Monday April 11, 2005 - 10:17:39 GMT
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Black Swan Capital - www.blackswantrading.com
$ correction on the S-word
“Boom and panic in one country seem to induce boom and panic in others, often through purely psychological channels. Just as one huge bubble breeds others in a country, so a host of bubbles in a financial market seems to inspire the production of others in other countries. Panics also travel though psychological conduits…A boom not paralleled abroad can be fed by capital inflows which increase credit base.
“The bubble is pricked when foreigners’ expectations change, leading to an external drain, tight credit, and the need to liquidate holdings.
“In short, the connections among national booms and panics are many and intricate.”
Charles P. Kindleberger, Manias, Panics, and Crashes
The S-word is being used more and more in mixed company. Some who previously believed the economy was roaring, and others who never believed it, are musing over the possibilities of stagflation i.e. stagnation plus inflation.
“At work, as we see it, are two conflicting sets of forces: The tailwinds of pent-up demand for capital spending and hiring still are likely to fuel resilient growth. But there are also economic headwinds: Soaring energy and materials prices, rising interest rates, and a slower pace of economic activity abroad are challenges to robust US growth,” writes Morgan Stanley’s Richard Berner on Friday.
Though Mr. Berner believes “the slowing is temporary,” with the caveat that if energy prices continue to rise, it could shift the balance into something more than temporary; it seems lower US economic growth expectations are subtly saturating the psyche of the market. This change in expectations could be the catalyst for a correction in the dollar.
Below is a daily chart of the US dollar index we highlighted in our Weekly Currency Summary & Forecast sent to clients yesterday:
Chart: US $ index daily
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