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Monday February 14, 2005 - 11:24:10 GMT
Black Swan Capital - www.blackswantrading.com

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In the midst of a dollar "correction"

Quotable

“Successful investing is anticipating the anticipations of others.”

John Maynard Keynes

FX Trading

This was a note I sent to clients after the dollar reversed on the US trade report last Thursday…

”The dollar reversal today could be the catalyst...For an overbought correction that we were seeing in the charts. We have to consider we could be in the beginning of a correction that could carry the dollar lower for a week or two.”

I show you this, not to appear omnipotent—though I do like that word. But to make a point: The dollar correction dwells in our midst. It is well overdue based on an examination of the charts. But for the assembled mass of punditry it can never be as simple as that. After all, those big salaries have to be justified someway, somehow.

No, it couldn’t be just a garden-variety consolidation of gains since the beginning of the year. There has to be some rhyme or reason; a definable cause and effect that any self-respecting currency strategist can point to explain the move after it has begun.

To digress a bit, recently I received an email from a person bragging about his “32-years of experience trading the currency markets”…blah, blah, blah… This person berated me for not providing him, on that particular day, not one single piece of analysis a currency trader could use. He was probably right. He was also pompous and indignant—rarely the type of attitude that allows one to survive “32-years in the currency markets.”

I first pointed out to Mr. Big that I thought it interesting that he make demands of me, though he doesn’t pay me a dime. Secondly, I told him, as a trader, often it’s better to receive no analysis at all because what is often perceived as analysis can be more detrimental to a trading account. He hasn’t written back to argue, brag, or berate. I am truly blessed.

Anyway, the point is, today appears to be the manifestation of a dollar correction which began last week, based on the price action. But there will be all sorts of rationales popping out of the woodwork to explain why! They have already started to accumulate.

Rationale #1: Deficits. You know this one well. It has been used and abused. And it’s still the perennial favorite of dollar-hatters everywhere. It’s the rationale that keeps on giving. As an analyst, you can shove this one in the back of your desk drawer for however long you like. When the time comes to explain a dollar decline, simply pull it out, dust it off, and give it to your favorite wire reporter for publication. It’s that easy.

Rationale #2: The Fed may not raise rates as fast as we expect. It’s always another good rationale to reflect upon when nothing else comes to mind. After all, most of the people who work at the Fed have no clue where rates are going, and overall policy is usually as transparent as mud. Yup, the Fed “aggressiveness” trump card is always there in a pinch, if one has used rationale #1 a bit too frequently.

Rationale #3: The Chinese “revaluation.” This was a hot rationale before the elites at Davos completed their little soirée. But just as the party was getting hot, the Chinese decided to throw a pale of cold water on to this canard. But rest assured that will not deter the currency analysis crowd from throwing it again onto the market of “ideas” when needed.

Expect to here several derivatives of this these and other rationales to explain the declining dollar. Rationalizing a price move through rationales is only limited to the creativity and dexterity of the rationale provider. When the market is hot, cause and effect is spit out faster than baby rabbits.

As you read this, you are probably thinking about all the seemingly silly rationales I have manufactured over time to justify my market stance over. I have only one response—guilty as charged! But I place as evidence before the court this: I know they are rationales, and have no illusion that I have ever defined or recognized cause and effect. And if I have at times, I shall chalk it up to luck instead of omnipotence, as I am a firm believer in “doing right” instead of “being right.”

In addition, I have memorized these two sentences penned by Nassim Taleb: “

“Intelligence can cause you to over interpret from a random pattern. Clearly if you add epistemic arrogance, you have, on occasion, a toxic combination of confidence and misdirected knowledge.”

Bingo! So until we locate a rationale that we can believe in, let’s stick to “a dollar correction” to explain what’s happening—one that could be with us for a week or two.

Jack Crooks

 

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