Friday June 24, 2005 - 11:03:02 GMT
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Black Swan Capital - www.blackswantrading.com
Is it reflation and dollar correction time?
“During the 10 years I traded for George Soros, I never heard him speak once about a winning trade. To hear him talk, you’d think he had had nothing but losers. Conversely, listening to the biggest losers, you’d think they had had nothing but winners.”
Victor Niederhoffer, The Education of a Speculator
Are we looking for another reason for a dollar correction here? I am.
The ECB is teetering on a rate cut. The BOE is thinking about a rate cut. And the BOJ doesn’t even have the word “hike” printed in its central banking dictionary any longer.
Two reasons why the three sentences above may lead to a deeper correction in the dollar than is expected:
1) We all know what I wrote about the central banks is true; much of the yield differential expectation—favoring the dollar—is probably already priced in the market.
2) The reason three of the world’s largest and most efficient money creating machines will likely pump many more tons of liquidity into the market in an effort to “stimulate” morbid demand.
Thus, 1 + 2 is ≥ another love affair with the “reflation trade.” And I think the chart below comparing the CRB commodities index to the US $ index defines the “reflation” trade as well as anything:
Why the need to “reflate”? Let’s see:
1) Stagnant consumer demand
2) Any remnant of consumer demand is likely hanging on the ledge of a an overleveraged dwelling i.e. the housing market
3) Though not showing in the inflation number—and not sure if it does—crude is most definitely acting as a drag on the more natural spending habits that make up the GDP number. I.E. instead of shopping at the mall—or buying more at the mall—consumers are putting the money into their gas tanks.
4) And business, desperately in search of pricing power can never seem to find it. Thus, they seem unable to pass on higher energy costs to their customer—unless of course you are an energy producer. They receive the windfall. And unless those receiving the windfall build and spend and hire at the same rate at which the money transferred to them would normally be used in a “normal” functioning economy—it represents a net drag, I think. (I apologize for lurching into economic theory. I am sure a real life economist will rip rant #4 to shreds, but early in the morning the mind works in mysterious ways.)
So, that’s my story for today. And as I look up at my screen I see the euro moving well off its overnight lows. So I’m sticking to this story, at least until Monday.
Have a great weekend.
Black Swan Capital
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