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September 28, 2013

Jamie Dimon’s Smug Mug

Filed under: Currency — Tags: , , — admin @ 2:24 am

Quotable

“Some of the biggest cases of mistaken identity are among intellectuals who have trouble remembering that they are not God.”

                                                      Thomas Sowell

Commentary & Analysis

Jamie Dimon’s Smug Mug!

I am not sure where or how Jamie Dimon grew up, but he carries himself like yet another prep-school brat who needs his smart-aleck mug readjusted. Had he hung out where I did as a kid, I am sure many of my friends would have been standing in line for an opportunity to help Jamie with plenty of adjustments. But of course, we can’t suggest such things in civilized circles; we have to play along with these “effete elite” Masters of the Universe who have more power than they ever deserve thanks to a very corrupt system that protects and nurtures the financial “industry.”

As I observe the financial press fawn all over poor Jamie as if he is some kind of “victim,” I consider this passage from Michael Hudson’s excellent book, The Bubble and Beyond, and then reach for my “effete elite” sickness bag:

So the world finds itself drawn into a new form of economic warfare. Waged by finance against industry as well as labor, it also is against government–at least, democratic government, which is turned into a vehicle to extract revenue and sell off assets to pay a creditor oligarchy. The trick is to convince voters to support a policy that shrinks the economy and throws the government budgets into deficit, adding a fiscal crisis on top of the debt crisis–which the financial sector sees as an opportunity to turn nations into a grab bag for assets and further control.

The effect is to make financialized economies higher-cost and hence less competitive–and less able to pull themselves out of depression by exporting more. Competitive advantage shifts to less debt-ridden economies, especially those where real estate is less debt leveraged and public infrastructure provides basic services at costs or subsidized rates. Politically, this means economies whose financial sectors have not gained enough power to capture the state, its central bank and regulatory agencies–or the academic economics curriculum, for that matter.

But financialized globalization seeks to widen the web of debt throughout the world, achieving what formerly was won by military force. In the name of “wealth creation” the financial sector has euphemized and transformed political ideology to such a degree that most countries are applauding the most predatory grabs of the public domain (government enterprises, land and mineral rights) since the Enclosure Movements of the 16th through 18th century in England, and earlier military conquests of the New World and most of Europe.

What is not recognized is that the effect of financializing an economy is much the same as levying tribute following armed conquest. Property ownership is transferred, on terms that block governments from taxing revenue that is “expensed” as interest or escapes through tax-avoidance transactions with offshore banking centers. Sell-offs of public monopolies such as roads and other infrastructure are turned into opportunities for rent extraction. This turns the economy into a set of tollbooths as user-fees raised on labor, industry, and other non-financial ‘real’ activity. Revenue is ‘freed’ of anti-monopoly rules and price regulation, and even taxation as property taxes are cut to leave more revenue ‘free’ to be paid as debt service.

The Progressive Era did not envision that campaign financing would make politics part of the ‘market economy’ by enabling the financial, insurance and real estate (FIRE) sector to buy political support for its debt leveraging. Government was supposed to regulate high finance, not cater to it. But the financial sector’s influence has become dominant by appropriating the central bank, Treasury and other agencies capable of remunerating it (or blocking public attempts to tax or regulate it). These financialized arms of government are filling the vacuum created by limiting government’s social welfare role. Rather than investing in infrastructure, central bank money creation and borrowing are limited to bailouts, subsidies and tax cuts for banks and their major customers.

…Internationally, bankers demand that governments pay creditors by privatizing whatever assets can be sold. Buyers borrow the purchase price from the banks, expensing their revenue as tax-deductible interest payments. These privatization policies together cause a fiscal squeeze that forces governments even further into dependency on bankers and bondholders.

…What is deemed ‘efficient’ is to shift planning out of public hands to those of bankers. Yet public policy aims (or is supposed to aim) at raising output, employment, capital formation and living standards. Financialized planning is short-term, and aims to capitalize the economic surplus into debt service at the going rate of interest. The business plan of finance capital is to expand interest and amortize charges to the point where they absorb all disposable consumer income over and above essentials, all business cash flow and real estate rent over and above break-even costs, and government revenue over basic police and other necessary functions.

And then the economy collapses! How else can matters end when debt obligations grow exponentially as interest charges mount up? Debts grow at compound interest, swollen by penalties on arrears. Unpaid bills are added onto debt balance, until foreclosure time arrives, transferring property to creditors under distress conditions. Vulture funds clean up.

