Currency Currents - Septemeber 28, 2009
Key News
• Japanese Prime Minister Yukio Hatoyama said on Monday that the recent rise in the yen has been tough for small firms. (Reuters)
Quotable
“Good pitching will always stop good hitting and vice-versa.”
Casey Stengel
FX Trading – Yen-Yikes!
Talk about fundamental disconnect—yikes!
Traders are all over the Japanese yen—it is the soaring against all comers. Some traders are eyeing the 85 level, an area not seen since 1995.
Other than a belief Japan’s Finance Minister, Hirohisa Fujii, is unconcerned about a stronger yen (countered this morning by the Prime Minister as $-yen tumbled), there doesn’t seem much in the way of economic fundamentals to be driving the yen higher…momentum is a powerful thing indeed.
Barron’s magazine ran a story this week, which made the case the Japanese economy is a ticking debt time bomb (maybe the leader of a pack of time bombs across the industrialized world). Total population in Japan is falling fast, and falling even faster is the working age population to support Japan’s massive debt to GDP ratio, measured officially at around 217%, that compares to 81.2% for the US and an average of 72.5% for the G-20 nations, according to Barron’s.
An analyst quoted by Barron’s says there is a major bubble in Japanese government bonds given this demographic reality i.e. he sees no way the low rates can be sustained.
Below a chart of the yield spread between US (red line) and Japanese government bonds (black line); spread total at bottom in green:
Source: Reuters
Near-term likely no matter…but the question is: Where is the tipping point on debt to GDP? JGB’s have remained low for a long time despite the massive debt build, and others have been on the idea of a bubble and been burnt. But maybe it’s a set up for long-term value players among us.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 25, 2009
Quotable
“Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous. The final outcome of the credit expansion is general impoverishment.”
Ludwig von Mises
FX Trading – Newspeak ramble…and this time last year the dollar rallied
Editor’s Note: If you like government and government control, I suggest you skip today’s issue. We get complaints often about being “too political,” as if politics just seem to operate in a vacuum and have no impact on the economy. We agree this publication should not be about politics. It should be about global macro economics and how that might impact currency movement. But, sometimes we just can’t help it. And watching the G-20 is just too much for any somewhat sane person to take.
Mr. Orwell, the Ministry of Truth would like to see you…
“Demonstrating the repeated abuse of language by the government and by the media in his novel, Orwell shows how language can be used politically to deceive and manipulate people, leading to a society in which the people unquestioningly obey their government and mindlessly accept all propaganda as reality”
Jem Bakes
Ah, G-20! Always trying to save us from ourselves…
The White House, masters of hyperbole on almost any issue one can think of, may have even outdone themselves with this one. According to the Financial Times, the White House said:
“The G20 leaders reached a historic agreement to put the G20 at the centre of their efforts to work together to build a durable recovery while avoiding the financial fragilities that led to the crisis.”
It just kinda makes you all tingly inside doesn’t it?
That is assuming you’re a bureaucrat hitched to this gravy train of government, or a lawyer who just loves more laws to exploit to fit a client’s needs. But if you are just trying to build or run a small business, or find risk capital to start a business, which if done successfully provides such trivial things as wealth and jobs creation, so government leaders can skim off much of that wealth in or to save us from ourselves, than you probably aren’t jumping for joy to hear the G-20 is going to give us more…
More regulation…More wine drinking and croissant eating weekend meetings to discuss more regulation and how to organize the next meeting so they can provide us with more regulation…
All makes sense, because those bankers are the bad guys…those bankers are the bad guys…those bankers are the bad guys…those bankers are the bad guys….those bankers are the bad guys…those bankers are the bad guys….
Find a demon. Justify your power grab based on that demonization. It’s a beautiful thing…and so it goes.
Just wondering, is it Oceana or Eurasia we are at war with this week? Hmmm….getting so confusing…
Speaking of Eurasia, we noticed our “good friends” the Chinese making catcalls from the cheap seats once again. Damn the dollar. It is the cause of all ills. Maybe they found a daemon to exploit? Ya think? Oh…not the Chinese!
It is interesting, as the US dollar was spiraling down to its dirt nap from 2002 to 2007, the Chinese didn’t seem all that concerned about the dollar. I guess, that’s because all those US consumers where giving them so darn many of them. Now that the symbiotic game is over, and China is now stuck with a massive export-based economy, built on the back of all those nasty little dollars, and Mr. and Mrs. US Consumer ain’t buying much anymore, it’s much easier to blame the dollar than their own internal policies of currency manipulation and massive capacity build now that the local serfs are finding it hard to find jobs.
Game over?
