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Tuesday October 20, 2009 - 13:08:19 GMT
Black Swan Capital - www.blackswantrading.com

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Does China Get You Feeling All Warm and Cozy, Too?

Key News
China Set to Impose New Tariffs on Nylon -- The ruling affects imports of Nylon 6, or polycaprolactam, which is used to manufacture a variety of products, ranging from toothbrushes to gun frames to chiffon. Starting Tuesday, China will require importers to pay deposits on Nylon 6 imports from foreign companies judged to be selling the material in China for less than a fair price. (Wall Street Journal)
Bernanke Warns on Imbalance Risks -- Ben Bernanke said on Monday that it was “extraordinarily urgent” that the US and Asia adopt policies that prevent a revival of global economic imbalances as the financial crisis ebbs.
The Federal Reserve chairman warned that global imbalances – the big gaps between national saving, consumption and investment rates reflected in large trade deficits and surpluses – had helped cause the crisis and needed to be corrected. (Financial Times)
 
Seminar Event Vancouver
Mike Campbell Money Talks All-Start Trading Super Summit
Saturday, October 24th 
For Details Please Click Here
 
Quotable 
“Here are five great myths and/or lies of the modern financial system: 

1) "The check is in the mail" 

2) "I'll call you right back"
 
3) "We are long-term investors"
 
4) There is a secret cabal of gnome-like creatures that manipulate the gold price (up or down, depending on your druthers)
 
5) "The United States believes in a strong dollar"
 
Macro Man
 
FX Trading – Does this bring out the optimist in you?

Let me just run through some timely market developments and when I’m finished I want you to tell me how you perceive the markets; though it’s rather obvious how the consensus is feeling ...
 
I’ll start with a headline that your average stock investor is happy to see: “World stocks hit new 12-month high; dollar weak” – Reuters. That’s global investing in a nutshell these days.
 
And after all, why wouldn’t it be? US earnings season has not disappointed. Yeah you can argue that Apple, who reported sizeable profits beyond expectations after the bell yesterday, is going to succeed regardless of recession, depression or a Deluge of biblical
proportions. But other companies are faring well, or at least better than expected.
 
And the kicker this week is the speculation leading up to Thursday’s report of Chinese Q3 GDP. Yesterday there was talk from a Chinese official who said that China would have no problem reaching the 8% growth threshold for the full-year 2009. That comes with 7.1% growth in the first half, expected growth of 8.9% in the third quarter plus whatever the fourth quarter brings. And why not expect China to grow north of 9% in Q4?
 
Another story from Reuters: “China economy growing faster every month” -Vice Premier.
 
Last week’s improvement in China’s dismal trade numbers is plenty justification for the mob of happy-go-lucky investors to jump all over the positive commentary and expect big things out of Thursday’s GDP numbers. This is already being baked into the cake.
 
Just to bring back the feel of pre-crisis growth in China, it was made public yesterday that the Chinese government would act to prohibit investment into certain industries in an effort to prevent overheating and overproduction. That’s indirectly a way of saying, “Growth is so strong again we actually have to take preventative measures from not growing too much. China is back, baby!”
 
But what about inflation all of a sudden? 
 
China’s reserves jumped up to $2.27 trillion last month; capital inflows have picked up substantially. Should prices get to out-of-control then perhaps we could expect the yuan to appreciate from its current pegged level to the greenback. “A vice-governor with the People's Bank of China said money would flow in from a rebound in the country's trade surplus as well as from investors betting on yuan appreciation ...” according to Reuters. 
 
Which brings me back to the Financial Times story I included in the Key News section above ...
 
Federal Reserve Chairmen Bernanke warned of potentially revisiting the imbalances that helped get us to financial crisis in the first place. This means the US better keep from adding to their deficit and China should not let its surplus grow uncontrollably. 
 
And then there’s the potential for the Federal Reserve to begin phasing out its liquidity-adding measures and eventually move on to the course of tightening monetary policy. Some folks over at VoxEU.com seem to think this potential for the Fed to act and move rates higher will be a cause for US dollar APPRECIATION in 2010. 
 
Assuming they’ve got their timing right on their Fed analysis, then what happens to these potential re-growing imbalances between the US and China. Will capital continue to flow into China the way they need it to in order to drive growth? Or will a stronger dollar attract capital inflows to the US?
 
S&P 500 futures are higher as the US session approaches; the US dollar is holding its ground after a rough day all around yesterday. We get housing numbers and PPI a bit later in the US. In Canada we’re set to get Leading Indicators plus an announcement of the latest Bank of Canada policy meeting. The market will be dissecting the rhetoric surrounding any need to intervene in Canadian dollar strength. Clear-cut language about stemming Loonie appreciation will be taken as negative; whereas more emphasis put on optimistic growth forecasts and less emphasis on Loonie-talk will likely allow the Canadian dollar to press higher.
 
 
John Ross Crooks III
Black Swan Capital LLC
www.blackswantrading.com 

Reader Mail: Deflation Rising?
 
In late September we penned a 22 page report on the growing dangers of deflation, the title of the piece is “Deflation Rising: Making the Case for a Lasting Deflationary Environment.”  A month later, our view hasn’t changed.  In fact, the numbers rolling in tend to support the view deflation could be a real problem for central banks and governments, especially given they have so few tools left in their standard arsenal to combat falling prices (a process that can be cleansing for the market, but is very painful in a world with too much debt outstanding). 
 
Yesterday, a reader was nice enough to forward an email about his real world experience which we think shows deflation is a growing concern and something we should not underestimate.  His email is below: 
 
Hi Jack:

I've written to you a couple of times in the past, thought you might be interested in this…
 
I work in a grocery store in a small town in Montana; anyway I was talking with our chief price marker the other day about cost of goods and he tells me that this week is the fewest amount of level gross changes he has ever seen. Level gross changes occur when cost of goods change, which as I'm sure you are aware that cost change is generally upward.
 
Now this is coming from the guy that hired me 21 years ago, He's been around the block.
 
Secondly our "soda" (I'll leave out the brand, suffice to say one of the big two) salesman comes through on Thursday and tells me that he's been instructed to inventory and cut out all sales that are not absolutely necessary.
 
Naturally I was dumbfounded I'VE NEVER SEEN THIS. Product salesmen from all walks are constantly pressured to beat last year's numbers, and now a directive to holdback; essentially cut sales. To be fair this activity does not include floor displays, but also to be fair we always have floor displays and anybody who's been around this business knows beating last year’s sales come from incremental increases.
 
Now to be fair again there could be a number of reasons for this, maybe they just want to streamline for winter, maybe they want to improve accuracy of orders, maybe they want to see if they can drop a salesman or two, but coupled with the comments of our price marker Me-thinks I smell a change in the wind.
 
I think said soda company sees the cost of raw material coming down significantly either in packaging or product.
 
Your thoughts would be interesting.

Have a great day 
           J.S. 

P.S.  We are offering our deflation report, “Deflation Rising,” as a bonus for all new members of our Currency ETF Investor service;  a monthly publication covering the what, when, why, and how of the world of currencies, with specific currency ETF recommendations to take advantage of the latest global trends. If you might be interested in subscribing, please click here to learn more. 

 

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Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



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