Tuesday November 10, 2009 - 14:59:20 GMT
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Black Swan Capital - www.blackswantrading.com
Bubble Theory Battle Royale
German investor confidence declined more than economists forecast in November. (Bloomberg)
Fitch Ratings warned Japan on Tuesday to keep to its borrowing target or risk a credit rating downgrade as the finance minister acknowledged the problem and tried to reassure rattled investors by saying spending had to be cut. (Reuters)
âOh, most excellent gold!â observed Columbus while on his first voyage to America.âWho has gold has a treasure [that] even helps souls to paradise.â
Peter Bernstein, The Power of Gold
FX Trading â Bubble Theory Battle Royale
I spoke at a conference yesterday. It shall remain nameless in order to protect the guilty. What was most funny/incredible/nutty is a belief by said conference chief the US dollar, and in fact all paper currencies, will disappear within 10-years. We will then move to a commodity-based monetary system and Mr. Greenback will be gone.
Anxious as I was to try out the 10-year dollar disappearance idea on someone who wasnât drinking the newsletter crowd Kool-Aid, so I called my number one son, John Ross, and shared the idea; JR asked the following right out of the gate: âDoes this guy think the US currency is going to start disappearing a bit each year, then eventually vanish, or is it a 10-year date to destiny whereby someone flips a switch, then poof it goes away?â I told JR I wasnât sure the purveyor of said lunacy had thought through the technical problems of replacing the world reserve currency. Maybe a house to house search team would be in order.
I hope you think that kind of thinking not only represents nonsense, as I do, but is a flashing yellow light exemplifying the max one-way bets against the buck. But, given the implicit signal by the US Fed last week of rates on hold forever, and no bone at all thrown to the buck by the G-20 over the weekend, it seems an orderly decline in the dollar is the policy tool at hand. So further, or even much further, it could go.
There is only one problem; the dollar is tied at the hip with the stock market; negatively correlated tick by tick. [Chart not available in text format.]
Many of us now believe stocks are in bubble territory and prone to pop. If thatâs the case then the dollar is prone to stage a very big rally. Both events would throw cold water on the current policy of using the dollar to juice stock markets to enhance the so-called wealth effect of real people and thus build confidenceâto stimulate the minions into doing what they do bestâshop!
So, the question of the day: Is there a bubble in asset markets?
Some of our most public and lofty seers seem at odds over that question, and it is making for strange bedfellows, or tag-team, partners.
Talking their respective books over this question we have a tag-team match of historic proportion shaping up: In the red corner we have Marc âThe Ponytailâ Faber teaming up with Nouriel âParty Animalâ Roubini; well lubricated machine these two. And in the blue corner, we have Jim âGosh I love Chinaâ Rogers teaming up with Alan âThe Maestroâ Greenspan; this is a real odd couple, but their skills cannot be questioned.
If you know anything about tag-team matches, you know there is always someone lurking in the background ready to bend the rules and jump in one side of the fightâŚhe has already identified himself, itâs none other than Frederic âThe Bruiserâ Mishkin (former Fed governor and expert at full body slams).
The Pony Tail gets the action started with a roundhouse punch glancing against the Maestroâs forehead:
"I would regard a failure [Gold] to hold above the âupside breakout pointsâ in the period directly ahead with great caution. In the case of gold a decline below US$1,000 would likely lead to further more meaningful weakness, possibly down to between US$800 and US$900," Faber added.â¨â¨Faber has been reiterating, in various recent interviews, the notion of over-streched assets and a possible short-term dollar turnaround.â¨â¨Speaking in a Bloomberg interview from Istanbul on Tuesday, Faber said: "Maybe the dollar has made a turn, it can easily rebound by 10%â.
The Maestro recovers quickly, and finds The Pony Tail off-balance, and looks to end it early, going for the pile driver, a dangerous move indeed:
Nov. 9 (Bloomberg) Former Federal Reserve Chairman Alan Greenspan said a rebound in stocks is âre-liquifyingâ the U.S. economy and housing prices are showing early indications of ending their decline.
