11 March 2016/7:36 a.m. ET
Despite the belief by some the ECB’s actions yesterday will finally help the real economy, I am skeptical. In my view we are mired at the moment in the “lead a horse to water but you can’t make him drink” environment. Maybe that comes to mind as I am tending my son’s small farm as he and his family are away this week. Let’s just saying typing on this keyboard all day is a bit easier and less messy. JBut it has been enlightening and all in all a learning experience.
Okay, back to the ECB. I can’t help thinking about the Japanese real life deflationary experiment over the last 2 ½ decades. It didn’t matter much when the Japanese move to ZIRP—zero interest rate policy. Borrowers didn’t take the money as they had few prospects on the business side of the fence and consumers were both over-levered and concerned about the future. So Japan has moved to NIRP—negative interest rate policy following in the footsteps of Europe. The ECB went deeper with the move yesterday. Now extending the bank’s largesse to buying corporate debt.
Well, so what? If corporations had business prospects available to them, interest rates were plenty low enough to make such prospects profitable. And we know lower interest rates globally have done little to spur anything resembling headline inflation (proving inflation is a lot more complicated than saying it is just about money—credit and velocity and capacity and debt burden and all kinds of other things come in to play). Yet with a straight face, God bless him, Mario spouts his two year inflation forecast based on the new money and credit created out of thin air yesterday. Shakespeare couldn’t make this up.
Maybe I am missing something—I usually do. But I am not seeing a direct linkage. It still seems pretty basic—a lack of global aggregate demand in the world. And though there are many culprits, and I do understand the central banks desperation and rationale for trying to keep economies afloat, this is not a problem which can be solved by monetary policy alone; I think we all know that so why keep playing along?
But of course the “lead a horse to water” analogy doesn’t apply to hedge funds and those looking to buy bigger and better houses (or horses)—which in and of itself represents a waste of resources on legacy assets; it is not creating real wealth or spurring innovation for real job growth. But stock markets reacted nicely to the ECB move yesterday. Commodities are stirring thanks to China’s recommitment to adding more juice—read debt. A multi-week bounce in commodities seems quite possible based on my technical view. But I am not sure any of this helps the Eurozone deal with all its attendant problems. So, I am looking to sell EUR/USD for an intermediate-term decline back toward 1.0500…watching this near- term recovery for a chance to get short.
UR/USD Daily: Note the sharp fall in Italy- Eurozone 10-yr spread indicating a fall in risk expectations after yesterday’s action? And remember how tightly EUR/USD was track(red line) ing on this spread, as you can see in the chart below? Hmmm… Looking for the trend move lower to resume…
EUR/USD Hourly: Possibly a test of yesterday’s high? First Fib support (38%) comes in at 1.1066 just above the swing high at minor wave 5…through there adds confidence the trend lower may already be back in play….second key support at 1.1019….
Tomorrow, 12 March 2016, I was invited to be on the radio with Mike Campbell—Money Talks Radio broadcast from Vancouver, Canada. Mike is a real pro and good friend. Mike’s grasp of global macro is incredible and he always has something interesting to share. So, if you would like to tune in and listen, I am scheduled for around 12:05 p.m. Eastern Time. You can listen on the internet at this link.
Thank you and have a great weekend.
Also, please be sure to visit our site at the link below. We have made some changes and upgraded the explanation of our spot forex trading service…maybe it can be right for you.
Jack Crooks Black Swan Capital www.blackswantrading.com