another question: can rising stocks mean a healthy, stable market for credit … in the current environment?
S&P 500 Futures vs. VIX Daily:
Again, I am skeptical.
US consumer credit is still in the tank. In June the number dropped by more than $10 billion. Being the fifth month of declines in a row, it marks the longest drawdown period since 1991. Consumers are saving more of their incomes. What they’re not saving they’re putting toward paying down debt – a two-legged trend that’s likely to last.
The point is, there’s been a major attitude shift … and consumers aren’t the only one’s watching out for themselves. Corporations are keeping their cash close to them. Capital expenditures just aren’t an attractive move to make right now. What’s happened over the last two years has caused many to rethink their approach to business and finance.
So, with credit markets starkly different from pre-crisis mode, is the financial crisis behind us? Depends who you consider when I say “us.”
There remain some major risks to German banks. At the top of the “risk list” for these banks are corporate downgrades and lingering toxic assets. In other words, should their big-name corporate customers suffer downgrades the banks would need to have larger amounts of capital on hand to deal with those inevitable capital fluctuations plus whatever writedowns they themselves must make.
The status of the banks remains the biggest risk to all of Europe and its recovery potential. And being Europe’s largest economy, Germany and its banks will certainly be under the microscope.
Like in the US, liquidity has been pumped through Europe by government and the European Central Bank. But it hasn’t exactly resonated as had been hoped – bank lending is not where they want it to be.
Is it clear that Europe will considerably lag the US in recovery? Perhaps not yet, but it seems likely the case. In such an environment, even the smallest differences between the US and Europe could mean a lot in the performance of the US dollar.
John Ross Crooks III
www.blackswantrading.com
Currency Currents August 07, 2009
Key News
• China to Scrutinize Stock Gains, Won’t Cap Loans as Money Floods Economy (Bloomberg)
• Calderon Peso Losing Confidence of Traders as Mexico Proves Worst Currency (Bloomberg)
• The liquidity pipes remain clogged (Financial Times)
Quotable
“Insanity is doing the same thing over and over again, but expecting different results.”
Rita Mae Brown
FX Trading – Overblown Jobs Report Tells Us Nothing
Honestly, I’m getting tired of these monthly jobs reports out of the US. Sure, it’s good to know the minute-by-minute direction we’re traveling … but the onslaught of investor analysis and market volatility after the fact is enough to make me want to turn off the screens by 8:45 a.m. eastern.
If you’re reading today for our prognostication on the upcoming July Nonfarm Payrolls then I’ll tell you exactly what might happen:
The drop in payrolls will likely be lower than in previous months.
The unemployment rate will likely be higher than in previous months.
Worse-than-expected payrolls warrants biggest price reaction (risk aversion).
Better-than-expected payrolls warrants somewhat smaller price reaction (risk appetite).
In-line with expectations payrolls may turn attention to unemployment figure.
Ditto on the reaction to unemployment rate.
In hindsight, we’ll know where the market wishes to go. But anyone reading or writing a forecast on this morning’s report will not know the results nor the outcome until then; though some guesses will be better than others!
I ask now: will the jobs report really tell us anything? I mean, will it tell us anything besides the fact that fewer jobs were lost this month than last month? It’s like telling a car accident victim before the paramedics arrive that he lost less blood this last minute than he did the previous minute.
We should consider the whole picture, even though the markets may not reflect such consideration. The whole picture, or at least a fuller picture, involves a deeper look into the US consumer. We’ve said it before and we’re sticking to it: without the US consumer the global recovery cannot really begin.
In the 12 months through June, wages and salaries dropped by the most since record-keeping began … in 1960. The fall in spending power over that 1-year period was a nasty 4.7%. Personal income is also falling. Housing wealth remains gone … and still going. The only solution is to cut personal spending and work to clean up personal balance sheets.
Easier said than done … despite the huge change in attitude (the right attitude, by consumers) we’ve already seen.
