Friday February 19, 2010 - 16:09:41 GMT
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Black Swan Capital - www.blackswantrading.com
â A multitude of causes unknown to former times are now acting with a combined force to blunt the discriminating powers of the mind, and unfitting it for all voluntary exertion to reduce it to a state of almost savage torpor.â
FX Trading â Hodgepodge
Can you say Chutzpah?
Letâs just say for example you study very hard an earned a PhD. in economics at a âtopâ institution. And letâs say, given that you had tenure and time to consider pie in the sky stuff, as opposed to being worried about paying your mortgage next month, you develop a very nice theory about how to create a common currency. The problem is, the particular zone you have in mind for this economic experiment is not fertile ground for a common currency, given diverse political and business cycle/productivity levels among the different members your theory cobbles together. Add to that, likely pound- for-pound the smartest economist who has ever livedâMilton Friedmanâtells you this is a bad idea precisely because it is not fertile ground for a common currency. No matter.
But, you are a powerful economist, and you are presenting this idea to people who like to control other people and increase their own political power, so they are quite happy to not consider Mr. Friedmanâs view that such an idea if implemented will end in tears. So, voila, your screwy ideas are implemented on a major scale and it is called the euro.
Of course I am talking about Robert âMr. Euroâ Mundell, a Columbia University professor and Nobel laureate in economics. He is credited by many as the intellectual force behind the creation of the euro, as we know.
So now Mr. Euro, your theoretical Frankenstein was brought to life and rampaged throughout the Euro continent, building giant welfare states beholden even more so than ever to the center for sustenance, achieving the architectsâ political machinations of control, and leading to an ongoing and significant amount of wealth destruction now that your Frankenstein is seen for what it isâa monster. But now you have the Chutzpah to start commenting about the impact of a rising dollar? Indeed you do.
âThe higher dollar is already hurting some American companies and is going to choke off the recovery,â Robert Mundell, a Columbia University professor and Nobel laureate in economics for his work on exchange rates, said in a Bloomberg Television interview yesterday. (Bloomberg.com 2/18)
This is to laugh! Or it is to start buying dollars in a big way.
We are sticking with our first target of the low 1.20âs in the euro for now; which we think will be achieved in the next few months. We noticed Gary Shilling has a target of parity on the pair. Never say âneverâ or you are â100% sureâ something can or canât happen when it comes to investingâit can!
Mr. Maaarrrccc Faaaaber and Nassim Taleb please call your office?
Feb. 19 (Bloomberg) -- The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is showing few signs of inflation.
Todayâs news got me thinking about my favorite hubris-filled duo.
There is a great phrase about brokers that I have always loved, once working as a broker many years ago, this phrase hit home with me: âSometimes wrong but never in doubt.â
That should be a disclaimer for many of the top TV-cum-star analysts that grace our screens and magazines. I can think of two who should bear this phrase on their foreheads: Mr. Marc Faber of Doom and Gloom fame, and Mr. Nassim Taleb of recent Black Swan book fame (he comes very close to pretending the Black Swan was his original idea and seems to do so where ever he is spotted, having little time to quote Karl Poppers 1959 essay that spawned the Swan into the lexicon, though others had used the analogy even earlier.)
A couple of quotes from our duo of doom and duplicity:
âI am 100 percent sure that the U.S. will go into hyperinflation,â Faber said. âThe problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.â
Whenever someone in the investment world tells you they are â100% sureâ about anything, cover your wallet and runâŚfastâŚvery fastâŚin the other direction.
And not to be outdone on the hyperbole meter, we have Mr. âI am not a Greek God; I just play one in real lifeâ Taleb saying that hyperinflation is a great bet, but hedging himself as usual, by saying you will probably lose money if you take the bet, but of course making sure he is credited with calling it, should it win. (WhewâŚgot that?):
âAt the recent Russia 2010 conference, an interesting question was posed: how would you invest $100 million for 12 months? The panel included hedge fund manager Hugh Hendry, black swan-er Nassim Taleb, and Marc Faber, among others.
âTaleb presented a few ideas that he would allocate to the 'risky' portion of the portfolio. He likes a short of the S&P 500 and a long of precious metals (gold, silver, platinum) in a fixed ratio of around 1.5 to 1. He also suggests to buy an out of the money option on hyperinflation through a basket of instruments on gold, treasuries, etc. He doesn't care about inflation, he wants to possibly game the slim chance of hyperinflation. He says you will probably lose money on the play, but if you're right and hyperinflation hits, you can win huge. Lastly, he also says that you should be shorting US treasuries, something we've seen numerous prominent hedge fund managers recommend.â
What is interesting about Talebâs commentsâŚhe is on record supposedly opposing such a framework for analysisâŚthe following is from Fooled by Randomness, the book Mr. Taleb wrote before the Black Swan, I think it is a great book, better than his last by far. This is trait #1-3 of what Mr. Taleb calls âMarket Fools of Randomness Constants:
â1. An overestimation of the accuracy of their own beliefs in some measure, either economic or statistical. They never consider the fact that trading on economic variables has worked in the past may have been merely coincidental, or, perhaps even worse, that economic analysis was fit to past events to mask the random element in it.
