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Monday October 19, 2009 - 13:49:08 GMT
Black Swan Capital -

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A very crowded trade!

Key News
Gold’s rally to a record means prices are still 53 percent below the 1980 inflation-adjusted peak. (Bloomberg)

Quotable – Trying to do business in China?  Good luck!
“The promise—and frequent disappointment—of doing business in China has been a common theme since at least the 19th century, when weavers in Manchester were said to dream of adding a few inches to every shirttail in China. Thanks to recession at home, foreign firms are keener than ever to capitalise on China’s growth. But Europe and America’s exports to China have remained broadly flat over the past year and amount to less than 7% of the total, even though shrinking exports to other countries flatter the figure. Even if the Chinese economy grows by the official target of 8% this year, the impact on Western firms’ total sales would be little more than a rounding error, says Ronald Schramm, a visiting professor at the Chinese European International Business

“Many foreign firms, of course, are doing well in China, especially at the two extremes of the value chain: things like luxury goods, fibre-optic cable and big aeroplanes on the one hand, and oil, ores and recyclable waste on the other. But in between, both explicit legal impediments and hidden obstacles continue to hamper access to Chinese customers, despite China’s promises of reform when it joined the World Trade Organisation (WTO) in 2001. Publishing, telecommunications, oil exploration, marketing, pharmaceuticals, banking and insurance all remain either fiercely protected or off-limits to foreigners altogether. Corruption, protectionism and red tape hamper foreigners in all fields.

“Recent reports from three lobbies for foreign businesses, the American Chamber of Commerce in Shanghai, the European Chamber of Commerce in China and the US-China Business Council, bear out this gloomy view. Their biggest gripes have nothing to do with typical business concerns, such as the availability of good staff or high costs. Instead, they complain about subsidised competition, restricted access, conflicting regulations, a lack of protection for intellectual property and opaque and arbitrary bureaucracy.

“To operate in China, the Council itself must provide documents from America’s State Department, the Chinese Embassy in America, the cities of Washington and Shanghai, the local tax authorities and the local branch of the State Administration for Industry and Commerce. It takes six months to obtain a one-year licence. At least there is an established procedure, albeit a costly and cumbersome one. Others are not so lucky: upon joining the WTO, China agreed to allow foreign firms to compete to offer booking systems to local airlines, but according to the European Chamber it has not yet produced the necessary regulations.

“Local officials go to great lengths to protect companies on their patch, often by giving them preferential access to land or credit, or by easing bureaucratic constraints for them. All the red tape would at least provide plenty of work for multinational law firms, were they permitted to employ Chinese lawyers—which they are not. The government, by dint of its control of the media, also controls advertising rates. That makes the cost of reaching a consumer in China higher than in many Western countries, although the potential rewards are much lower since most Chinese are so much poorer, says Tom Doctoroff, the boss of JWT, an advertising firm. There is little reliable business news.”
                The Economist

FX Trading – So crowed for so many good reasons, silly ones too…
It’s starting to remind me of queue of people trying to squeeze past one another, pushing toward the window to buy those last few concert tickets on sale.  But in the $’s case, they ain’t pushing up to the window to buy.
To say the dollar trade is crowded is probably an understatement.  Measured by the US Dollar index, the buck continues to channel down nicely…a tight orderly decline so far:
[Chart not available in text format.]

There really are solid rationales supporting the dollar’s decline, despite the size of the crowd.  I think you know the story by now:
    •    interest rates
    •    relative growth
    •    budget deficit
    •    quantitative easing 
I’m sure there are plenty more reasons too.  That’s just the thing.  If you have sold the dollar and are riding this trade, you are probably fairly confident by now that “your” particular rationale makes the most sense.  Or, as a trend follower, you don’t give a darn about the rationales.  Price validates the reasons and trend; therefore more money is heaped on board.  
No matter that everyone “knows” the reasons for the decline; discounting be damned when self-reinforcing moves materialize.  
How long?  No one knows.  How far?  No one knows.  But if you believe the US will continue to dominate the global economy far into the future, as we do, there will come a point when you start to say—the buck just looks cheap.  Apologies to the newsletter nuts that say the dollar will disappear entirely. 
But, it seems the self-reinforcing crowd is still in the driver’s seat—and the value crowd wants to see at least a couple of the good rationales for selling Mr. Greenie to start looking stale (and the silly rationales to gain even more traction). 
Maybe as long as the decline is “orderly” in the tight channel lower, there is no reason for the US Treasury to worry—dollar liquidity is spiking the global punch bowl again.  
But in this environment, the probability of a spike down in Mr. Greenie seem to be rising by the day i.e. the orderly decline could turn disorderly fast. 
That’s why we think the probability is also rising the Treasury (through the Fed) may do something to put a little risk into this very crowded trade.  
Jack Crooks 
Black Swan Capital 


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