Wednesday February 24, 2010 - 14:43:12 GMT
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Ouch! Mr. Consumer Surprises Big Time! Will stocks follow?
The risk that a government funding crisis in Europe will spread across the Atlantic Ocean is declining. (Bloomberg)
Greek police clashed with youths in central Athens as tens of thousands of people took to the streets in protest at the Socialist government's austerity measures. (WSJ)
Britain's economy finally clawed its way out of its deepest recession since the 1930s in the fourth quarter of 2009, but it only managed to expand by a much weaker- than-expected 0.1%.
âOur current period of international economic relations is as unusual as it is precarious. Eras of economic protectionism have historically coincided with monetary nationalism; eras of liberal international trade, on the other hand, have coincided with a universal monetary standard. Today, we are witness to an unprecedentedly liberal global trade and investment regime operating side by side with the most extreme doctrine of monetary nationalism governments have ever contrived. This is a recipe for periodic crisis, both economic and political.
âIt is an admirable intention of government that interest rates in their country should be kept low so as to facilitate investment. It is also an admirable intention of governments that the exchange rate of their currency be stable, so as to facilitate trade and investment. But as a deputy to the French National Assembly said in 1790, in response to a proposal that government issue more fiat revolutionary currencyâwith the admirable intention of providing the people with more wealth: âIt is necessary to be gracious as to intentions; one should believe them good, and apparently they are; but we do not have to be gracious at all to inconsistent logic or to absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally.â Likewise, we do no good in being gracious to bad logicians with good intentions. Where governments grant themselves the right to print money in the future, interest rates will rise proportionally with peopleâs expectations of future exchange rate depreciations.â
Benn Steil & Maunal Hinds
FX Trading â Ouch! Mr. Consumer Surprises Big Time! Will stocks follow?
Who leads, who follows? Do rising stock prices make Mr. Consumer feel good i.e. wealth effect? Or does the ebb and flow of Mr. Consumerâs confidence blaze the trail for stocks?
US Consumer Confidence Index 2000-2010: [Chart not available in text format.]
As usual with seeming correlations, itâs not clear. But the two pictures do look eerily similar. The problem is, we canât predict the direction of either. But intermarket correlations (if we can call it that) do help us add more pieces to our constantly building three-dimensional puzzle.
So, why might Mr. Consumerâs lack of confidence be leading the market this time? Possibly because of this very nasty looking chart below showing the number of âunemployed personsâ statistic.
USA Unemployed Persons 2000-2010: [Chart not available in text format.]
Iâm sure it can be argued (state numbers prove it) that a stat like this does not even begin to cover all the people really unemployed, let alone underemployed. But it does make it clear that this recession has been very nasty for workers. And with this number continuing to rise, and in such a dramatic fashion, itâs probably no surprise Mr. Consumer isnât filled with confidence.
We told our audience in Vancouver, at the World Outlook Conference in late January, that we expected a double-dip recession. The employment picture and attendant lack of global demand, bolstered by a change in sentiment by Mr. US Consumer (and others) toward spending and debt, was our primary reasoning.
If our reasoning proved true on Mr. US Consumer, then for us, it was a direct line drawn to Chinese export demand; export demand that is vital in order to clear the market of the huge amount of new capacity the Chinese have created with their stimulus.
It is why we are squarely in the camp that says this move in stocks represents a bounce in an ongoing bear market. We label it as most in the Elliot Wave world doâa wave 2 correction.
S&P 500 Index Weekly: [Chart not available in text format.]
So far we have witnessed a 50% retracement of the high to low move from October 2007 to March 2009, respectively. Shorting S&P 500 here with a stop in the range of the recent high seems a decent risk/reward bet.
But Big Ben is stepping up to the podium today. Could he save us again? Maybe! But keep in mind even Atlas Shrugged.
New Service Note and Thank you: We want to thank all the respondents to our recent survey about a new Global Macro service. I read every written responseâgreat advice and criticisms. Thank you for taking time to do that. It helped immensely. Todayâs issue in Currency Currents is an example of the type of asset-class analysis you will see when we launch our new service; used to justify taking an intermediate- to long-term positions in various asset classes. We will utilize both futures and Exchange Traded Funds. We are planning to launch our new service early next week.
Black Swan Capital LLC
A note from David NewmanâŚ
Jack shared with you today a brief example of how we go about analyzing marketsâ utilizing economic fundamental and Intermarket relationships in conjunction with technical analysis. Stacking this up together, we think stocks look very risky here.
This is the type of thing we do each month, in much more detail, in our Currency Investor newsletter. (And will do in our new global macro service that goes beyond just currencies.)
Last month in our Currency Investor letter we explained why the risks are growing in China because of the credit bubble formed thanks to capital controls, a fixed currency, and hot money flow. In addition, Jack and JR defined why they believe currency prices move in a boom-bust pattern, while summarizing the key points from George Soros excellent book, The Alchemy of Finance.
Our monthly Currency Investor newsletter is geared to a conservative approach to the foreign exchange market. 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.
Director of Marketing & Sales
Black Swan Capital
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