Duration told us and Symmetry is telling us oil has bottomed

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Quotable

“Formula for success: rise early, work hard, strike oil.”

                                     J. Paul Getty

 Commentary & Analysis

Duration told us and Symmetry is telling us oil has bottomed

There are lots of decent rationales to suggest why oil prices have bottomed.  Rising prices for Permian Basin drilling properties would be one.  Inability of Iran to crank up production as fast as expected might be another.  China’s latest stimulus might fit.  But what got my attention a while back was the break of a major trend line coupled with our wave analysis.  What added confidence to a longer term bullish view was duration and now chart symmetry suggests more to go on the upside.

Duration is a simple concept (not the fixed income type).  And it’s easy to apply.  If you can count, you can follow duration.  No algorithm or fancy technical charting package needed.  I started following duration years ago after reading an excellent book by Woody Dorsey, titled, Behavioral Trading. Besides being an incredible analyst, Mr. Dorsey is a gifted writer; you have to love a book when the title of the first page of introduction is this: “The History of Markets Is the History of Human Error.”  Bingo!

“There are decisions in trend duration measurement that may seem equivocal….Mathematical models like econometrics are precise.  But precision, while always presuming to be righteous, is not necessarily always the most useful.  If we want to absorb the form or gestalt of the market, we may be willing to honor some abstraction over the ‘precise’ precision….Practical behavioral finance is not about mathematical models, which are the sole province of the purely rational.  It is about unleashing the intelligence of our other brains and dancing to the music of the durations.”

                                                                            Woody Dorsey

Simply put (and this will be clear in the chart oil prices below), in bear markets the duration of the moves lower in price will be consistently longer than the moves higher; thus, defining a bear market means the trend moves (lower) take more time than the corrections (higher). 

Now, in said bear market, what if we see a “correction” higher with duration much longer than normal (defined by the average length of recent corrections higher). Well, that should get our attention immediately; and especially if increase in duration occurs at a time when sentiment in extreme territory.  That is a flashing yellow light telling us that a trend may have changed—pay attention!

Below is a chart showing the duration periods for crude oil from late June 2015 through yesterday (Friday 26 August 2016). Editor’s Note: I shared this chart in a recent issue for Money Talks Michael Campbell’s Insider Edge in an article about finding the trend.  Mike is a friend; and one of the best global strategists you can find anywhere.  His Saturday Money Talks weekly radio show is brilliant.]

Crude Oil Futures Daily:

Key points from the chart above:

  1. After the trend low in oil prices was made in early February 2016, the duration of the move higher was 27 days; dwarfing the duration of four previous rallies of five, two, eight, and six days, respectively.  That alone was an indication maybe the trend had change. 
  2. In the midst of that 27-day move higher there was a break above the long-term downtrend line going back to June 2015.
  3. There was divergence in momentum and the low in price was made on February 11th 2016.
  4. And you can bet the sentiment was pretty bleak for oil in early February 2016. 

So in effect, the duration added confidence to our other indications the trend in oil prices had changed.  The intermediate term trend was higher.

Now, as you view the chart above, notice the symmetry.  The red dotted line dissects the chart into halves (the fulcrum).  Notice how the left side looks like a mirror image of the right side.  This confirms two important aspects of markets: 1) trend duration seems to be similar in bull or bear markets; and 2) price movement in markets is fractal. 

So there you have it.  Trend duration and symmetry to help us spot trend changes; thank you Mr. Dorsey.  A powerful set of indicators we can all do at home boys and girls, all you need do is have access to a price chart and count.  Once again, it appears letting Mr. Market talk to us in his own language beats hanging our hats on the gossip of the pundits any day. 

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And in case you don’t know this – I eat my own cooking; i.e. I take the same trades in my sport forex account as I suggest to you. [Note: We do not trade currency options for our own account at Black Swan Capital due to the potential for front-running as options markets can be quite thin.]

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Jack Crooks

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Comment

Dollar Retrospective Chart 1971-2016: Next Major Cyclical Driver?

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Quotable

“Well, you can just stop and think of what could happen if anybody with a decent system of government got control of that mainland. Good God.… There’d be no power in the world that could even—I mean, you put 800 million Chinese to work under a decent system… and they will be the leaders of the world.”

― Henry Kissinger, On China

Commentary & Analysis

Dollar Retrospective Chart 1971-2016: Next Major Cyclical Driver?

Here’s a retrospective and, hopefully, some perspective on the drivers of the long-term trends in the US dollar index in the era of free-floating after President Nixon closed the gold window on August 15th 1971 and rendering the Brenton Woods system to the dustbin of history.  I have added the major macro (blue) events and more specific triggers (maroon) that led to multi-year trend changes; i.e. bull and bear markets, in the dollar.  