The dynamic has happened before, most notoriously in the Roman Empire after 133 BC when creditors used violence against the Gracchi and other reformers. Violence and corruption are essential tactics to impoverish the economy while creating billionaires at public expense.

So, I guess it was no surprise Ben Bernanke and friends decided to continue to supply what their masters demanded recently. What has all this central bank largesse brought us?

A good friend recently shared some research with me from a brilliant man named Criton Zoakos of Leto Research. Mr. Zoakos sums it up quite well:

… after five full years from its inception, the “exceptional” monetary accommodation appears to be putting down roots for the long haul – both in the United States and among the other major central bank jurisdictions.

…The evidence now available from five years of “exceptional” monetary accommodation suggests that there is no “returning” to “solid recovery” because the downturn is not cyclical. It is structural, and the structure in question is global. The trade, production and investment structures that have emerged from a quarter century of globalization are no longer compatible with the financial and debt structure.

During the five years of “exceptional” monetary policies, central bank balance sheets exploded by $10 trillion (150%), global government debt by $20 trillion (65%) and global total stock market capitalization by $26 trillion (84%). During the same five years, however, real global GDP grew by only $8 trillion (11.5%).

Global unemployment as measured by the International Labor Organization (ILO) increased by over 32 million people to 201.4 million, from 169 million (to 6.1% from 5.4%) to 200 million. Moreover, this rising unemployment rate is calculated against a declining rate of labor participation: according to the ILO, the global ratio of employment to population declined from the pre-crisis level of 61.3% to 60.2%. In many parts of the world, including the United States and the European Union, the reduction of employment was accompanied by reductions in real wages and salaries.

On the whole, the five years of “exceptional” monetary policies have been to the great benefit of owners of capital and to the loss of labor, employed and unemployed. This widening socio-economic gap and the stagnation of economic activity were the defining features of the previous five years of QE and have triggered rising social and political conflicts in virtually every part of the world.

Take this information and do with it what you will. Call me a socialist (which couldn’t be further from the truth). Call your local congressman (whatever good that will do). Grab your pitchfork and head to Washington (I didn’t say that NSA if you are listening). But please, please don’t cry for Jamie Dimon.

Have a great weekend.

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September 18, 2013

Guessing Where Bonds Go In Front of Fed? Crazy I Know.

Filed under: Currency — Tags: , , , , — admin @ 2:24 am

Quotable

“If we become increasingly humble about how little we know, we may be more eager to search.”

                                    Sir John Templeton

Commentary & Analysis

I’m not sure what the Fed will share with us tomorrow. But I am looking for a bounce to 136^32 on the 30-yr T-bond futures. Thus, risking two points to make five isn’t a terrible risk/reward for a short-term trade.

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September 12, 2013

Trading Ruminations: A Game of Probabilities-and Your Edge

Filed under: Currency — Tags: , , , , — admin @ 2:25 am

Quotable

“To climb steep hills requires slow pace at first.”

William Shakespeare

Commentary & Analysis

I layout my best available insight about the currency markets on a daily basis. I tried to sound “smart.” Often I tried to convey some sense of prescience I may have about currencies. But I have no “gift of hindsight,” few of us do. I know that. And because I have seen some very strange things happen over the years that have drained more money from my trading account than I care to talk about (or let my wife know about), I do my best to approach markets as a game of probabilities. I think it’s the right way to do it.

What I mean by a game of probabilities is this: I do the best I can in my fundamental and technical analysis; I do all I can and try to do it with discipline, focus and consistency. I do this to try to gain an edge. But I know there is never such a thing as certainty; one can never have enough brain power or computing power to harness the mind of the market. It’s not because the computing power isn’t available–it is. It’s because the players in the market do not make “rational” decisions all the time.

When push comes to shove, the big moves in the market are driven by real people moving real money based on good old fear and greed–base human emotions. It’s why I like Elliott Wave analysis–I believe it best displays the consequences of price action in what Soros’ refers to “boom bust.”

Economists who believe in things like equilibrium and modeling of cause and effect and the rational man as the cornerstone of economic (price) analysis have had their clocks cleaned. It is why the new thinkers in the field of economics are gravitating increasingly to behavioral economics for help about how the real world really works.

Needless to say, we all continue to search for some type of Holy Grail model to forecast price action. But no such Grail seems to exist, or at least those who have found it aren’t sharing. Is there is reason to believe the perfect price model will be found anytime soon? I don’t think so.