Maybe, but rebalancing hasn’t yet entered the lexicon of the central committee it seems. If we just hold on a bit, hammer the Americans for their spending habits, and hope their spending habit return to drunken sailor proportion, which we are now criticizing them about, we will get that V-shaped recovery we were hoping for, and get more dollars and grab more market share thanks to our massive infrastructure stimulus package. Ah yes…Capitalism with a Chinese face. It is the way.
So, instead of doing the heavy lifting of making a transition to more balance internal growth, which means we just might have to lift capital controls, which would give our citizens a modicum of freedom to choose, let’s instead just bash the dollar. Heck, we know all about Newspeak. And of course The Ministry of Truth is there to help those who don’t quite understand capitalism with a Chinese face. Proving once again those White House guys are hyperbole pikers compared to us.
If we could just find a new currency…hmmm…let’s see, because we don’t want to lift our draconian capital controls, or let our currency find its economic value, or give our citizens more power to spend their wealth in other countries, and create a viable currency and all the responsibility and freedoms that come with it, let’s just see if those guys at the IMF have some leftover Special Drawing Rights (SDR’s) in a desk drawer or storage closet somewhere down in the basement. Yeah. Maybe if we could pump those things into the system magically global demand will rebound and we could all get rid of these nasty little dollars. We know the Russians hate those greenbacks too.
New world currencies, regulation that will create growth, demonization passed off as action…it’s just so depressing.
Do we need a new world currency? Yeah. But not another one of the fiat variety that will be used to create endless spending and paper over the massive inefficiencies and incredible arrogance of governments everywhere…we would want men to trade real value for value, then maybe they’d get unhappy with all the blood sucking parasites in between that hang their very existence on political favors and the dole.
Gold of course would be a nice choice.
But that genie is out of the bottle. The rigors of a monetary system based on something of real value might cut back on wine sipping weekends for government officials. And, gasp!!!…It means they sadly wouldn’t be able to create the funds to “help” their constituents who can’t seem to help themselves.
Trading real value for value would crush the altruism of our leaders; altruism with our money, proving Ayn right once again, that altruism is nothing more than the ugly lead dog of power.
Nope. Instead we play this game of wealth creation hampered by those who don’t seem to get it. They just don’t seem to get the fact that if they got the heck out of the way we would all be better off.
So, back to decision making in this warped environment that I guess seems perfectly natural to most…
Yesterday the dollar got a nice bounce on news that central banks may start reining in all those dollar-based credits they relied upon when the global credit markets were close to imploding and the world was staring into the proverbial abyss. Today, the G-20 communiqué tells us stimulus will stay. So, a mixed bag we have.
Either way, the dollar is due for a bounce. But then again, it’s been due for a while unfortunately in our book. And from a cyclical standpoint, it would make sense. That is assuming cycles make sense.
Of course the yen isn’t playing nice today with the dollar. It was reported Japan may start pulling in on the reins on their stimulus, the Bank of Japan may upgrade its economic outlook, and there is a growing view the new Japanese government would not be upset by a strong currency.
On a purchasing power parity bases, the last numbers we saw suggested the yen was about 27% overvalued against the US dollar. But overshoot is part and parcel to this currency game.
Interesting, the yen was a currency that appreciated strongly from September 2008 last year, even as the US dollar index did the same….
Happy Friday!
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 24, 2009
Key News
• Paul Volcker, Lord Turner & the EU’s new take on the intoxicating effects of global finance (Naked Capitalism)
• Germany Will Borrow Less Than Planned as Recession Ends, Confidence Gains (Bloomberg)
• Fed Signals Return of U.S. Growth Insufficient to Withdraw Record Stimulus (Bloomberg)
• Pound slides after King backs weaker currency (Financial Times)
Quotable
“Why then is Lehman’s failure perceived to be such a problem? The major complaint, and the only persuasive argument, is psychological, not technical: Markets expected the government to bail everybody out. Lehman’s failure made them reconsider whether the government would bail out Citigroup. If everyone expects the government to bail out, it has to do so to avoid a panic.”
John H. Cochrane
FX Trading – The Immortal Words of John H. Cochrane and Irving Berlin
Here we sit with nothing but blue skies ahead. Kind of reminds me of the popular song of the same name (I enjoy the Frank Sinatra and Willie Nelson versions of Blue Skies).
The blue days have come and gone. Nothing but blue skies for investors from now on.
Risk appetite is back with a vengeance; US stocks almost refuse to succumb to any pressure; commodities have found support despite the fact that global demand and international trade have not returned in any meaningful way; analysts are quick to tout the healing power of stimulus.
Source: Elliott Wave International – Cargo ships waiting for cargo.
At this point, it doesn’t make sense to fight the tide of investor optimism. Any beachgoer hopefully knows you’ll drown if you try to swim against a rip current; and so it goes …
In spite of all the long-term global analysis we, and many others, point to indicating a serious potential for deflationary forces to smother recovery efforts, people are more than happy to swim against the global macro currents … because the safety and stability of the shore is so close they can practically touch it.