Also notice I have added an Elliott Wave count to the current US dollar bull market which began back in March 2008, triggered of course by the credit crunch, aka the saturation of the US capital markets a la the massive recycling of the Chinese trade surplus.

I am expecting one more wave higher (5) to a US dollar bull market which is getting a bit long in the tooth when measured against the other bull and bear periods. 

Besides the technical wave view, there are a couple of other reasons why I think this dollar bull has more juice left:

1)      We have not reached the stage where soccer moms and grocery store baggers are talking about the US dollar.  There is just not enough love yet.  The dollar bull won’t end until we witness an explicit extreme in bullish sentiment; we aren’t there yet. 

2)      This rationale is a bit speculative, but I have believed for a while the next growth phase in the world economy will be driven by an Asian consumer boom.  We have started to see outlines of that, but we are not there yet.  China will have to rebalance first, and that process is still underway.  Secondly, this consumer boom will likely be coincident with development of a viable and deeper Asian capital market capable of handling the foreign direct investment flow into Asia part and parcel to a local boom in demand—that hasn’t yet materialized.

Why would an Asian consumer boom lead to a change in the cyclical trend in the US dollar?  I suspect because both hot money and foreign direct investment will overwhelmingly be targeted to Asia; and additionally China will no longer be concerned about holding US Treasuries to suppress its currency appreciation.  A relatively strong Chinese yuan would further enhance the wealth of Chinese consumers and also satisfy China’s longer term strategy of challenging the US dollar world reserve currency status.  As indicated, this view has to be considered guess work at this stage, but I think has a degree of plausibility. 

That said, there is always the Black Swan event lingering out there which may be a driver of a trend change.  But the point is, until there is another macro sea-change in the global economy, the US dollar bull market should continue.

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1.       Morning Report

a.      Update on current open positions

b.      Market comments – general market comments & key news

c.       Levels – Support/Resistance, Swing, & Pivot levels for each major pair both hourly and daily basis

d.      Comments on each of the major pairs

e.      Chart View of each of the major pairs

2.      Updated details Elliott Wave analysis – emailed and posted to our site archives

3.      Occasional audio/video updates on the technical setup of the major pairs (also posted to site archives)

4.      Suggested trading ideas laying out all necessary levels – entry/risk/two profit targets

a.      Sent in a timely manner through email, Skype, and text to mobile phone

b.      Continuous follow up through the life of the trade idea – risk adjustments, updated profit levels, and specific commentary

5.      Access to me via email, Skype, or telephone (after noon ET for phone calls please).  I cannot give specific trading advice, but I am happy to clarify and discuss any thoughts and ideas I have shared in the service.

Our analysis is completely independent.  We have no ax to grind or story to prove.  We take what the market gives us.  Our trades are driven by the Elliott Wave pattern setups keyed off the hourly charts. Holding period is normally about two to four days. 

This is an active trading service which can benefit both the sophisticated individual trader and institutions seeking specific actionable ideas and ongoing research.  But even if you don’t consider yourself “sophisticated” and want to take advantage of the profit potential, you may be able to do so through our Trade Copier Program; you can click here to find out if you are eligible.

You can find our track record posted here at our site.

And in case you don’t know this – I eat my own cooking; i.e. I take the same trades in my sport forex account as I suggest to you. [Note: We do not trade currency options for our own account at Black Swan Capital due to the potential for front-running as options markets can be quite thin.]

Thank you.

Jack Crooks

President, Black Swan Capital

jcrooks@blackswantrading.com

www.blackswantrading.com

 

Comment

Some “Overlays”

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Quotable

“There is, in short, no great idea that stupidity could not put to its own uses [....] The truth by comparison, has only one appearance and only one path, and is always at a disadvantage.” 
― Robert MusilThe Man Without Qualities

Commentary & Analysis

Some “Overlays” 

I am painfully aware, through real money loss, correlation is not causation.  And often said correlation can break down just at the worst time—when you bet on it.  Even more concerning is the belief diversification of portfolios is based on the idea of “non-correlation.” 

We have seen many times when hyper irrational behavior substitutes for the normal everyday irrational behavior in the market; it is often the time when supposed “non-correlation” of various assets and sectors becomes correlated, i.e. they all head south at the same time encouraging more selling of that expected “non-correlated” asset class to raise margin funds—the dreaded feedback loop of selling begets selling.  Feedback loops were never incorporated into the Capital Asset Pricing Model; well at least it wasn’t when I was in grad school many moons ago. In fact, does anyone other than an academic even waste time with CAPM anymore? 