To highlight a very key point that underlines the negative view on the US, let’s look generally at the current fiscal policy. While consumer debt is imploding government debt is exploding. Debt to GDP in the US has actually risen in the last 12 months even though consumers have reined themselves in. And even though the only legitimate solution involves a major deleveraging process, the government and their spending and money pumping just keep piling on the debt.
When bankruptcies and restructurings should be part of a painful yet necessary path to cleansing the economy, it instead seems as though the government is trying to block that path with stimulus and bailout spending … with the HOPE that it will lead us on a short-cut to recovery.
This is nothing new – we’ve talked about the dangers of impeding the market process; many others have discussed the consequences too. But it seems even more now prefer looking to less-bad growth numbers … or better-than expectations.
Will this perspective change any time soon? Have a nice weekend!
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - August 06, 2009
Key News
• German factory orders posted their biggest increase in two years in June (Bloomberg)
• The Bank of England increased its bond purchase program by 50 billion pounds ($84 billion), saying the U.K.’s economic recession is deeper than policy makers expected.
• The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, Deutsche Bank said on Wednesday. (Reuters)
Quotable
“The severity of the financial crisis has, with some exceptions, increased the attractiveness of the ‘EMU umbrella’ for hopeful applicants. And while we have likely passed the moment of maximum financial stress almost everywhere in the region, it is still plausible that policymakers in CEE find euro adoption a more attractive prospect now than they did before the financial crisis erupted last summer. While their willingness to speed up the pace of euro adoption may be greater now, their ability to do so is severely constrained by the fact that budget deficits are spinning out of control and the reference inflation criterion is falling fast. …The next EMU candidate could be Estonia, which we expect to avoid devaluation and adopt the euro in 2011-12. In Central Europe, Poland might be in a position to adopt the euro in 2014-15, whereas for Hungary, Bulgaria and Romania accession is a story for the second half of the next decade, we think. The new Czech government which will come out of the October elections may adopt a more ambitious agenda, but thus far the Czechs have remained on the whole proudly euroskeptic, valuing the flexibility granted by their own currency.”
Pasquale Diana (Morgan Stanley)
FX Trading – Why? …And the buck testing key weekly support!
The trend is your friend. Price is the final arbiter. Market prices are reality. If you fail to respect the information contained in those last three short sentences you usually end up trying to find a source of funds to start another trading account.
But, despite those truths we can’t help asking some why’s:
1) Why is the euro at $1.43 when it’s clear the currency is creating huge pressures within the Eurozone, straight-jacketing countries like Spain with 20% unemployment, and hurting the export machine of Germany thanks to falling currency prices for its two major competitors, US and China?
2) Why do people believe Chinese economic numbers when a whole host of seemingly bright people who have seen China up close and personal tell us said numbers are mostly fabricated?
3) Why does oil surge above $70 per barrel when oil companies who know the market better than anyone tell us there is ample supply and little demand on the horizon?
4) Why is there so little anecdotal evidence among the people in your town suggesting the bottom in the recession is here?
5) Why do some emerging market currencies whose countries are 2-3 clicks away from sovereign bond default surge against the US dollar?
6) Why does the US government continue to eat the seed corn of entrepreneurism when new business and the jobs created therein are the only way to revive the US economy long term?
7) Why does the Japanese yen act as a safe haven while Japan’s debt-GDP towers over other all industrialized countries?
Why does everyone love gold even though it has risen only about 10% since it peak in 1980, while the Dow is up about 10-fold since then?
9) Why do we think enormous stimulus will work everywhere else when it hasn’t worked at all in Japan?
10) Why do so many believe the US will lose its currency reserve status when there is no real competitor currency out there to take over that role?
11) Why does the US government confiscate taxpayer money in order to subsidize US citizens who buy Japanese cars?
12) Why is it that former US Presidents now never seem to just fade softly into the night?
All these, and many other things, are a seeming mystery to me. But, as they say, if it were easy we’d all be rich.