“If you are going to use probability to model a financial market, you had better use the right kind of probability. Real markets are wild. Their price fluctuations can be hair-raising–far greater and more damaging than the mild variations of orthodox finance,” writes Benoit Mandelbrot, The Misbehavior of Markets.

Note: Benoit Mandelbrot is the person who created fractal mathematics. He was a brilliant man, to say the least. He was shunned to a degree because he never bought into financial orthodoxy that starts out with “the rational man.”

“Real markets are wild.” If you trade for real money, you already know this. And if you attempt to overlay cause and effect on price action, you know this.

So, does this mean we should be defeatist and believe we can never win? Absolutely not! If you attack the market with the mindset that it is a probability game–interspersed with wild and unpredictable movements–that already can give you a substantial leg up on the crowd. As traders, our goal is not to believe we can forecast the next layer of irrational reaction to future news we cannot predict, but it is to develop a system (technical, sentiment, or fundamental driven) that can increase the probability of our success.

I believe a probability mindset forces a degree of perspective and discipline that most other players don’t have. The natural benefit of thinking in probabilities is the acceptance you cannot predict with any degree of certainty. This doesn’t mean you don’t forecast. It means when you do it, you know ahead of time how much the right to forecast will cost, i.e. your stop-loss level.

Granted, even the process of trying to formulate a probability is subjective. But, keep in mind, in trading you can win many fewer times than you lose and still make money. How? If when you do win, it is that much larger than when you do lose. This is where the probability mindset pays its biggest dividends. It is hard for those who haven’t traded and been dinged psychologically over the years, to understand that losing more than you are winning can be a winning strategy. This is another reason why trading is not easy, and to a large degree unnatural.

So, as trite as this sentence may be, and there are many such trite phrases when it comes to trading and investing, I still think it’s worthwhile to keep it tight packed into your short- and long-term memory banks. Whenever I forget it, I get myself into trouble.

Your edge, applied with consistency, should allow you to inch the probabilities of a winning trade slightly in your favor; this alone is what will allow you to win overtime. And keep in mind, this trading game in reality is a marathon, whereby you remain open to learn more and more along the way and finish the race stronger than when you started. That is why I use the phrase “over time.” Long-term investment success, even for those of us who trade short-term, is the destination.

It’s in our reach.

I have learned much from reading and listening to Mark Douglas. Applying his insights has made me a better trader. Here is a video of Mark Douglas, author of Trading in the Zone, talking about thinking in terms of probabilities.

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September 11, 2013

The Market “Reprieve” Goes “Full Risk-On”

Filed under: Currency — Tags: , , , , — admin @ 2:24 am

Last Thursday I wrote the following in Currency Currents:

“September is well known for being the worst month for US equity market performance. That may be reason enough to expect the opposite in the early going. After all, the catalysts for market weakness — mainly concern for emerging markets and rising interest rates — are probably overdone in the near-term.

“I expect a reprieve from general selling pressure in global equity markets and other risk assets over the next few weeks. In that environment, the US dollar probably will be pressured lower. Once the US dollar is again looked at as a dog, it should be about time for it to head higher as many have been quick to forecast in recent months.”

I was reading a Bloomberg article this morning and read an analyst’s reaction to recent economic data and market action. Effectively he said:

“Markets are full risk-on mode.”

I suppose we are. Three things to consider:

1) The view in China is a major impetus — better-than-expected export and industrial production numbers yesterday and today, respectively, are helping to drive the rally in Chinese and emerging market equities.

2) Russia apparently has a respectable proposal on the table that would see Syria give up its chemical weapons and bring an end to the face-off that’s unnerving market players. I can’t yet say with any confidence that Russia engineered this Syria fiasco, but I can say they seem to be coming away with increased global influence. Russia has been mocking the US by pointing out the insanity and inanity of America’s social policy disputes. And now Russia is seen to be driving the dimplomatic efforts in the Middle East.

3) The Fed will always be in the picture. And it seems Friday’s Nonfarm Payrolls report is being used as a rationale for why risk is on this week. It’s not surprising.

The question, of course, is this: how long will risk appetite remain the impetus du jour?

As I said, I thought this reprieve rally might last a few weeks. But a look at several recently beaten down assets shows that the market has bounced back sharply and quickly. It will take persistent optimism to generate additional significant gains going forward.

Perhaps the September bears will emerge next week around triple-witching. But they have to get through the September 17th -18th FOMC meeting first.