But if we and so many others are accurate in our broad analysis that leaves the door open for deflation and stagnation (at best), then why are investors not heeding the advice? What’s giving them confidence that they’re swimming in the right direction?
All questions we don’t necessarily know the answer to, but we’ll give it a try …
A loyal reader recently asked:
Is it possible that the U.S. government is encouraging a weak dollar (read devaluation) as a means of facilitating the repayment of the enormous national debt?
To it we say it’s absolutely possible and may be the policy. A weak dollar policy they see as a way to boost global asset markets in an effort to drive demand on rising confidence. It is a very dangerous game now, especially when there is no real growth opportunity in the US. We think they think they can “manage” the dollar. They can’t. It may bite them, and us, in the process.
Jury is still out but possibilities rising.
Also, think about how the wealth effect factors in …
Much wealth was lost from plummeting home prices and portfolio values. Perhaps a weak dollar policy, considering the tight correlation between the buck and risk appetite, is aimed at restoring some of the lost wealth via the stock market and, in effect, restoring confidence in the system.
Either way, we think Mr. Cochrane (in the quotable used above) made a good point, taken from his recent testimony to the House Financial Services Committee. He was discussing the perception of the Lehman Brothers failure; but I am referring to the perception of the global economy’s condition:
The rally in risk has been mostly psychological, not technical.
The widespread belief is that policymakers and leaders reacted quickly, that they played an integral role in stabilizing the economy in the wake of financial collapse. And perhaps more importantly, it is believed they are ready to pounce should any notable signs of a double-dip recession surface.
Perhaps, considering their save-the-day persona, we should call them superheroes; because if they’re anything like Barbara Boxer then they may be offended if we just call them policymakers.
Shall we join Mr. Irving Berlin for a few lines?
Never saw the sun shining so bright
Never saw things going so right
Noticing the days hurrying by
When you’re in love, my how they fly
…
I should care if the wind blows east or west
I should fret if the worst looks like the best
I should mind if they say it can’t be true
I should smile, that’s exactly what I do
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 23, 2009
Key News
• The cost of goods leaving South African factories and mines fell an annual 4 percent in August, the fourth consecutive decline. (Bloomberg)
Live Webinar Event Today - Black Swan Capital, Courtesy of Tom Busby’s DTI
Topic: Interest rate rules and expectations as it impacts currency prices
Time: 11:30 a.m. EST
To register: Please click here
Quotable
“Credit expansion is the governments’ foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous. The final outcome of the credit expansion is general impoverishment.”
Ludwig von Mises
FX Trading – Fed Wednesday. It might be interesting.
Quiet so far this morning in front of the Federal Reserve Bank’s pronouncement on all things monetary due out later this afternoon. We wait to hear how Mr. Bernanke & Co. will decide to save us from ourselves yet again.
One of the questions on the minds of traders everywhere might be: When will Mr. B and Co. decide it’s time to start removing some of the hooch from the punch bowl? We are not sure we will get an answer today, but maybe the Fat Lady of the Fed is warming up. Yesterday, we saw a story indicating as such:
“The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the system the last two years, according to people with knowledge of the discussions,” Bloomberg News reported yesterday.
Of course, as you read further on in the story, the same people with “knowledge of the discussions” say there are no plans to do this anytime soon. I guess the Fed is just getting a brush up from dealers about the arcane process known as reverse purchase agreements—a process used to drain reserves from the system. Heck, the Fed hasn’t drained reserves for so darn long it likely has forgotten how to do it.
Even if Mr. B wants to drain some reserves from the system, most of which are simply sitting un-loaned on banks’ balance sheets anyway, we wonder if Barney Frank will allow it?
But, should the Fed provide some inclination that it’s actually getting ready to act, it might throw some cold water on the idea the dollar is now the carry trade currency of choice, thanks to super low short-term interest rates and US Treasury benign neglect of the dollar. We think there is a lot more to a carry trade currency that meets the eye than just low rates, but we save that view for later today.
We all know there is a wall of momentum, spurred by excess dollar reserves, booting up asset markets here and abroad (whether a bubble or not depends ultimately on a revival of global demand or not). And we all know the “Stimulator of Last Resort’ (US government) is big on the wealth effect i.e. juicing asset markets to try to juice consumer confidence to try to juice global demand, so they seem quite happy with stocks going up.
So if the Fed doesn’t do something to suggests if might mop up something soon, it may be taken as green lighting the seeming US government implicit weak dollar policy as a tool that will continue as long as said dollar falls in an “orderly” matter—bada-bing-bada-boom.