Buck testing a famous Fib level
Not much support left down to the old all-time low for the dollar should it cut through the 61.8% Fibonacci level technical analysis types far and wide are likely watching very closely. It is a full-moon out there. Head fake or spike down time? Only Mr. Market knows for sure.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - August 05, 2009
Key News
• Australia’s Trade Deficit Unexpectedly Narrows in June on Gain in Exports (Bloomberg)
• China’s Stocks Not in `Bubble,’ Set to Extend Rally, Harvest’s Chen Says (Bloomberg)
• China’s growth figures fail to add up (Financial Times)
Quotable
“Some economists took the fact that prices were unpredictable to infer that prices were in fact “right”. However, as early as 1984 Robert Shiller, the economist, correctly and boldly called [Efficient Market Hypothesis] “one of the most remarkable errors in the history of economic thought”. The reason this is an error is that prices can be unpredictable and still wrong; the difference between the random walk fluctuations of correct asset prices and the unpredictable wanderings of a drunk are not discernable.”
Richard Thaler, Financial Times 4 August 2009
FX Trading – Waiting for the Jobs; Plus, Canadian Dollar Comments from Blackmont …
Since topping out on Monday the euro has been tracking sideways. The likely story is that many traders are awaiting a hint from the ADP Payrolls report due out today … ahead of Friday’s release of July US Non-Farm Payrolls. Expectations are for an improvement in the employment situation. The euro is popping towards Monday’s highs as the report draws nearer. There may be some reaction to a surprise number, better or worse, today. But more than likely the most of the fireworks won’t shoot of until Friday.
The British pound found some reason to rally. There’s been speculation that the BOE will end their bond repurchase program because the economy is showing signs that it may be emerging from recession. This is a stark difference from the way a potential end to this program was received days ago – i.e. it’s too early to stop pumping money into the economy. The British pound made a new high on this surprise optimism.
The Canadian dollar started back-tracking yesterday after comments from Finance Minister Jim Flaherty regarding the Canadian dollar becoming too strong relative to the US dollar. He noted that the Central Bank could take action to stem its appreciation if necessary. Apparently Mr. Flaherty can take action as well.
On the next page you can find more comments on the Canadian dollar, from Yves Lamoureux, Investment Advisor at Blackmont Capital Inc …
JR Crooks
www.blackswantrading.com
The effect of deflation from Toonie to Loonie to Looney Tunes…
The Canadian 1 dollar commonly called the Loonie has taken on a new role. Our bird is definitely matching in speed and strength the American eagle. The consensus has it that the Canadian currency will reach parity again in a somewhat near future. That is common discourse if you are in the recovery camp. I am not.
If you look at things long enough will it make it so?
We have been used to an environment where inflated values held long enough to make us believe that it was so. I dare suggest that it is changing quite rapidly and most never had the chance to really appreciate this new reality.
In this new paradigm shift let’s take a look at the Canadian dollar compared to oil.
Since it is a petro dollar, it does correlate to oil very well.
On two occasions in the past we have had oil trade around $40. I have circled them at about late 2000 and early 2003. With this in mind, I also circled the Canadian dollar at the same point in time. It had a value of 1.50 USD/CAD. We are at 1.07 USD/CAD today.
In my preferred scenario, I am expecting oil to probably retest the $40 level again. Weak demand and oversupply does not resonate with me in the bull camp.
On a retest of oil at the $40 level, does the Loonie revert back to its older valuation before the big oil bubble? That is what I expect in a new paradigm shift of normalization, the real normal is back.
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.
Currencty Currents - August 04, 2009
Key News
• Australia Keeps Benchmark Interest Rate Unchanged at 3% for Fourth Month (Bloomberg)
• Calderon Peso Losing Confidence of Traders as Mexico Proves Worst Currency (Bloomberg)
Quotable
“Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.”
Andy Xie
FX Trading – Tight Coupling, Decoupling and Risk – So What?
In Richard Bookstaber’s A Demon of Our Own Design he starts things off with a brief analysis on economic and financial market risk. His conclusions are that we’ve made quite a bit of progress at removing much of the risk from economic cycles, i.e. the pain is much less severe with each new downturn.
