Friday June 17, 2005 - 11:21:35 GMT
Share This Story
Black Swan Capital - www.blackswantrading.com
CRB and the dollar
“The crowd is at the mercy of all exterior exciting causes and reflects their incessant variations.”
Gustave Le Bon, The Crowd
The action in the commodities market lately should probably have dollar bulls a bit worried. Take a look at this chart and you will see what I mean:
This two indices have been negatively correlated for a while i.e. commodities up, and the dollar down. Not too long ago, before the Fed started “aggressively” raising the Fed Funds rate, we used to call this the “reflation trade.” The logic behind the reflation trade was simple. Global central banks, running printing presses 24/7, poured liquidity into the market in order to stave off the deflation bogey man. Or, put in terms much better than I ever could:
“Credit expansion is the governments’ foremost tool in their struggle against the free market. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous.”
Ludwig von Mises
Well, government did help create a boom—and that boom came in the form asset bubbles in real estate, a liquidity prop for the stock market, and big move in commodities (which got a double-whammy thanks to real demand from China). But China’s demand was predicated on keeping its customers demand alive—the US and European consumer.
So, global central banks erred on the side of asset bubbles to keep this game in play. Now, at least we are told by the world’s chief central banker, Mr. Greenspan, that it’s time for him to take his ball and go home—game over! But if this is true, somebody forgot to tell the players, for they are playing on…
• Copper breaking out to a new high
• Crude oil soaring
• Gold on a tear
• Grains starting to crank
And houses are still being churned out as fast razor blades. Hmmm…the good old days of the “reflation trade” are here again; but why?
Below is a chart of MZM (the red line is based on monthly and represents the % change from the same period last year):
Money Zero Maturity is defined, according to Investopedia: MZM has become one of the preferred measures of money supply because it better represents money readily available within the economy for spending and consumption. This measurement derives its name from its mixture of all the liquid and zero maturity money found within the three "M's."
Ok! We can see based on this chart that at least the rate of growth in MZM is decelerating fast—it would suggest liquidity is being drained from the system.
So back to the same question: Why is everyone acting as though the reflation trade is back in vogue? Ah, is this conundrum #2, or simply a derivative of conundrum #1? Who knows? We know one thing—the trend is our friend, until its not.
So, play on commodities crowd—who cares the referee took away the ball.
Black Swan Capital
Forex Trading News
Daily Forex Market News
Forex news reports can be found on the forex research
headlines page below. Here you will find real-time forex market news reports
provided by respected contributors of currency trading information. Daily forex
market news, weekly forex research and monthly forex news features can be found
Real-time forex market news reports and features providing
other currency trading information can be accessed by clicking on any of the
headlines below. At the top of the forex blog page you will find the latest
forex trading information. Scroll down the page if you are looking for less
recent currency trading information. Scroll to the bottom of fx blog headlines
and click on the link for past reports on forex. Currency world news reports
from previous years can be found on the left sidebar under "FX Archives."