Net, net, this post meeting commentary might actually be interesting.
Black Swan Capital LLC.
www.blackswantrading.com
Currency Currents - September 22, 2009
Key News
• Bernanke Effort to Accelerate Growth May Be Undermined by Loan Contraction (Bloomberg)
• China’s Stimulus Delays Efforts to Make Consumers Drive Economy, ADB Says (Bloomberg)
Quotable
“The stimulus that we have still got to give the world economy is greater than the stimulus we have already had. What we want to do is safeguard a recovery from a recession we feared would develop into a depression.”
Gordon Brown
FX Trading – “[We Won’t Be] Waiting on the World to Change.”
Some of you may not know this … but this week is Climate Week. The goal is to spread the word about climate change and the importance of enacting climate change legislation that addresses key problems associated with man-made global warming.
I will not be participating in Climate Week.
More of you may know that this week Pittsburgh, PA plays host to the G-20. The goal is to spread the word about economic status quo and the importance of enacting stimulus policy that addresses the major deficiencies associated with man-made financial crisis.
I’m not buying the G-20 summit.
Ideally, the market process would handle both the above issues on its own. But leaders don’t want to leave it to the free market; the free market is the problem, they’ll tell you.
So in an effort to look out for our best interest, the top-most officials on each matter will see to it that the market does no more damage and that legislation, regulation and policy take over the role of destroying saving the world.
But it doesn’t matter what I think. If what I thought actually mattered, then I’d be independently wealthy. Instead, it is what the market thinks that matters. And right now the market thinks (regarding the G-20 initiatives anyway) that the world has been rescued.
And if Gordon Brown’s quotable from above means anything, then the global economy should have no trouble getting back on its feet and global markets should run into few obstacles as the road to prosperity is paved for them.
So it shouldn’t come as a surprise when the US dollar can’t string together more than two days of corrective rally. Despite what the charting mechanisms may forecast, risk appetite in this market is running on high and the US dollar is hated.
This morning has already been a monster day for currencies. Using the US Dollar Index as the broad indicator, traders have wiped away the last two days of dollar advances and the index is testing last week’s low, which happens to be the lowest level for the US dollar index since this time last year.
To demonstrate my point about market sentiment here, the Asian Development Bank has made waves with their recent comments about growth in Asia. Markets love the fact that growth estimates have been revised upwards. They also love the fact that China has imported a whole bunch of crude – the second-highest monthly increase on record in August.
Logically, this could be taken as a sign that China is revving up the engines and is ready to pull out of pit road.
The market, though, found a way to avoid the comments from the ADB regarding China’s binge on stimulus and record lending. They particularly noted the decision to push back or ignore necessary rebalancing efforts that would help mitigate the dependence on investment and exports and spark some much needed growth in domestic consumption.
But why should that matter? Everyone’s having a good time now; nobody likes a party-pooper.
Pushing back the imbalances for another day, huh? The ADB seems to think this is what China’s doing. I’m not going to argue with them … as you probably already know.
But what about the G-20? Are they ignoring imbalances, are they pushing back the need for rebalancing? If so, can they succeed in forcing growth on a global economy that’s not ready for it?
Call me old school, but the free market has been known to correct imbalances of yesteryear. No? Come to think of it, hasn’t the market already taken steps toward correcting such imbalances this time around?
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 21, 2009
Key News
• China Can’t Get Enough Treasuries as Dollar No Deterrent to Foreign Buyers (Bloomberg)
• Merkel, Steinmeier Face Economic ‘Mess’ as Stimulus Peters Out (Bloomberg)
Quotable
“All ‘public interest’ legislation (and any distribution of money taken by force from some men for the unearned benefit of others) comes down ultimately to the grant of an undefined undefinable, non-objective, arbitrary power to some government officials. The worst aspect of it is not that such a power can be used dishonestly, but that it cannot be used honestly. The wisest man in the world, with the purest integrity, cannot find a criterion for the just, equitable, rational application of an unjust, inequitable, irrational principle.”
Ayn Rand
FX Trading – Packing on the Pounds: Sterling Looks Heavy
The British pound, relative to the euro or the Australian dollar, has traded heavy over the last two months. On days when it’s up against the US dollar … it’s up less than the commodity dollars or the euro. On days when it’s down against the US dollar … it’s down more than the commodity dollars or the euro. While the euro and Aussie shot to new highs with ease, the pound remained wallowed in range-bound trade. What gives?
Certainly now the technical pictures is adding to the pressure.
If traders key on the weekly head-and-shoulders (it’s less defined but exists also on the daily chart), then the British pound may have more downside coming. We’re seeing a test of the neckline as this week gets started up. If the head-and-shoulders pattern plays out as general expected it could wipe a quick 800 PIPs +/- off the value of the pound over the next couple weeks.