On the contrary, he believes, all the steps taken to reduce the risk in financial markets actually serve to worsen the impact of each successive crisis. Later in his book he credits this phenomenon to something he calls ‘tight coupling’ or, more clearly, complexity and unintended consequences.
I’ll get back to Bookstaber in a minute. First, I wanted to bring your attention to an article I came across on www.voxeu.org this morning:
Business cycles become less synchronised over time: Debunking “decoupling”
I’m not going to attempt to explain the intricacies of the research discussed in that article as I’ll never do it justice; you can click on the link above and trudge through it at your own risk if you’d like. But I do want to discuss the findings of the research …
Based on careful analysis of business cycles in industrial and developing economies, and the various correlations between them, it was found that there is little evidence that there has been any substantial decoupling from 1980-2007. It does seem, however, that business cycles across the world have become more tightly correlated since 2000.
As you might recall, the rest of the world’s supposed decoupling from the US in late 2007 and early 2008 was getting quite a bit of press. Then, uh oh, the financial crisis sets in and no country, no economy, goes unscathed.
Now, back to the demon of our own design, what are the biggest risks as global investors and economist try to determine the path that lies ahead?
It’s been our belief that significant economic and financial market risk remains.
But perhaps we’re underestimating Bookstaber’s point that economic risks have been mitigated by the many new techniques, policies and procedures implemented over the last several decades. And maybe the global economy recovers … together… and sooner than we expect.
In this case our current long-term expectations would be flat wrong. But …
We’re not yet ready to write-off the chances that Europe runs into more financial/banking trouble … or that China bursts at the seams of excess liquidity … or that US households have much more work to do in tidying up their balance sheets.
If our analysis proves correct and markets react to economic risk as they did when this crisis began, then we could very easily see another pull-back in the dollar-based credit that’s beginning to flow more freely around the globe yet again. The result, demand for the safety of US Treasuries and demand for the US dollar.
And as it relates to financial market risk, there’s no doubt about Bookstaber’s belief that financial markets have become more complex and, thus, more risky. In fact, the abundance of risk in financial markets helped fuel the great collapse of 2008. Then again the tight lock between world economies is what really made the global recession, well, global.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - August 03, 2009
Key News
• The Australian economy has “a long way to go” to full recovery, so the government won’t move to remove stimulus spending, Treasurer Wayne Swan said. (Bloomberg)
• Australian manufacturing contracted in July at the slowest pace since September. (Bloomberg)
• The CLSA China Purchasing Managers’ Index rose to a seasonally adjusted 52.8, the highest level in a year, from 51.8 in June. (Bloomberg)
• Merchandise exports were valued at 612.17 billion rupees ($12.8 billion), down 27.7 percent in dollar terms from 759.3 billion rupees ($17.7 billion) a year earlier, according to government figures.
• The biggest private equity groups are sitting on a $400bn debt mountain that needs to be repaid over the next five years, putting the future of some of the largest buy-out deals in doubt.(FT)
• The UK manufacturing purchasing managers’ index rose to 50.8 in July from an upwardly revised 47.4 in June, the first time the number has been above the 50 level that divides contraction from growth since March last year. (Reuters)
• German retail sales dropped by a real 1.8% in June from May, and declined 1.6% from June 2008, the Federal Statistics office said Monday. (Dow Jones News Wire)
Quotable
“The antidote to hubris, to overweening pride, is irony, that capacity to discover and systematize ideas. Or, as Emerson insisted, the development of consciousness, consciousness, consciousness.”
Ralph Ellison
FX Trading – Media Superstar Building
It’s usually the case that when we get it right in the markets we surmise its brains, and when we get it wrong its bad luck. In trading, getting it right is what matters, no matter if it’s for the wrong reason—which when you think about it is lucky.