S&P 500 chart setup — finishing a B-wave corrective bounce?

The S&P 500 is testing a key Fibonacci retracement number that could mean the end of this corrective bounce is near.

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September 10, 2013

A Reliable Framework for Trading Currencies?

Filed under: Currency — Tags: , , , — admin @ 2:24 am

Quotable

“Why, sometimes I’ve believed as many as six impossible things before breakfast”.

Lewis Carroll, Through the Looking Glass

Commentary & Analysis

“Six impossible” beliefs before breakfast are probably the norm for most currency traders. There seems a simple reason for this–it’s because there are incredible number of potential variables in the marketplace that seemingly move price. Our goal, as traders, is to develop a trading system that helps us sift through the potential reasons with some degree of clarity

The bottom line is: If something works for you, use it. It is not for me or any other trader to say what you are using is wrong. We all see the market differently and process information differently. So, keep in mind as you read this missive it is only an attempt at summarizing a “rational” framework to apply to an extremely “irrational” world.

One reason so many experts are consistently wrong when it comes to the world of currencies is because of all the asset markets available to trade, the movement of currency prices seems the most random, or irrational.

As a trader your goal is not to forecast real world events, but to monitor the expectations of the players who are trying to forecast real world events. George Soros, the man credited with “breaking the Bank of England” shorting the British pound had this to say about market prices:

“I believe that market prices are always wrong in the sense that they present a biased view of the future.”

We think, feel, and forecast for all kinds of different reasons; millions and millions of reasons. All of these reasons taken collectively are what we refer to as market sentiment.

It is a sentiment game

Currency trading can be boiled down to a sentiment game. It’s a game driven by a crowd mentality. And it’s a tough game. Irrational and seeming random short-term price action can shake us out of what proves ultimately to have been a very good position. Price action is the final arbiter, but do we react too quickly? Usually, the panic out of what otherwise was a good position usually is driven by the fact we are trading too large. We need a framework to help us remain in “good” positions; those based on solid rationales that have worked for us before:

To achieve this lofty goal I think the system must contain these three primary elements:

  1. Reasons for making a trade

    Sentiment analysis and technical: helps you determine the crowd’s expectations and helps you to exploit the seemingly irrational price action

  2. Risk in the trade

    Trading discipline: define your risk and set your stop-loss level

  3. Time-frame

    The choice of time frames will impact your reasons and risks. And the amount of risk you take on will help dictate your trading size (# of positions).

Going with flow

So our framework can be equivalent to “going with the flow.” Let the market do the talking. Each of the elements of our framework is grounded in the fundamentals of market price action and human behavior

This is a framework that can be used by either day traders or position traders. The only thing that changes is the time-frame. Keep in mind, the shorter the time frame the more your technical skill will come into play.

Now let’s examine the component parts of this framework.

Sentimental journey

It is exceedingly difficult to determine the underlying driver of currency prices, especially in the short run. Currency prices are affected by the fundamentals and the fundamentals are affected by the currency price. It is a continuous feedback loop.

Because the players are not sure what is really moving currency prices–trade, interest rates, inflation, deficits, geopolitics, economic growth, on into infinitum, any expectation that is validated by price action enhances the belief of the players that their current position is the “right” position. It emboldens the players to add positions. This price action and player reaction process is raw material of a self-reinforcing trend.

If you follow the news you have probably seen it many times before. What seems like an important piece of fundamental news that would move a currency in one direction results in a movement in price opposite of your expectations based on the news–the real world event. The “trend’ is established and that’s the key driver. And as this driver pushes prices, these new prices tend to influence the fundamentals. And the strategists create very plausible sounding rationales to further encourage this trend following behavior.

It this process that leads to two things we see in all markets, but even more so it seems in currency markets: 1) more consistent trending for longer periods of time that leads to 2) “overshooting,”–prices becoming extremely detached from the fundamentals.

Self-reinforcing cycles become the nature of our irrational beast–forex. So our goal is to ride this beast with the knowledge that at some stage the players will begin to realize the widening gap between expectations and reality. This is when we as traders need to start looking in the other direction than the crowd. We apply our sentiment analysis.

Measuring sentiment

Some relatively easy methods can help you judge market sentiment. These methods include both quantitative measures and qualitative judgments. They are: open interest and volume, consensus, and perception of the trend.