But even before this bleak technical picture formed, the pound had already been lagging behind the pack.
Now, over the course of the year we’ve not found much to justify the pound’s strength/resilience versus the dollar. But considering the correlations and the appetite for risk, the pound has been able to avoid being judged on fundamentals alone.
Maybe now that the worst for the global economy is behind us, traders are becoming a bit more picky than the purely risk-on, risk-off approach. That might be the drag on the pound.
Yes, UK home prices have been somewhat of a welcomed bright spot in the headlines; they’ve firmed up after serious deterioration. But it’s clear after looking at the lending and mortgage activity, as well as banks’ attitudes, significant pressure should continue to smother any noticeable recovery in the housing market.
And there’s been little real improvement elsewhere. The UK employment picture remains hinged on the financial sector, which remains in distress. It seems clear that the G-20 meeting in Pittsburgh will devote a lot of air to shoring up the financial sector, banking and lending in hopes of solidifying the recovery they so far pumped up.
As a percentage of 2008 GDP, UK government debt is expected to roughly double by 2009. This may seem familiar, as the US economy is battling similar fiscal chaos that’s taking a toll on the US dollar. As investors look away from assets of deficit countries, it can mean the currency suffers the consequences.
Basically, the government is stepping in, in a big way, to take the place of a consumer that’s gone by the wayside. During boom times, credit-fueled consumers drove growth. The UK household is even more up to their ears in debt than the consumer in the US. Is this the right way to play it?
Investors aren’t looking too favorably at the British pound right now. And the potential is there for things to get uglier in a hurry.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 18, 2009
Key News
• For the first time in nearly two years, American households grew a little wealthier in the second quarter. (WSJ)
• The UK government borrowed another 16.1 billion pounds ($26.3 billion) during August — a record for the month. (AP)
Quadruple Witching Today – Stay Tuned
Quotable
First witch: When shall we three meet again,
Second witch: In thunder, lightning, or in rain? When the hurly-burly’s done, When the battle’s lost and won.
Third witch: That will be ere the set of sun.
First witch: Where the place?
Second witch: Upon the heath.
Third witch: There to meet with Macbeth.
First witch: I come, Greymalkin!
Second witch: Paddock calls.
Third witch: Anon!
All: Fair is foul, and foul is fair:
Hover through the fog and filthy air.(Macbeth, Act 1, Scene 1) William Shakespeare quote
FX Trading – Stages of the dollar
Maybe some of you have been receiving the same email I have been getting; it says the market will crash sometime between Thursday, September 17th and Monday, September 28th. I haven’t delved into the details of the prediction, and probably wouldn’t understand them if I did. But, with today being quadruple witching and all, I thought I’d share that warning.
Of course we are seemingly in the midst of a crash already, if you define your terms accordingly, it is the crash of the US dollar. But have we reached the climax stage? Probably not, as it seems the US government is playing the benign neglect game and liking how a weak dollar is juicing the US stock market—can you say wealth effect?
Thinking in terms of stages, below is repeat of a piece we wrote several moons ago that lays out the stages of the dollar. It’s a framework that can likely be applied to any currency and any asset market in general. If you’ve pinpointed exactly where we are in the dollar cycle, please let us know. Thanks.
——————————-
Seven Stages of the Dollar
It’s always difficult to pinpoint where we are in terms of a trend. Long-term trends in the currency markets have ranged from six to ten years, measured by the various bull and bear markets in the dollar since the inception of the free-floating currency market back in 1971. Here’s the pattern of long-term bear and bull markets in the dollar as measured by the US $ Index:
1971-1978: Seven-year bear market (President Nixon closes the gold window closed)
1978-1985: Six-year bull market (Fed Chairman Volcker squeezes inflation)
1985-1992: Seven-year bear market (Triggered by the Plaza Accord)
1992-2001: Ten-year bull market (Tech boom and money flow to US assets)
2001-2008: Seven year bear market (bottom on the credit crunch)
2008- ? : Next major bull market?
No one can say when multi-year bull and bear markets end without some perspective. But we can evaluate conditions as they develop that may indicate the potential for a change in the big trend. I use the boom/bust cycle of price action to help put this longer-term moves into some type of perspective.
The dollar, especially from a longer term perspective, moves in waves—discernable waves based on human emotion and supported to differing degrees by the underlying economic fundamentals at various stages along the way. It sounds complicated but it’s not. Here’s an example of the waves or stages of the dollar in a boom/bust price cycle…
• Stage 1: The unrecognized trend – This is the early on stuff. It represents the beginning of a new trend that is recognized by only a few of the major players.
• Stage 2: The beginning of a self-reinforcing process – This is the stage where the consensus begins to realize there are real underlying fundamental reasons why this “new” trend has legs. This is the most powerful and longest leg or wave of the trend.