âWe have been very fortunate that the stock markets moved backâ and are âre-liquifying the whole process,â Greenspan said at an event in Edmonton, Alberta, presented by Abu Dhabi National Energy Co., the state-controlled energy producer known as Taqa.
Pony Tail shakes it off and tags up with Party Animal who leaps off the top rope, a direct hit here and the match is over:
âBut while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.â
Fresh off another win and well rested, âGosh I Love Chinaâ quickly moves into the ring, helping his partner The Maestro avoid the death blow. He does. And then launches into his own with a flying drop kick to the head of the Party Animal:
How can you talk about a bubble when assets such as silver are 70% below their all-time high? Same for coffee, sugar, cotton, natural gas, and many more. I have a problem talking about a bubble when assets are this depressed from their all-time highs.
A bubble is when assets are screaming to new highs everyday, everyone is talking about them, and everyone owns them. Right now, virtually no one owns commodities. So for Mr. Roubini to talk about a bubble in commodities defies comprehension. It proves he does not understand markets.
I am flabbergasted at Mr. Roubiniâs comment about bubbles because there is not a single market in the world making all-time highs except Gold, US Government Bonds, Cocoa, and the Sri Lankan stock market. Thatâs hardly reason to call for a bubble. So, I am most perplexed about this alleged bubble which is out there.
If an asset rises 100% in one year, thatâs a great year, but not necessarily a bubble. Look at oil. Itâs up huge off the bottom but nowhere near itâs old highs. Look at Citigroup. The stock is up 3 or so times off the bottom âŚ
ââŚ And since Mr. Roubini thought oil would stay below $40 a barrel for all of 2009, I would love for him to tell me and the rest of the world exactly where are all the oil supplies because the International Energy Agency (IEA) â which has the best global data set on energy supplies â has no idea where is the oil. Mr. Roubini should tell us where this price suppressing oil supply is hidden. All the oil possessing countries in the world have declining reserves. All the oil companies have declining reserves. So Mr. Roubini must know something the rest of us donât.
OuchâŚthat hurt Party Animal more than his usual late night last call mixer. It was a powerful kick indeed delivered by Gosh I Love China. But, the Party Animal knows how to take a blow, and has plenty of fighting experience while dazed and dreary. Even so, heâs wobbling.
Slipping under the bottom rope, from across the ring, out of sight of the referee, The Bruiser enters the ring to end it with one of his patented full body slams:
âThere is increasing concern that we may be experiencing another round of asset-price bubbles that could pose great danger to the economy. Does this danger provide a case for the US Federal Reserve to exit from its zero-interest-rate policy sooner rather than later, as many commentators have suggested? The answer is no.â
Wow! The Party Animal has taken a beating, and is about to be pinnedâŚone, twoâŚand just in time, The Ponytail applies the Thai death-lock to the referee before he can count to threeâŚwhat a matchâŚeveryoneâs in the ring now, flailing away. This is exciting stuff. Man, itâs a lot more than we bargained for. These guys are tough, smart, and technically gifted. Stay tuned. This battle has legs and ainât over yet.
Jack Crooks, Black Swan Capital, www.blackswantrading.com
Are Euro troubles looming in the background?
This seemingly unnoticed piece of news breezed by our Reuters screen yesterday afternoonâŚ
ATHENS, Nov 9 (Reuters) - European Central Bank President Jean-Claude Trichet criticised Greece for producing unreliable statistics, saying they undermined the functioning of the euro zone's growth and stability pact.
Speaking on Greek television, he also called for Athens to set up a fully independent statistics agency and said the country needed a very significant fiscal readjustment after recent warnings from the EU on a budget gap ballooning into double figures as a percentage of GDP.
The new Greek government said last week that the highly indebted country's deficit would reach 12.7 percent of GDP in 2009, more than double what the previous cabinet had projected, prompting an outcry in EU capitals and among rating agencies.
"We absolutely need to be sure about the figures in the future," Jean-Claude Trichet told Antenna television.
"We cannot have data which is not reliable, this calls into question the functioning, the good functioning, of the stability and growth pact, of the peer monitoring among Eurogroup members," he said in the interview recorded in French on Thursday and aired on Monday evening.
"There is a problem of credibility," he said.
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