Market talk often describes the crowd as either bullish or bearish. Always keep in mind there are “talking” bulls and bears and there are “acting” bulls and bears. The “acting” bulls and bears show up in open interest and volume. Of course you can’t get volume and open interest numbers for forex, but they are reported for currency futures. And these measures (the non-commercial players) represent an excellent proxy for overall market sentiment.

Turning points in currency markets often coincide with extremes in open interest levels, i.e. one-way bets. Watch for both high levels of open interest and large changes accompanied by unusual volume to alert you that a turning point may be near. (These changes also show up during minor fluctuations within the major trend, i.e. the fractal stuff.) If you begin to record changes in open interest and volume for each of the currencies traded at the Chicago Mercantile Exchange (CME) on a daily basis, you probably will be surprised to learn how often changes in trend correspond with unusual fluctuations in these numbers.

Though open interest numbers are of little use intraday, knowledge of a change in trend or extreme speculation in a particular currency based on open interest and volume can be valuable information for any time frame.

Watching the consensus

Consensus, conversion flow, and perception of the trend are qualitative measures. How is the market acting? What is the tone? Is it moving in line with the background news events? Is the bullish or bearish talk among players actually showing up in the open interest and volume? Are longer-term fundamental traders who have been wrong starting to capitulate to the trend? Is price action confirming specific news events? Are important pundits and players getting behind the trend with a new rationale?

Here is how Bruce Kovner, a Market Wizard and major player in the currency markets, views consensus opinion:

“During major moves, [the consensus] will be right for a portion of it. What I am looking for is a consensus that the market is not confirming. I like to know that there are a lot of people who are going to be wrong.”

Kovner, in effect, validates several key items: currencies trend, the crowd will be right during the middle of the trend, and because of the overshoot quality in currency price behavior, there comes a time when consensus expectations are no longer reflected in prices. Here is where we begin to see conversion flow–traders changing positions based on the belief in a new rationale.

The new rationale eventually leads to a new trend. And as more and more traders switch direction, the crowd begins to articulate this new trend i.e. the perception of the trend.

Here is a roadmap of a typical currency cycle. It should help put the terms “conversion flow” and “perception of the trend” into better perspective for you.

  1. Extreme bearishness–this is the stage where “shoe shine boys” are shorting the currency and can articulate the rationale to anyone and everyone who will listen. This is when things seem the most bearish, but are in reality most bullish (as later can be seen with the elusive gift of hindsight). This is Tao of the market time!
  2. Conversion flow–this is the stage when bears (during a long downtrend) start to question their “so obvious” rationale for being short. It is the stage where the flaw in perception of the crowd begins to be recognized by members of the crowd. Conversion flow has an early stage and a more advanced stage. It is why we see increased volatility when the trend changes. The players begin to realize something has changed. But they realize it at different times.
  3. Perception of the trend–this is the stage where the crowd recognizes that a new trend may be underway. They have discarded the old rationale and are beginning to accept the new one.
  4. Capitulation to the trend–now the trend is fully underway. The crotchety old diehard bears can’t hold out hope any longer–they capitulate and buy into the new trend. Often this is a sign that the new trend is actually becoming a bit stale, for now even the diehards are along for the ride.
  5. Extreme bullishness–now the “shoe shine boys” are buying the currency and are articulating the rationale to anyone and everyone who will listen. This is when things seem the most bullish, but are in reality most bearish.

That is the typical pattern or five stages of the currency life cycle.

So the key is to understand consensus expectations while at the same time fighting the need to judge whether such expectations are right or wrong. The moment you start to judge the “rightness” or “wrongness” of market expectations, you have admitted that you are being guided by expectations of your own. Simply watch how consensus expectations play out relative to real world events and watch the way the market reacts to the that interplay.

Of course, it is never easy or we’d all be rich. But hopefully some of these insights may help you when trading currencies.

*A special thank you to John Percival for many of the ideas I shared in this piece.

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September 7, 2013

US Nonfarm Payrolls. Gross!

Filed under: Currency — Tags: , , — admin @ 2:27 am

What a weak-handed attempted to recover $7.7 billion in redemptions last month.

That’s the amount of money that flowed out of Pimco’s $41 billion Total Return Fund in August. And Bill Gross is trying to stem the outflows by promoting the NEED to be in short-term Treasuries and credit.

He and his colleague, Mohamed El-Erian, are campaigning with their predictions for a very unstable investing future, albeit one where the Fed continues to maintain historically low interest rates.

