Friday September 16, 2005 - 11:19:43 GMT
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Black Swan Capital - www.blackswantrading.com
$ Forecasting Futility
•The Bush administration is turning up the heat on Beijing to allow the Chinese yuan to rise against the dollar, reigniting an economic dispute that had appeared settled. (WSJ)
•China's economy has grown by an average of 9.5% a year over the past twenty years and the OECD says it won't slow down any time soon. (BBC)
•Economics Minister Heizo Takenaka said on Friday that mild deflation persists in Japan's economy, and further efforts by the government and central bank are needed to overcome falling prices. (Reuters)
•Key reports due today (WSJ):
8:30a.m. Second-Quarter Current Account. Consensus: -$192.4 Bln. Previous: -$191.5 Bln.
12p.m. Mid-Sept. Univ. of Michigan Consumer Sentiment Index. Consensus: 84.0. Previous: 89.1.
“A crowd thinks in images, and the image itself immediately calls up a series of other images, having no logical connection with the first.”
Gustave Le Bon, The Crowd
A random thought on the futility and frustration of forecasting—a view that flows from hearing people say “this will happen,” or “this won’t happen.”
•US Consumer confidence
•Bank of Japan Zero Interest Rate Policy
•US fiscal deficit
•US current account
Choose your poison or your rationalization—many times they are one and the same. When you stop to think about it, there are lots of things we think about while playing this currency game (above is a partial list of the potentialities). We probably shouldn’t waste our time thinking too much, because we can’t forecast future events—no matter how good we think we are. But we forge ahead each day speculating on future events. We then apply those forecasts to forecast to currency prices—forecasting to the second power. Does anyone else see this process as being just a bit odd?
If you believe you can forecast the future, you see nothing wrong. But for those of us that know we can’t, we see much futility playing out in front of us each day.
So where does that leave us?
Should we apply a pure technical approach? Maybe! It avoids picking and choosing what we think does matter. For in the end, it’s only price action that does. “Listen to what the market is saying about others, not what others are saying about the market,” attributed to Richard Wyckoff, and a quote that rings in our head each day when we put fingers to keyboard. For in this report we play the forecasting game—with a limited degree of success and much flat out failure. (Editors note: our perceived value from doing this each day is not to be right, though we do our best to be right, but to help us do right when it comes to trading.)
If there is a point here, it is this: currencies are driven by the actions of real players acting on their perceived view. That view does not have to be based in reality. In fact, “instead of fundamentals [that which we attempt to forecast] determining exchange rates, exchange rates have found a way of influencing fundamentals,” Mr. George Soros tells us.
In other words, our actions influence the events we are trying to forecast. And we know many of our actions are less than rationale. Thus, another wrinkle added to the difficulty of forecasting. I think Mr. John Percival does the best single job in helping us understand this game when he says, “It all comes back to sentiment.” He adds four qualifiers: “know your risk, know your reasons, know your time frame, and know yourself.”
For the ebb and flow of sentiment is the driver of currency prices. If we can grasp that, it’s probably the best we can do.
Black Swan Capital
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