• Stage 3: The successful test – This is the pull-back that challenges the consensus view, it represents a significant retrace of the prior wave “self-reinforcing” wave. In the case of the dollar, the bear market correction we witnessed during 2005 is an example of a “successful test.”
• Stage 4: The growing conviction, resulting in a widening divergence between reality and expectations – This represents the last major leg or wave of the trend. It is supported by real fundamentals or expectations of how the fundamentals will play out, but it also represents the stage in which the currency is either “overvalued” or “undervalued” on a pure fundamental basis.
• Stage 5: The flaw in perceptions – This is the stage in the cycle when some of the major players begin to realize the currency cannot be supported by the fundamentals, as highlighted above.
• Stage 6: The climax – This is the final stage of the move, and represents the “overshoot” we often see in currency markets because they tend to be more sentiment driven and price-led than other asset markets.
• Stage 7: A self-reinforcing process in the opposite direction – The trend begins in the opposite direction.
So where are we now in terms of this dollar major bear or bull market?
For help, we paraphrase Joe Kennedy, former stock manipulator and SEC Chairman (things really haven’t changed much on the regulatory front have they ), when shoeshine boys start playing the FX market and all know the dollar is dead, and are making a killing short the dollar, it’s time to go long. That’s when you know we are very close to Stage 7, time to start looking in the other direction.
I think I’m going to have my shoes shined on my next trip, which is next week. I will keep you posted.
Jack Crooks,
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 17, 2009
Key News
• Initial Jobless Claims in U.S. Unexpectedly Decreased to 545,000 Last Week (Bloomberg)
• Bank of Japan Sees `Downside’ Risks to Economy, Keeps Rate Target at 0.1% (Bloomberg)
Quotable
“Everything worthwhile is a good idea, but did you ever notice there is more bad ideas that will work than there is good ones?”
Will Rogers
FX Trading – Recession Over? US Dollar Over?
It’s turning out to be a long September down a one-way street for the buck.
The decisions of investors who’ve jumped in on stocks and risky assets are being validated by three things:
1. Improvement in economic data
2. Affirmation of recession’s end
3. Continuation of risk taking
Each amounts to imminent recovery, in the eyes of so many. And who knows, they may be right. The worst may be in the rear-view mirror, a double-dip may not be in order, and corporations will be able to justify valuations brought on by this rally.
Forgive me, though, for not falling into the consensus camp just yet. It seems there is a long, slow uphill climb still ahead … at best. Thus far, this rally has taken on a sort of self-reinforcing quality. Perhaps it’s come unhinged from reality. A sobering up that seems inevitable at some point should at least throw a wrench into this mindset.
In many areas, the less-bad data has morphed into positive data. But let’s remember what started the crisis in the first place: credit crunch. Sharply receding credit zapped economic growth.
But now that growth is back, it would only make sense that credit growth was back too.
Not so fast. This is one item that analysts mostly refuse to acknowledge but economists cannot ignore. An article in the Financial Times broaches this subject quite well. As we’ve noted several times throughout this rally in risk: banks are not yet lending, credit markets are not sufficiently functional.
From the FT article:
“In a normal economic cycle, a flood of capital market liquidity would fuel a recovery. However, there is nothing normal about this cycle as major channels of finance in the real economy remain blocked. Increased corporate issuance and rallying equities may raise the amplitude of the inventory cycle, stabilise consumer wealth and slow job losses.
“But without policy measures to restore normal credit creation the pressure of leverage on company and consumer balance sheets will keep spending below depressed income evels. As international markets price in the beginning of Fed, ECB and Bank of England exit strategies next year and China moves to restrict loan growth, this hardly bodes well for global growth.”
And in similar comments from The Institutional Risk Analyst:
Looking at the banking industry, it is really remarkable that Fed Chairman Ben Bernanke has decided that the recession is over - but not surprising. After the past decade or more of credit fueled exuberance, no surprise that the maddening crowd wants to go back to the way it was. Many of the bankers and Buy Side investors with whom we speak feel that the worst of the economic crisis is behind us. And we do see increase activity in the secondary markets for loans and failed properties, an encouraging sign that may - emphasis may - push down the ultimate cost of cleaning up the mess in the banking industry. There are many other indicators that suggest consumers and business are rebounding from the summer of dread.
But while we all do hope for better times ahead, the fact remains that the supply of credit available to the global economy continues to shrink with the balance sheets of banks around the world. Forbearance and flexibility are the order of the day for most lenders. The impact of this credit shrinkage on asset prices is decidedly negative, but in many cases, investments in residential and commercial real estate made over the past five years are so far under water that the owners are simply walking away. And when we say owners, we are not just talking about residential home owners, but some of the most respected institutional players in the worlds of Wall Street and commercial real estate as well.