They may be right about the increased instability, the low-interest rate environment, or both. I tend to think they’ll at least be right about the Fed sticking to its low interest rates policy …

As it concerns the more immediate future — the taper — I think the Fed will at most gesture with a small decrease in its monthly bond purchases. But it will need to simultaneously emphasize its continued commitment to low interest rates, monetary accommodation and new bond purchases if needed.

The Fed is nowhere near an exit if you consider the global dependency its policies have created. The global economy is not ready to stand without the Fed’s crutch.

What does this mean?

Well, sticking with Bill Gross’s area of expertise, I think bonds may find some support here. A colleague of mine this week called shorting bonds “the easiest trade in the world right now.” As such, he seemed as reluctant as I am to jump on this easy trade right now.

On a weekly basis, this drop in bond prices (rise in interest rates) appears to be overextended. In looking at a weekly chart I noticed a similar price pattern between now and late 2010/early 2011.

In the last four months, the 30-year Treasury Bond has fallen nearly 13%. In the four months ending January 2011, the 30-year Treasury Bond fell just over 13%.

What happened after January 2011? It’s interesting you ask. The 30-Year Treasury Bond price rallied 40%, low to high, over the following 17 months.

Now, I know this is not a perfect and certainly not a scientific comparison. So many things are different different between now and then. So this pattern may not be an apples-to-apples comparison. And it may not be a trading signal you’re comfortable jumping on.

But it may be worth considering nonetheless. It may show we’re close to a maximum tolerance level for interest rate increases over said period of time.

The US Nonfarm Payrolls report this morning was not stellar. It wasn’t overtly bad either. But it was soft enough that it gets investors thinking more about the anticipated certainty of the Fed taper.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota recently said the US economy needs more stimulus, continued QE. He says the Fed’s own forecast on inflation and unemployment calls for continued accommodation. If the Fed does decide to taper, this suggests it will be a marginal move — a gesture — that keeps its ultimate commitment to accomodation intact.

Interest rates may find at least a temporary top if this idea gains traction.

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September 6, 2013

Setting Up for a US Growth Disappointment

Filed under: Currency — Tags: , , — admin @ 2:25 am

It seems the US trade deficit data released yesterday went largely unnoticed. And that’s usually how it goes each month, probably because there tends not to be much, if any, knee-jerk market reaction to that report.

But considering how most markets have been moving this week (up), it got me thinking about how the trade numbers might influence markets over the next few weeks …

To recap: the US trade deficit widened sharply in August. That followed the previous month’s narrowing to a level not seen since October 2009.

I was particularly wondering how this might impact the US dollar. There is not a tight correlation between the US trade balance and the US dollar, especially over the shorter-term. But the widening trade deficit is a nod to the typical dynamic — trade imbalances — that’s characterized global growth over the last decade.

Manufacturing PMIs in US, Europe and China are all higher in the most recent month, poking above the 50-level that delineates expansion and contraction.

Despite the recent scare over emerging markets, many are quick to notice a general stabilization in global growth expectations.The US economy has been the least of the concern for investors. But if the world is seen to be stepping back into what’s been a typical growth pattern, then maybe Asia (namely China) gets cut some slack.

In an environment where things seem to be “back to normal,” then maybe we see capital exit the US in search of return. Maybe the US dollar loses any safe-haven appeal and is potentially looked at as a funding currency. And maybe most markets around the world feel a reprieve from recent selling pressure.

Obviously this is all speculation on my part. And it’s all speculation that I imagine would run its course in a relatively short period of time, say three to six weeks.

So I may be stretching it to think the trade deficit could have such an influence on markets in that amount of time.

But one reason (among many) I tend to think such a “back to normal” growth mentality won’t last too long: the recent US GDP beat was driven largely by a surge in exports.

As mentioned, the latest trade deficit number showed the surge in US exports reversed last month. In other words: come the end of September or early October, everyone may be rethinking their expectations for the US economy. And if they start rethinking the US, chances are they’ll start rethinking global growth as well.

This chart is from Part 5 of a five-part series The Wall Street Journal put together on “China’s Rising Risks.” Click the image to access the article.

September is well known for being the worst month for US equity market performance. That may be reason enough to expect the opposite in the early going. After all, the catalysts for market weakness — mainly concern for emerging markets and rising interest rates — are probably overdone in the near-term.

I expect a reprieve from general selling pressure in global equity markets and other risk assets over the next few weeks. In that environment, the US dollar probably will be pressured lower. Once the US dollar is again looked at as a dog, it should be about time for it to head higher as many have been quick to forecast in recent months.

