Thursday January 6, 2005 - 11:46:51 GMT
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Black Swan Capital - www.blackswantrading.com
The dollar and underlying conditions
“I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting a swelled head. A great many smashes by brilliant men can be traced directly to the swelled head.”
Edwin Lefevre, Reminiscences of a Stock Operator (Chronically the speculations of Jesse Livermore)
We wake, at least on this side of the pond, to find the dollar in rally mode once again. And despite the protest from the “current account deficit is the only story” crowd of strategists, the buck continues to punish all comers.
I think as “traders” or “speculators” we need to drive a stake through the heart of the notion one can determine the direction of the dollar based on the current account. Long-term, I am not denying it MAY not be healthy. But, when it comes to any conceivable time-frame in which we base our dollar trading decisions THE CURRENT ACCOUNT IS AN UNRELIABLE INDICATOR. And if it is unreliable it is useless.
In hindsight, once the “strategist” capitulate to the new dollar trend, we will probable be subject to their new enlightenment, which will be nothing new at all. I think it was Jesse Livermore who said “There is nothing new in Wall Street.” We should extend that to say, “There is nothing new in the currency world.”
The new enlightenment will probably be what your already know or should know—underlying conditions. Back to Mr. Livermore (as chronicled in Reminiscences of a Stock Operator) for help here:
“I began to realize that the big money must necessarily be in the big swing. Whatever might seem to give a big swing its initial impulse, the fact is that its continuance is not the result of manipulation by pools or artifice by financiers, but depends on underlying conditions. And no matter who opposes it, the swing must inevitably run as far and as fast and as long as the impelling forces determine.”
And what are these underlying conditions? Nothing new to Currency Currents readers:
2) Inflation rates
3) Economic growth
It may be argued there is a whole bunch of “short-squeeze” driving the dollar move in the New Year. There may be some of that. But it is not the “underlying condition.” Here is the primary underlying condition…
Fed Funds Rate Chart
Coupled with the next underlying condition (inflation) remaining tamer than the FOMC would have us believe…
And we get the payoff of RISING REAL INTEREST RATES.
Despite our consistent inability to forecast interest rates, we can often get a good “feel” for the trend. And in this case, the trend is the friend of the buck (which until just a few days ago had very few friends.)
Now back to Mr. Livermore:
“The way to make money is to make it. The way to make big money is to be right at exactly the right time. In this business [speculation] a man has to think of both theory and practice.”
Have we seen a “bottom” in the dollar? No one can answer that, except your run of the mill guru/charlatan; there are many to choose from as they run rampant in the newsletter world. But I think if we pose the question this way: “Have we seen an intermediate-term [multi-month] “bottom” in the dollar? The answer is yes, at least based on the flawed theory of the current account and the underlying conditions.
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