Monday January 8, 2007 - 16:50:47 GMT
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Black Swan Capital - www.blackswantrading.com
Dr. Doom warns...
â€śBecause programming content need to be filled and research reports must be written, a variety of institutional and cultural pressures make gurus profess to knowledge of the markets that no one can possibly have. Every morning they are expected to look at the future when, much of the time, they are merely misreading the present. The endless and often random oscillations of the stock market can market every market oberverâ€™s ruminations seem right or eventually right. And on the occasion they may be wrong, they are never in doubt.â€ť
FX Trading â€“ A warning from Dr. Doom
The dollar is trading mixed today, while stocks and commodities have regained some ground after the sharp sell off on Friday. There is not a lot of data due out from the US this week. The key news will come on Thursday, when the European Central Bank makes its interest rate announcement.
In the background we are seeing growing concerns that a major correction in global asset markets may be brewing. Long-time international market guru, and free-thinker, Mark Faber told Bloomberg today: â€śIn the next few months, we could get a severe correction in all asset markets.'' Mr. Faber added, â€śIn a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate.â€ť
Whatâ€™s the key concern? I think itâ€™s all about liquidity, as I talked about in Fridayâ€™s Currency Currents. There is still plenty of liquidity, or money, floating around the global markets. But often when markets become highly leveraged i.e. many investors borrow more than they normally would in order to take advantage of big bull moves as weâ€™ve seen, it only takes a slight decline in liquidity, or available money, to tip the balance and force liquidation among many players at one i.e. they rush to exit at the same time. This is why small incremental changes â€śat the marginâ€ť can have a surprisingly large impact. And it can lead to a sharp and deep correction that would otherwise not make sense based solely on the market fundamentals.
Over the near-term, any major correction in global markets might be good for the dollar because US fund managers have a ton of money invested offshore. If a decent piece of that money rushes back onshore to hide in short-term cash deposits, it would likely boost the buck. That could surprise. Another surprise that could flow from a global market correction is a big rally in the Japanese yen against all the major currencies on a unwinding of the yen carry-trade.
Stay tuned. If Mr. Faber is rightâ€”a correction could be very swift and deep because there is a whole lot of money out there being held by people with very itchy trigger fingers.
Jack Crooks, Black Swan Capital
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