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September 5, 2013

Alley-Oop: Aussie Up!

Filed under: Currency — Tags: , — admin @ 2:24 am

I could tell you this article is an alley-oop, that buying the Australian dollar right now is a slam dunk.

But then I’d be sounding much too certain for my own good (and yours.) So consider this a regular chart setup with lots of rationales suggesting the Aussie could shoot higher by nearly 4% from current levels.

First, here is a chart from Jack. (It should give you a good idea of the key levels he’s monnitoring for members of his Black Swan Forex trading service. If you’re interested in a FREE WEEK of his trade alerts and analysis, click here.)

Jack’s looking for a c-wave move at least reaching high enough to test the AUD/USD 0.9317 level … and then a potential extension that could reach the next swing high at 0.9664

I, obviously, agree the Aussie’s direction will be higher if it can hold trendline resistance (inverted head-and-shoulders neckline) it’s testing today. What’s intriguing is that so many indicators — specifically the targets generated by those indicators — are converging at pretty much the same spot on a chart: AUD/USD @ 0.9525

Many targets converging at AUD/USD 0.9525

Here are those three targets:

1) A c-wave extension measuring right on 161.8% Fibonacci retracement

2) A 38.2% Fibonacci retracement of April to August downtrend

3) An inverted head-and-shoulders projection of about 3.75%

If you’re already trading Forex, you can use AUD/USD to play this idea. If not, you could use shares or call options on the CurrencyShares Australian dollar Trust (FXA).

Good luck.

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September 4, 2013

USD/JPY: Where From Here? My Best Guess a Triangle Pattern in Play…Then Higher

Filed under: Currency — Tags: , , , , , , , , — admin @ 2:27 am

Quotable

I got a random tattoo the other day. It’s a red triangle, which makes everyone think I’m arty, which I’m not. I used to draw red triangles all the time. It must mean something – maybe I don’t know it yet. But I’ll figure it out.

                                    Ellie Goulding

Commentary & Analysis

USD/JPY: Where from here? My best guess a triangle pattern in play…then higher

The Japanese yen trade isn’t as easy as it used to be. Many, including me, did well during the huge rally in USD/JPY from the low 77.11 on 14 Sep 2012 to the high of 103.73 on 24 May 2013–a whopping 34.52% gain in just 179 day. Thank you Prime Minister Abe. But as you well know, there is no such thing as “easy” when it comes to trading and investing. If there is, I haven’t found it.

With the gift of hindsight it appears Mr. Market is in the process of shaking out those one-way bets long USD/JPY and short Japanese yen futures. It was a very lopsided consensus going into the high at 103.73, as you can imagine. So where does the yen go from here?

Based on the Commitment of Traders Report (COT) data, there is still an overwhelming short position in Japanese yen futures (equivalent to long positions in USD/JPY). Here are the numbers from the COT as of 27 August 2013:

Non-Commercial (smaller speculators)

  • Long 23,396 contracts or 18.7% of the total
  • Short 101,749 contracts of 81.3% of the total

Does it mean there is more to be shaken out of this lopsided futures short position, i.e. yen futures rallies further and USD/JPY falls further from here? My guess is yes. If so, it may signal the pair is completing an A-B-C-D-E triangle pattern. The weekly and daily charts and video updates I shared with my Black Swan Capital clients this morning are below…

USD/JPY Weekly: Targeting up to 106-level once this “correction” completes…

Click here to view a video update of the long-term USD/JPY forecast

USD/JPY Daily:

Please click here to view a video update of the daily USD/JPY forecast

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August 31, 2013

Financial Repression: A Game Every Government Loves To Play

Filed under: Currency — Tags: , , , , , , — admin @ 2:24 am

Quotable

I saw their starved lips in the gloam

With horrid warning gaped wide

And I awoke and found me here

On the cold hill’s side.

                                                            John Keats

Commentary & Analysis

Financial Repression: A game every government loves to play

I’ve been trudging through Prof. Michael Pettis’ latest book, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy.  I think it’s excellent.  I’ve learned a lot.  I particularly like his coverage of financial repression.  It is a game all our governments are now playing to the detriment of their own peeps.  Shocking, I know.  J I think and understanding of financial repression may shed some light on why central banks have wondered off into monetary Wonderland, a place where our boy Ben Bernanke stars as The Mad Hatter.  

 “I’m investigating things that begin with the letter M.”