But what I find interesting is the way the financial media makes superstars out of people who have been right at key moments in the past, but in hindsight we realize these seemingly great seers were just lucky, proven by their history of dismal calls going forward, which we knew about precisely because they were closely tracked being media superstars and all.
This is a subject I was briefly discussing last night with a couple of good friends, while taking in the sites of the beautiful Bellagio hotel in Las Vegas. It’s a good place to watch human emotion and think about risk-reward and luck.
A few past media superstars came to mind during said discussion: Joe Granville–a man who made some great market calls, but when he turned his on-balance-volume skills to earthquake prediction, one had a sense that hubris was starting to overwhelm real analysis; Elaine Garzarelli who was credited with calling the 1987 stock market crash and was awarded the reins of a mutual fund by Lehman Brothers, which turned out not be such a good idea for Lehman or investors their ensconced; Howard Ruff, a man who never met a metal he didn’t like, at any time, and seemed to keep recommending gold as it staged its dramatic fall from near $1,000 down to $250 as disinflation played itself out across our find globe; George Gilder, who rode that Nasdaq bubble as many did, but confused a liquidity-driven frenzy with his love of technology. These are just a few.
The more you think about it past greats who have faded from the scene, the longer the list will grow. But the beauty is we don’t often think about it; this stuff slips down the proverbial memory hole until another media market seeing superstar fades away after a series of well publicized bad calls begins to overwhelm the good and requests for interviews and TV appearances fade. There is nothing new here. [Note: All due respect goes to the players mentioned in the paragraph above, as they were out there, exposed, in the game, doing the best they could, and they were right for while whether hubris filled or not.]
When you think about this process of building a media superstar, then crash and burn, it is very much aligned with the natural rhythm of boom-bust cycles which I think is a good stylistic representation of all traded asset markets, especially currencies. We put together the power point slide below for your perusal:
Early on the market seer makes a great call, but does so in a bit of a vacuum (leg number one, or the unrecognized trend, or smart money accumulation stage). But as said call begins to play out, the media begins to trumpet said seer’s earlier call about being right. This process in and of itself, media trumpeting during the most powerful phase of the trend (third leg up, or markup, or public participation phase), is what solidifies the reputation of the market seer as “being right.” Then the “flaw in perceptions” stage sets in (leg five or flaw in perceptions or distribution to the public phase), whereby the price trend has gotten very far extended and comes unhitched with real value, the market seer is doing multiple TV appearances now and can be found quoted in all conceivable sorts of places by the now fawning financial press. Seer’s story is now well-worn, but because it has brought so much fame and fortune, he clings to rationales that may not longer apply. But, why not, the trend is your friend and your PR rep’s phone is still ringing off the wall.
This boom-bust process is recognized by old hands (especially former NYSE specialist before the advent of those nasty computers) immediately as accumulation, mark-up, and distribution (Dow Theory); while those dabbling with Elliott Wave see it as a typical five wave up process, three impulse and two corrective waves. In short, it seems the natural rhythm of human action in markets—real people moving real money for all types of reasons, some emotional, some analytical, and some with a lot more information than others (can you say Goldman Sachs?).
I think, and thinking during a powerful trend can sometimes get us into real trouble, but that said, I think we are very much close to the end of the flaw in perceptions i.e. overshoot & climax stage, when it comes to China. If you examine today’s headlines, we see China’s manufacturing “boom” and commodities demand as reasons why the bottom in the global recession is in place; it engendered green shoots. But we also know that this boom in China has been a massive force-fed government engineered liquidity-driven phenomenon. [Take a look at this article from Seeking Alpha sent to me a by a very smart friend in Canada who thinks about this stuff and does seem swayed by price trends alone.]
The article concerns China real estate. It could be applied to other areas in China, as it shows the direct link and ease of force-feeding and favoring state owned enterprises to reward important constituents when there is no real price discovery in the market.
Is it a shell game? Market seers who continue to write books and boast of China’s “new way” forward might want to at least consider there may be other reasons for perceived Nirvana.
Jack Crooks
Black Swan Capital
www.blackswantrading.com