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Tuesday September 15, 2009 - 12:27:04 GMT
Black Swan Capital - www.blackswantrading.com

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The Feel-Good Measure

Key News
•    South African Rand Rises to 13-Month High as Finance Minister Signals No Intervention (Bloomberg)
•    Europe's Two-Speed Economy Complicates ECB's Job as Spain, Ireland Slip (Bloomberg)
•    US credit shrinks at Great Depression rate prompting fears of double-dip recession (Telegraph)
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Topic: A discussion of US dollar scenarios: controlled decline, crisis, or recovery
Date: Today - Tuesday 15 September 2009
Time: 4:30 p.m. EDT
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Quotable
“Don’t ever average losers. Decrease your trading volume when you are trading poorly; increase your volume when you are trading well. Never trade in situations where you don’t have control. For example, I don’t risk significant amounts of money in front of key reports, since that is gambling, not trading.”

                Paul Tudor Jones, in Market Wizards

FX Trading – The Feel-Good Measure

France’s per capita GDP is roughly 14% lower than per capita GDP in the US. But that’s only a mirage ... and only factors in economic figures, rather than the actual mood of those who make up the economy. The differential between the two economies should actually be much narrower, or so we’re told.

Perhaps France isn’t the only economy bogged down by its economic numbers. Germany keeps reporting stronger levels of consumer, investor and business confidence. Just today the ZEW index of investor confidence rose to highs not seen since the end of 2006.

Bear in mind that lofty confidence numbers at that time were no surprise – it marked the peak of the global credit bubble; times were good.

Despite the fact that kneejerk reaction to today’s ZEW number is poor because analysts were actually expecting a much stronger number, it begs the question: what are they putting in the water over there in Germany?

Whatever it is, don’t forget to factor that into their GDP figures.

It’s obvious just by looking at the markets of late that the consensus is looking for a solid recovery, perhaps having already commenced. A headline I came across this morning stated plainly: Economic Recovery May Prove Much Stronger than Expected.

Ok, very well then. But someone better tell the UK so they don’t miss out on the happiness boat.

The Bank of England is considering ratcheting down their deposit rate a bit further, in an attempt to encourage banks to lend all that money the BOE has shared with them; it seems UK banks (and most others for that matter) haven’t conveyed the same confidence in recovery as global investors. The Bank governor noted today that the country’s major banks are still dependent on public sector aid.

Darn – I can’t imagine how this somber tone must be influencing the GDP mood of the United Kingdom.

And is the European Central Bank at risk of falling victim to similar feelings? Sure, Germany and France seem to have their minds focused on the ultimate goal. But the ECB doesn’t have the luxury of governing just France and Germany. As the article in the Key News section above discusses:

“Europe’s economies are rebounding at different speeds, complicating the European Central Bank’s efforts to put the region back on a more stable footing.”

Now that just doesn’t seem fair that the ECB has that demonstrative hurdle impeding its effectiveness. And on that note, China’s Ministry of Commerce spokesman, Yao Jian, chimed in on the recent tariff imposed on Chinese tire exports to the US.

He said, “It’s not fair if the U.S. only cares about its own employment and not China’s growth,” noting the potential for social instability should Chinese industry begin to feel the pain of this decision.

Not fair? It seems, though, that what the US has done here fits within the guidelines of the WTO agreements (assuming one has time to read through tens of thousands of pages highlighting how “free trade” is supposed to work).

So what’s not fair? Looking out for the interests of the economy that’s under your direction? China should know something above favoring its own economy, in a very perverse sort of way.

Perhaps Joseph Stiglitz has it right. He’s part of the fine crew that’s responsible for proposing measures of societal well-being, or as it could be also called: economic fairness accounting.

“A political leader attempting to promote the well-being of his citizens is pulled in different directions: he will be graded on economic performance but there are many other dimensions to the quality of life, including the state of the environment. While there is no single indicator that can capture something as complex as our society, the metrics commonly used, such as gross domestic product, suggest a trade-off: one can improve the environment only by sacrificing growth. But if we had a comprehensive measure of well-being, perhaps we would see this as a false choice. Such a metric might indicate an increase in wellbeing as the environment improved, even if conventionally measured output went down.”

Karl Marx would be so proud. This should work wonders on drowning out the capitalistic shortfalls of the markets.

We are all psychiatrists now.

*****

Editor Insight:

Often we are asked how our daily Currency Currents is linked to the trading decisions we provide Members of our subscription-based services ... whether it be recommendations in spot forex, currency futures, currency options, or currency ETFs.  

Answer: It’s the first step in the process, a process that is a three-pronged approach consisting of:

1)    Understanding the big picture helps us determine where the money is going.  Currency prices move because real people buy and sell them.  Prices among the free-floating world currencies are determined by two simple factors: supply and demand.  Understanding business conditions, key market themes, and knowing what areas of the world are “hot, or not” puts you on track to determining this flow of investor capital.

2)    Get a handle on market sentiment. We want to get in the mind of the crowd.  We want to understand how the market sees things, which can be quite different, at times, from what we may see in our research; sentiment embodies all the expectations of all the players.  Sometimes judging sentiment is not clear cut, but there are both qualitative and quantitative tools we employ.  

Extreme Consensus + Extreme Speculation = Extreme Price

3)    Evaluate the technical picture.  This means we study the charts to decipher price action.  We apply technical analysis to help us better time our trading decisions, verify trends and spot potential turning points.

Bear in mind, use of these tools varies with the time frame of the investment.

For example, for Currency ETFs representing a long-term investment decision, we rely more heavily on the evaluation of business and economic conditions; while for short-term trade setups in, say, the spot forex or currency futures markets, we would rely more on our technical analysis; and for intermediate-term trading decisions, perhaps utilizing currency options, we seek a balance by applying all of these tools.
   
This process is far from a Holy Grail.  We can find ourselves out of tune with the market on occasion.  It’s those times where controlling risk is crucial, e.g. trading less or never trading with too much leverage. 

We have learned that if we stick with this discipline our chances of success in the currency market increase dramatically.  Tilt probability of success ever so slightly in your favor, by doing your homework and controlling your risk; that’s about the best you can do towards winning over time


Jack and JR
Black Swan Capital LLC
www.blackswantrading.com

 

 

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