â2. A tendency to get married to positions. There is a saying that bad traders divorce their spouse sooner than abandon their positions. Loyalty to ideas is not a good thing for traders, scientistsâor anyone.
â3. The tendency to change their story. They become investors âfor the long haulâ when they are losing money, switching back and forth between traders and investors to fit recent reversals of futune.â
I guess we chalk this very good advice from Mr. Taleb to the following: Do what I say, not what I do (I too am guilty of this as charged).
If you want to read our report on why deflation, not inflation, is the major risk now facing the global economy (written in Sep â09) you can click here to download the PDF.
But as our TV-cum-analyst stars count on, if we are wrong about deflation, we expect it to go right down the memory hole so that we can then pen a new report on inflation. (Just kiddingâŚof course.)
A guest piece from Mr. Yves Lamoureux, Investment Advisor, Macquarie Private Wealth:
Are repos signaling a buy or a sell opportunity?
The study of repurchase agreements (or repos) gives us a recent insight into the big playersâ view.
The theory behind repurchase agreements is that large banks use them to buy and sell stocks. A repo is, by definition, a contract giving the seller of a security the right to buy that security back after a stated period of time, at a stated price. The buyer in turn keeps the interest.
Repurchase agreements are an important tool of the Federal Reserve that allows them short-term control of money. In the face of this market correction, is there going to be an encore of purchasing agreements that leads to a probable rebound ?
We have already demonstrated the Federal Reserveâs use of this tool before on a smaller scale and we present today the larger cumulative view as well.
Up until about early 2008, the correlation had moved up to 0.86 or 0.75 squared. It broke down after that period. This is one reason that we will show the larger, updated version today. [Charts not available in text format.]
I feel that the ascending rate of cumulative repos is simply unsustainable.
I have been a good observer of this over time. I recognize the typical activity that is always a precursor. The market usually corroborates the buying or selling at turning point. This is no surprise with a 0.86 correlation coefficient.
The heavy lifting done by key players did little to prevent a massive drop from happening.
One would always prefer to be on the same side of the trade. Selling is the predominant force now. It does not give great confidence in trying to establish positions.
Those repos will equally need to be unwound if players were to change their minds and decide not to support the market at key points. It is a rather large problem. This would, therefore, negate the buying opportunity that lower prices can afford.
I still believe that a sudden buying bonanza is just around the corner and there are many buyers waiting for it with patience and, most importantly, large reserves of cash.
âYves Lamoureux, Investment Advisor, Macquarie Private Wealth
The opinions contained in this report are those of the author and are not necessarily those of Macquarie Private Wealth Inc (MPW). Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor MPW makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. No entity within the Macquarie Group of companies is registered as a bank or an authorized foreign bank in Canada under the Bank Act, S.C. 1991, c. 46 and no entity within the Macquarie Group of companies is regulated in Canada as a financial institution, bank holding company or an insurance holding company. Macquarie Bank Limited ABN 46 008 583 542 (MBL) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. MBL is not authorised to conduct business in Canada. No entity within the Macquarie Group of companies other than MBL is an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia), and their obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any other Macquarie Group company. Macquarie Private Wealth Inc is a member of CIPF and IIROC.
Happy Friday! Have a great weekend.
Black Swan Capital LLC
Note from David Newman ...Is China at Risk of Crisis?
In the February issue we explained why the potential for a crash in China is risingâŚ
- Massive amounts of credit are needed to keep the music playing.
- Current growth rates cannot be sustained much longer.
- Social pressure is building because of the rising urban-rural income gap.
Our monthly Currency Investor newsletter is geared toward newcomers and experienced investors who are looking for a conservative approach to the foreign exchange market, and learning more about how the global economy works.
In plain language we deliver global macroeconomic analysis and actionable ideas geared toward exchange rate fluctuations.
Our analysis is comprehensible and our recommendations consist of ETFs, so donât get turned off by buzz words like âexchange ratesâ or âforeign exchangeâ â this investing strategy is as easy to implement as buying and selling stocks.
At $39 per year itâs a deal youâd be hard-pressed to find anywhere else.
Plus: Get our 2010 Forecast Issue âŚ 20+ pages of analysis and charts covering the major and emerging market currency worldâkey themes and targets.
Please contact me if you have any questions about our Currency Investor service.
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