Friday August 25, 2006 - 10:35:31 GMT
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Black Swan Capital - www.blackswantrading.com
Maybe Ben was right...
â˘ Inflation in Germany slowed in August. (Boomberg)
â˘ Japanese consumer prices rose less than expected in July. (Reuters)
â˘ Key Reports (WSJ):
No economic indicators are scheduled for today.
âVolatility is in the nature of financial markets, but âexcessâ liquidity has made it worse. Ups and downs in asset prices are a reflection of revaluation and devaluation of risks and rewards. This is how markets work and, albeit stressful, there is no better economic system to allocate resources as efficiently as possible. However, impulsive mood swings creating sudden bursts of volatility can still distort the transmission channels and result in sub-optimal positions. Indeed, the liquidity super-cycle in the post-2001 period had become such an unsustainable basis for speculative behaviour across all asset classes.â
So maybe the yield curve and Mr. Bernanke had it right. Prices keep coming in less than expected lately. Growth seems to continue to disappoint.
Lower than expected âinflationâ in both Germany and Japan throws a monkey wrench into the view these currencies will quickly closing the yield differential with the buck. And it also throws into question the notion that global growth can be sustained should the US economy continue to decelerate. This may help explain why the dollar has been acting well relative to continued dismal economic news flowing from housing and other places in the US.
Housing and its impact on the US consumer is supposed to be the Achilles heel for the dollar. Itâs the collective âthingâ that all have been waiting for as a trigger to drive the buck into its death spiral.
Some problems with this theory:
1) Too many people seem to be expecting it. Thus, the major long/short imbalance in the euroâthe favored candidate when the dollar death spiral begins.
2) The weight of US money overseas that could potentially support the dollar if slowing global growth is reflected in global equities and leveraged risky investments.
3) If prices continue to remain in check (as yield curves have anticipated), expectations for rate increases globally will be reigned in. In a relative game, the dollarâs existing yield, despite the Fed on pause, looks pretty good.
4) If the US consumer decides to take a holiday, the bogey man that all use as another reason for the dollar death spiralâthe current account deficitâwould likely improve.
Itâs getting very interesting out there. Mr. Bernanke speaks today. Stay tuned.
Jack Crooks, Black Swan Capital Black Swan Subscription-based Service
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