So as long as this dynamic is overlooked, or viewed as unimportant by mainstream investors (or is slowly resolved), then the environment might not change for a while … barring some sort of China disaster/disappointment.
For the buck, this means that momentum may not let up … that the drive lower will continue. The current environment is flush with US dollar-based credit that’s funding risky investment. And while a short breather may be in order for the near-term, sentiment is in a place where a major US dollar rally does not currently seem feasible.
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 16, 2009
Key News
• Confidence in the world economy held at a record high in September. (Bloomberg)
• Unemployment in the industrialized world will hit its highest level since World War II next year. (AP)
Quotable
“It’s only hubris if I fail,”
Julius Caesar
FX Trading – Ode to the Outlaw Goldbug
My father in-law, the family gold bug, makes sure I know that gold is going up, in case I haven’t noticed. He’s loaded to the gunnels with gold and silver (no bomb shelter yet that I know of). He, being the type that once literally hid buckets of silver coins in his walls, is loving life with the move higher in gold and silver prices. He should. He was right. I was wrong. I kept telling him that so many TV commercials about gold must indicate there is a major top shaping up; it must. But onward gold marches. Every $10 higher it goes and my father-in-law seems to forget he mentioned to me it was going higher $10 ago. I guess that’s why they call them outlaws.
Oh well, I owe him that pleasure at least, especially given he allowed me to marry his wonderful daughter 29 years ago; yes, that was just about the time those buckets of silver in his walls soared to $50 per ounce thanks to the Hunt brothers cornering of the silver market—near and dear, as we all lived in Dallas at the time. Of course the New York Metals Exchange (in their infinite self-interest and interest of their always self-interested Northeast banking “elite” friends decided to change the rules on the Hunt brothers in the middle of the game). It ended badly for the Hunts, silver, and those buckets in my father-in-law’s walls. Payback is a bi*&^ as they say.
So here we sit, gold looking very good. And many now believe on the way to $1,500, $2,000, and beyond. In the world of global finance and potential for all types of unforeseen events to rear an ugly head at any moment, it seems we’ve reached a stage where almost anything can happen.
Who would have thunk the most powerful institutions in the world, at least if we believed their press clippings, could have literally disappeared overnight—a la Merrill, Lehman, Bear… Gone, the entire “investment” banking industry of the US in a blink! Of course, the Government of Goldman (morphing quickly to bank status like the chameleons they are) is still here to see us through these tough times; we bow down in thanks I am sure.
So is it outlandish to say gold goes to $2,000? Not if you consider that markets can overshoot in such huge fashion. And with gold climbing tremendously in a world of improving optimism, what happens if all things hit the fan again? $2,000 sure won’t look like an overshoot.
But a battle seems to be shaping up, with speculators very long and commercials seemingly very short. And of course also in the game is the lowly dollar, the gold mirror image.
We hate to keep falling back on intermarket correlations as an excuse for thinking, but they are still seemingly in play despite the relative normalization of interest rates among the major central banks. As you noticed in the key news above, global confidence is rising. As you may have noticed global stocks are doing the same. Oil is back over $70. Emerging markets seemingly looked right past the mini-break in Chinese stocks, which now seem to be recovering. China has made it clear they will do all it takes to keep hope alive. Analysts say their growth is accelerating. It seems we are still in the midst of some powerful self-reinforcing trends.
Marty Zweig made the saying famous, “Don’t fight the Fed. And don’t fight the tape.” Worry we can about statistics and positioning and key technical levels, but sometimes it’s best to just bury the stuff in the wall somewhere and forget about it. Yet another of the endless lessons I learn and re-learn about investing.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com
Currency Currents - September 14, 2009
Key News
• A U.S. decision to impose special duties on Chinese tires could open the door to a host of trade complaints against Chinese products, creating tensions as Western nations seek Beijing’s support at the G20 meeting. (Reuters)
• Euro zone industrial output fell in July and employment dropped again in the second quarter. (Reuters)
• U.K. banks are less than half way through posting 240 billion pounds ($398 billion) of losses on loans and securities, according to Moody’s Investors Service Ltd. (Bloomberg)
Quotable
“The conventional view is based on the notion that free trade is always a win-win proposition and that our trade with China fits the conditions of the traditional free-trade model. These include the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements. If this were a true picture of our trade in tyres with China, then imposing tariffs would truly be harmfully protectionist and not be justified.