The Mad Hatter

“Financial repression is not always well understood, but in fact it can often be, and usually is, the most powerful of all the policies or conditions that generate trade imbalances and is at the heart of Chinese and Asian overall imbalances. Financial repression matters to trade even more than undervalued currencies, although, unfortunately, it rarely enters into the debate on trade imbalances.

“What is a financially repressed system, and why does it matter? In a recent article Carmen M. Reinhart, Jacob F. Kierkegaard, and M. Belen Sbrancia described a financially repressed system this way:

Financial repression occurs when governments implement policies to channel to themselves funds that in a deregulated market environment would go elsewhere. Policies include direct lending to government by captive domestic audiences (such as pension funds or domestic banks), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks, either explicitly through public ownership of some of the banks or through heavy ‘moral suasion.’

Financial repression is also sometimes associated with relatively high reserve requirements (or liquidity requirements), securities transaction taxes, prohibition of gold purchases, or the placement of significant amounts of government that that is nonmarketable. In the current policy discussion, financial repression issues come under the broad umbrella of ‘macro prudential regulation,’ which refers to government efforts to ensure the health of an entire financial system.

“As the passage implies, most savings in financially repressed countries, like most of the countries that followed the Asian development model, are in the form of bank deposits. The banks, furthermore, are controlled by the monetary authorities that determine the direction of credit, socialize the risk, and set interest rates. Financial repression is a way of describing a system in which the rates of return and the direction of investment of domestic savings are not determined by market conditions and individual preferences but rather are heavily controlled and directed by financial or political authorities. At the extreme the financial system is often little more than a fiscal agent of the government.”

Key points:

In short, financial repression is a direct transfer from the household sector (who is the primary source for deposits) to the net borrowers, which Prof. Pettis defines as “local and central governments, infrastructure investors, corporations and manufacturers, and real estate developers,” because the repressed deposit rates effectively lowers the cost of capital for the benefitting entities. 

[Note: There was some excitement recently over the fact China was lifting its cap on rates its banks can charge borrowers; but the most telling part may have been caps were not lifted on depositors, steeping the yield curve in favor of banks.  China over the recent past has clearly been the most aggressive of financially repressive government.  Since the credit crunch, however, Western governments have dramatically improved their game.] 

Here are some of my random thoughts on this process and its implications:

  • It’s a reverse Robin Hood when you think about it.  Those that can borrow get the subsidized goodies.  Yet our government is here to “help us” don’t you know.  It really is the big money scam and why the big players in the financial community love The Mad Hatter, i.e. Mr. Bernanke. 
  • It tends to reduce consumer income and therefore consumption.  Effectively this is another way of attempting to increase the relative size of export component, i.e. improve the trade balance and by virtue the current account. Put another way, it forces the major players to scramble for relatively scant aggregate global demand in the world. 
  • It explains why retail investors’ “stretch for yield” and are willing to buy stocks with little regard to risk. 
  • It explains why the big money guys have been so confident stocks can only go higher, and have reaped a huge bounty from their bet.  Liquidity is the mother’s milk of stock prices. 
  • It explains why the real economy, where Joe Six Pack works and lives, is so badly disconnected with the financial economy, where Joe Hedge Fund and his banking buddies work and live. 
  • It explains why big interest lobbyists are flush with cash to manipulate the so-called “Representative Republic,” with a blatancy we have witnessed in our lifetimes. 
  • It helps explain why our government is so dramatically cracking down on US citizens who have money offshore, as those Swiss bankers know all too well. 
  • It may lend credence to the idea if things do get worse, the government may begin to put restrictions on citizens buying gold.
  • It definitely explains why even the US banking system reserves have soared something like 2,145.6% percent since the credit crunch and continue to rise–incredibly.  

(Billions of $’s in banking reserves: Aug ’09 $97.3 billion – Jul ’13 $2,185.0 billion or agrowth of 2,145.6%)

  • It may explain why the emerging market problems may be “their” problems, as the result is likely more developed world investor money returning to the collective coffers of our illustrious governments via those conduits we call banks and Treasury paper.  

I could continue on with this, and I am sure you can add a few of your own, but you do get the point I hope.  Financial repression allows for greater government control over the system is the bottom line.  This is not to suggest all implications of financial repression are negative.  There are times when imbalances are so great government must do all it can to right the system, lest the entire credit system evaporate; some believe that’s the justification for the severe financial repression now being applied in the United States. 

Maybe or maybe not, only the Mad Hatter knows for sure. 

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