Friday October 31, 2008 - 12:59:58 GMT
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Black Swan Capital - www.blackswantrading.com
Ultimately a probability bet it is!
This morning, we our reprinting Currency Currents past from 28 August 2007; itâs the âbest of Currency Currentsâ if you will.
What is interesting is that our top key news event back on 28 Aug â07 was Barclays, a UK bank that is in the news again today after sealing a deal to obtain funds from a couple of places that still have someâAbu Dhabi and Qatar.
We particular liked this old issue because it lays out a thought process to help shield us from a world chock-full of guru-ism, which is always a danger to oneâs trading account.
As you know, weâve been looking for a dollar âcorrectionâ and lately have caught a bit of it, after being first steamrolled. But as you also know, the dollar doesnât have to âcorrect,â and its cranking again this morning. Are we seeing a digestion of the sharp moves higher in the euro and pound and Aussie over the last few days, or something more?
It seems the market is increasingly firming to the idea that growth in the Eurozone and UK could be much worse than in the US. And as Chinese growth continues to fade, dampening the fortunes of many others in the region, the old ugly greenback, warts and all, is looking like a relatively decent place to hide in a world still full of potentially very ugly outcomes.
Tuesday 28 August 2007 6:00 a.m. EST http://www.blackswantrading.com
â˘ Barclays has been left with an exposure worth several hundred million dollars to failed debt vehicles created by its investment banking arm amid growing scrutiny over its links to Sachsen LB, the failed German public sector bank. (FT)
â˘ The [UK] house price boom of recent years could be set to slow to a near standstill next year even assuming the credit market storm blows over. (FT)
Key Reports Due (WSJ):
7:45a.m. ICSC Chain Store Sales Index For Aug 25. Previous: +0.2%.
8:55a.m. Redbook Retail Sales Index For Aug 25. Previous: -0.7%.
9:00a.m. Aug Richmond Fed Manufacturing Index. Previous: 4.
10:00a.m. Aug Conference Board Consumer Confidence. Expected: 105. Previous: 112.6.
5:00p.m. ABC/Wash Post Consumer Conf For Aug 26. Previous: -20.
âThe indirect effects of greater uncertainty and higher volatility are more important in todayâs world. Tracking the transmission of economic shocks from one country to others used to be straightforward when trade linkages were the main channel of contagion. For example, countries with greater trade exposure to the US and/or commodity markets tend to have highly synchronized business cycles. However, with increasing globalisation, cross-border financial links have also become an important source of transmission across the world. As a result, although direct effects of the liquidity squeeze may remain small, we should not ignore the indirect effects of greater uncertainty and higher volatility in global financial markets. In other words, market dislocations and growth fluctuations can now spread through an intertwined set of financial and economic channels that could magnify the shock.â
Serhan Cevik and Katerina Kalcheva
FX Trading â Ultimately a probability bet it is!
Cross-border financial links are much tighter in a âglobalizedâ world, no doubt. Thus, contagion is more than a four letter word. When these cross-border financial links are supercharged with leverage, as they are, itâs difficult to believe weâve seen the worst of it.
We think the first round of risk-reduction effectively pulled the pin on many hedge fund grenades. As these explode, the whiff of confidence we saw among the financial market Tout TV crowdâhoping, praying, and saying anything that might help their storyâwill likely explode too. And of course, this crowd will blame the Fed for the woes instead of what is always the case: greed and a belief the future will somehow resemble the most recent past leading to complacency. (This is not to say that central bank policy isnât to some degree culpable as contributing to the crowdâs complacency.)
If I hear this mantra call of the recent past one more time I think Iâm going to scream, âThe dollar is going lower and gold is going higher. Sure, gold isnât acting like it should, but it will. And the bargains in gold stocks are incredible.â Scream I will not because itâs wrong. But because of two things: the arrogance with which those who looked at a weekly chart say it, and the mindlessness of the mantra at the core. Unfortunately, in the newsletter world one canât escape this arroganceâit seems the general nature of a so-called âguru.â And as the newsletter world is set up as the parent-child relationship game, arrogant âgurusâ not only survive, but seem to make the most money; just I case you needed a little insult added to intellectual injury.
Again, itâs not that the âgurusâ will be necessarily wrongâitâs just that their arguments, lack of critical thinking, and seeming source of their knowledge is so flimsy for the most part. If the future resembled the recent past we wouldnât be in the midst of a global credit crunch. And because we are in the midst of a credit crunch it means some things have changed. And if some things have changed, why should there be any degree of confidence that trends that existed before things changed (which had reasons likely well beyond the grasp of most of us, though the price trend validated our rationales) will reassert themselves?
At Black Swan we talk and write about things as if we have some knowledge of them. This is unfortunately how we communicate our views. And we have stepped into and will continue to step into the guru trap, for the fact that we tell a story about markets (provide our guess is all it is) in public immediately subtracts from our ability to be objective. And it assumes we have some reliable source of knowledge. What you donât see is that no matter how much confidence we may exude about a particular themeâthere is continuous self-doubt in us simply by the mere fact we have verbalized a story based on, themes driven by the recent past, and all the time knowing that all knowledge is flawed. Full circle back to the criticism we just flung at so-called âgurusâ who mantra-like love gold and hate the dollarâwe plead guilty.
âWhat should we do, I suggest, is to give up the idea of ultimate sources of knowledge, and admit that all human knowledge is human: that it is mixed with our errors, our prejudices, our dreams, and our hopes: that all we can do is grope for truth even though it be beyond our reach. We may admit that our grouping is often inspired, but we must be on our guard against the belief, however deeply felt, that our inspiration carries any authority divine or otherwise.â
This all may sound a bit psycho-babble-ish to you, and maybe it is. But there is a point to this ramble. And itâs this, and we need the help of one more quote to finish it:
âAn edge [in trading] is nothing more than an indication of a higher probability of one thing happening over another.â
No matter how we dice and slice this stuff we call speculation, or investment, it is nothing more than a probability bet. It always has been, and it always will be.
Ah ha! So working from that definition, maybe the most recent past lays out the highest probability for the future? HmmmâŚmaybe thatâs why they call them âgurusâ after all.
One probability bet that weâve been sharing lately is the idea that maybe the path of the British pound wonât resemble the recent past. Lately weâve been wrong about this. But if the assumption that cross-border financial linkage bonds this global system together and the derivatives side of the fence is where most of the problems are emanating, than we would suggest London could get hit harder than most places.
And if London takes it on the chin, UK growth will suffer. If UK growth suffers, the Bank of Englandâs may likely cut interest rates. Of course this rating cutting game could all be relative in a world where many central banks are racing to do the same. But either way, it doesnât bode well for a currency that on a purchasing power parity basis is the most overvalued of the majors.
GBPJPY Monthly Chart: Last month, before the four letter word of contagion cascaded throughout our fair land, this pair tested its 1992 highâŚ
(Chart unavailable in text format.)
Is it a decent probability bet? Asking that simple question does what is needed: if forces us to boil it down to a yes or a no. Thatâs a requirement if we want to play the game; that we know for sure.
Black Swan Capital
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