“But this is not even close to the reality of our trade with China, which far from embracing orthodox free trade has openly adopted a neo-mercantilist, export-led economic growth strategy. China keeps its renminbi undervalued against the dollar in order indirectly to subsidise its exports. Foreign direct investment in China is often induced by the use of special, targeted tax and financial incentives. Foreign companies investing in China are often required to export the bulk of their production as a condition of being allowed to enter the Chinese market. This is the case with Cooper Tires, which agreed to export 100 per cent of its production in return for being allowed to invest in a Chinese tyre factory. The tyre industry is characterised by enormous economies of scale and imperfectly competitive markets in which a few oligopolistic producers divide the market among themselves. It is Chinese industrial policies and not market forces that are currently determining the trade flows and the location of production and jobs to the detriment of the US tyre industry.
“Nor is the detriment only to the US industry. Orthodox unilateral free-traders argue that, even if the US tyre workers lose their jobs, the US economy will enjoy a net benefit from lower consumer prices. But this is true only if the shuttered US factories and laid-off workers quickly shift to some other equally productive and well-paid activity. If, as we know, they cannot, the entire economy will suffer a loss of productivity and wages.
“This kind of trade is not win-win. Rather it is a classic zero-sum game. It is well-known to game theorists that in such situations a tit-for-tat response is the optimal strategy. Unilateral acquiescence to the aggressive initiatives of another player (the orthodox unilateral free-trade response) is a sure way to lose.”
Clyde Prestowitz, Financial Times editorial 9/10/09
“The American press is Confucianizing itself. A key factor is that increasingly in the last twenty years, media professionals have been subjected to a litmus test on trade. Those who embrace laissez-faire ideology have seen their careers flourish. Those who don’t haven’t.”
“The litmus test is applied by various players with considerable power to influence a journalist’s career. Take, for instance, high-placed news sources in government, in business, in the think tanks, and on Wall Street. For top journalists, easy access to such sources have long been aggressively in Beijing’s camp. In the classic Confucian fashion know throughout East Asia, such sources seek to marginalize and indeed ostracize any reporter who tries to uphold the freedom of the press on China-related issues.”
“Even before reporters get the chance to talk to sources, they are already subjected to a litmus test by media proprietors…Proprietors who apply the litmus test include not only Ruper Murchoch’s News Corporation but General Electric (the ultimate owner of NBC) and Viacom. It is no coincidence that these companies have assiduously cultivated business links with China over the years.”
“…While not all corporate America’s socialization of media people is necessarily so Machiavellian, the fact is that literally trillions of dollar are at stake in the free-trade debate. The debate is of historic concern not only in China, and its corporate friends but also to all the Confucian nations—nations that, by no coincidence, have traditions going back millennia on the sort of politically motivated personnel management we have seen in the American in recent decades.”
Eamonn Fingleton, In the Jaws of the Dragon
FX Trading – Hats off to China—They have made their intentions clear.bsccc091409
It may at times be a cozy symbiotic relationship that has been beneficial for the US; especially as it relates to the US consumer getting increasingly higher quality and very inexpensive goods from China—that does increase domestic purchasing power. But, our relationship with China is not free trade in the “usual” sense. Based on empirical evidence, i.e. read real world not theory, if we continue down this road the US economy will be completely hallowed out of advanced manufacturing—which is important.
Granted the US has the lead in technology, but when US multi-nationals willy-nilly share that technology with key competitors, what’s the competitive advantage?
The most powerful interests in America will continue to try and convince us it is free trade and will invoke Adam Smith and David Ricardo blah, blah, blah…all in an effort to too keep the game going (there is likely a mix of true believers and those who know better but have the look of the Cat that swallowed the canary).
It won’t take much, except facing up to the most powerful entrenched interests in the world to at least convert the US-Chinese relationship into at least pseudo free trade; that should be the objective.
So, a full-court press of Obama trade policy bashing will likely be filling the airwaves. No Obama fans are we. No Union fans are we. But it is just plain stupid to continue to call our trade relationship with China free.
China has proven again and again to be many steps ahead of its Western counterparts. It is in their interest to do so—so their actions cannot be faulted in the game of great powers. Those going into China to manufacture know the rules (most of them), China has clearly established the ground rules both explicitly; and implicitly by actions. They make no secret of the fact they want to receive technology transfer as quid pro quo, requiring domestic production for access, instead of just shipping in goods, as happens in a trade relationship almost every place else on the planet. Chinese policymakers make no secret of the fact they want foreigners to establish a domestic partner so that said technology can be replicated by a Chinese domestic firm and sold into the Chinese domestic market. Western manufacturers volitionally accept this situation. A situation they don’t seem to accept anywhere else.
So we are not spinning China into the bad guy here. Hat’s off for playing the West like a violin.
That said, any disruption to the China-US trade relationship could rock markets big time. But, given the power behind the status quo, the tire dispute will likely fade from memory as just another Western anti-trade action. And so it goes.
Jack Crooks
Black Swan Capital LLC
www.blackswantrading.com