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Monday May 18, 2009 - 12:50:05 GMT
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16% Annualized Crushing…Does it matter?

Key News
• The yen hit session lows against the dollar and euro on Monday after Japan's vice finance minister said Japan is watching foreign exchange movements carefully and does not want exchange rates to have a negative impact on the economy. (Reuters)
• Recent economic data suggests China will meet its 8 percent growth target this year but Beijing will take additional measures if the economy starts losing momentum again, an official at the top economic planning body said on Monday. (Reuters)
• The euro zone's trade balance swung into a surplus in March. (Reuters)
• Prices paid by New Zealand farms, factories and other producers for commodities and services needed to run their businesses had a record decline in the first quarter led by crude oil and jet fuel. (Bloomberg)
• India’s benchmark stock index jumped a record 17 percent, bonds rose and the rupee gained the most in two decades after Prime Minister Manmohan Singh’s Congress Party won nationwide elections.

US$ - Indian Rupee Daily:
 (Chart unavailable in text format.)

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“Last Friday the European Commission published what were arguably the most catastrophic economic statistics produced by any official institution in the capitalist world since 1945. These figures showed that Germany has suffered the steepest economic collapse ever recorded in a major industrialised country; and that several of the countries in Central Europe and on the periphery of the eurozone are now in a state of economic and financial meltdown comparable with Argentina, Indonesia and Russia in the 1990s or with Iceland last year.”

            Anatole Kaletsky

FX Trading – 16% Annualized Crushing…Does it matter?

On Friday, German reported some very nasty economic news—their economy fell at a 16% annualized rate during the first quarter of 2009.  An excellent summary of the key problems now facing Germany and the Eurozone is provided by Anatole Kaletsky, an economic commentator for the UK Times and resident guru for GaveKal.  We have provided the key points below for your perusal[our emphasis]:

Last Friday the European Commission published what were arguably the most catastrophic economic statistics produced by any official institution in the capitalist world since 1945. These figures showed that Germany has suffered the steepest economic collapse ever recorded in a major industrialised country; and that several of the countries in Central Europe and on the periphery of the eurozone are now in a state of economic and financial meltdown comparable with Argentina, Indonesia and Russia in the 1990s or with Iceland last year.”

I have described repeatedly the three interacting elements now hitting Europe in a “perfect storm”.

The first element is Germany's dependence on exports, especially of capital goods, cars and other consumer durables.

… The second element of the perfect storm has been the reckless lending to Central Europe and the Baltic States, especially by banks based in Austria, Sweden, Greece and Italy, which in turn have been large borrowers from German investors and banks.

… The third component of the economic hurricane is the euro itself.

… The ultimate result is that the European economy will be caught in a 1930s-style deflationary spiral of deteriorating credit, deflationary government policies, falling wages and even further declines in credit.

The most plausible way for Europe to escape from this vicious circle will be for Germany to abandon its age-old philosophy of fiscal rigour, to embark on a large-scale fiscal stimulus and to guarantee the debts of all its partners in the eurozone.

A 16% annualized beating in the economy on Friday and the euro is flat at the moment after clawing back from losses earlier this morning.  

 (Chart unavailable in text format.)

Fundamentals do matter.  But as we know, what matters most is the perception of the fundamentals by traders.  The idea that the worst is over means the rear view mirror bad news, such as a 16% annualized fall in the economy, marks the bottom because “it can’t get any worse.”  At least that’s what the move in the stocks is telling the currency crowd—risk asset investment train is leaving the station and you’d better hop on.

Our view is all these guys (in the chart below) are overextended…but no matter our view, the trend is your friend.  Despite our skepticism meter running on high, we must remain open to the idea that stocks have bottom.  The recession is about over.  It’s time for a cyclical rebound.  International assets are cheap.  And the game of spreading dollar-based credit is back in vogue. 

 (Chart unavailable in text format.)

It’s 2001 all over again!  (Sorry Yogi!)  If you believe that—fine.  But as Mr. Kaletsky implies, it may be best to validate that trend against Germany.  If they aren’t feeling magnanimous, this trend ain’t your friend.

Jack Crooks
Black Swan Capital LLC


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