Wednesday October 19, 2005 - 11:24:40 GMT
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Black Swan Capital - www.blackswantrading.com
•Key reports due today (WSJ):
8:30a.m. Sept. Housing Starts. Previous: -1.3%.
“Nature’s admonition to avoid the dice altogether...[E]veryone who bets any part of his fortune, however small, on a mathematically fair game of chance acts irrationally…[T]he imprudence of a gambler will be the greater the larger part of his fortune which he exposes to a game of chance.”
Daniel Bernoulli, taken from Against the Gods by Peter Bernstein
Warning: You dollar haters—and you know who you are—might experience some slight indigestion from today’s CC.
Other than the fact that the euro is tanking against the US dollar (yet still grasping a thin reed of support) the level of open interest (red line in the chart below) appears surprisingly lame. Does it tell us anything? Maybe it says there are still plenty of quiet dollar bears holding out hope the dollar will begin its long-term decline into oblivion. After all, there are too many “structural problems” facing the dollar—“it must decline” still seems a deep-seated belief among many players.
Chart: euro Futures Dec '05 Daily
No matter how much one believes something, doesn’t guarantee it must happen. And in a world where prices are still driven by real people, acting in both rational and irrational fashion (not sure how we distinguish between rational and irrational when it comes to investing), and where the actions of each player ultimately impact upon future expectations—Soros refers to this as “reflexivity’—forecasts or beliefs can be dangerous places to hang your hat.
“”The participants’ perceptions are inherently flawed, and there is a two-way connection between flawed perceptions and the actual course of events, which results in a lack of correspondence between the two. I call this two-way connection ‘reflexivity.’”
No where is “reflexivity” better dramatized for all to see than in the currency markets, assuming one can attempt to discern with some perspective instead of clinging to a story. The dollar demise story, which not coincidently mirrored the peak in the euro during late ’04/early ’05, is the best current example of “flawed perceptions” we’ve seen in a while.
“The arguments of the dollar skeptics are well known: they mostly revolve around America’s record current account deficit of more than 6% of GDP, which is widely viewed as unsustainable. Hence, the argument goes, central banks and private investors would start to shed dollar assets at some stage in the search for another reserve currency. Given the size of the euro area’s economy and financial markets, the euro is widely seen as the leading contender for the next reserve currency. However, as I see it, rumors of the imminent death of the dollar as the leading reserve currency are grossly exaggerated, for several reasons,” writes Morgan Stanley economist Joachim Fels. [Our emphasis]
The reasons, according to Mr. Fels:
(1)Reserve currencies don’t lose their status that easily.
(2)Large-scale currency diversification is difficult for dollar-peggers.
(3)The euro is not a glaring alternative.
(4)Diversification into risky assets may benefit the dollar
“Fears of a dollar-crash due to currency diversification are overblown.”
Thank you Mr. Fels!
Black Swan Capital
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