That being said, I have some interesting “overlays” to share.  At least I think they are interesting and hope you do to.

 Let’s start with good old Dow Theory.  To refresh your memory; back in April 29, 2016, on these august pages, I shared the same chart (below) and said:

According to Dow Theory, any new swing high or swing low in one index must be confirmed by similar price action in the other index.  I am no Dow Theory expert, to say the least, but the chart below appears to be a non-confirmation signal.  The Dow Jones Industrial Average made a fresh swing high (black line), but it was not confirmed by a similar new swing high in the Transports (red line). It suggests a deeper move lower could be in the cards, beyond a standard correction to the bull trend.

To date, the Dow Theory confirmation warning provided itself wrong.  The Dow Jones Industrials are up about 500 points since then.  Catch up time?

Do yields matter in the currency world anymore?  The chart below shows the Australian dollar versus the 2-year benchmark spread between Australia and the United States. Since early July 2016, there has been a big divergence in the price of Aussie and the yield spread.  Hmm…Is it time to bet yields still matter?

Interestingly, within a span of only three months, the 21-day correlation between AUD/USD and the 2-year benchmark Aussie-US spread, fell from +98% to -46%.  It’s a nice example of how quickly correlation can change.

In the words of the late great Burl Ives, singing Silver:

Silver and gold

Silver and gold

Silver and gold

Ev'ryone wishes

For silver and gold

How do you measure

It's worth?

Just by the pleasure it

Gives here on Earth…

I suspect some people have other measures for silver and gold—I know my father-in-law (FIL) does. 

It is an interesting dynamic, the price action between precious metals and the US dollar.  Most of the time there is a negative correlation.  But it is not uncommon to see the buck and metals move together for months at a time.  Now let’s play a silly game and pretend we do know cause and effect. 

I would suggest (read guess) if Janet Yellen & Co. continue to hint that indeed they will hike again in 2016, it should benefit the US dollar because of rising relative yield.  And if the US dollar benefits, based on the “overlay” chart below, gold and silver would take a hit. 

I am cautiously dollar bullish on the expectation Janet & Co. have become a bit more hawkish because of one key piece of information: The dire consequences the political and media elites warned us about (automatic death of first-born son, locust, World War III, killer frogs, etc.) has not come to pass even though UK voters decided they wanted Brexit. 

Of late, UK economic numbers have been decent; and so have Eurozone numbers.  Germany has reassured it understands it cannot ice out the UK as it will only hurt its own trade and the EU in general.  Prime Minister May is busy lining up new deals now that David Cameron has run off to play with his toys.  London-based banks are still in London the last time I checked.  And even the sun still rises in the east.  Amazing all those over-educated derelicts could be so completely wrong.  Well not really amazing.  There is a name for it; it’s called the hubris syndrome. 

Anyway…to the “overlay” of Gold (green); Silver (black); and US$ Index (blue)

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Please be on the lookout for Forex Free Week.  I think we have improved our forex service—adding a new Elliott Wave analysis archive, a new weekly Currency Review, updating our Morning Report to subscribers, and focusing our trades within time frames that make sense in this market. Starting on Thursday we will be opening the service to anyone who wants a free one-week look at what we do.  If you trade currencies and are looking for a resource, hopefully we can be that for you. 

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Jack Crooks

President, Black Swan Capital

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Comment

US Dollar Index Weekly Wave View - Lower before higher?

The US dollar index weekly view is below.  The fact the dollar could not sustain a rally despite the much stronger than expected US jobs report might be saying a lot; we don't know yet but the rational man would have expected much more given the setup and the rising yield differential in favor of the dollar.  There is an increasing probability the dollar index is tracing out some type of wedge pattern; if so a multi-week move lower is in the cards.  Wave E to complete the wedge down near 91?  

Jack Crooks

Black Swan Capital 

Comment

South China Sea Heating Up

Quotable

“War: a massacre of people who don't know each other for the profit of people who know each other but don't massacre each other.”

                     Paul Valery

Commentary & Analysis

South China Sea Heating Up

Despite the UN tribunal ruling that China has “no legal basis” for its expansive claims in the South China Sea, China is digging in and saying they refuse to accept the decision. [Bill Haden. The South China Sea, Yale University Press.]

From local schoolroom to national museum the leadership has worked to instill the notion that China's modern history was shameful until the Party took over. While much of the message is about taking pride in the country's contemporary achievements, it's underpinned by a sense of personal violation at the dismemberment of the country's national territory and the collective violation of the Chinese people at the hands of foreigners. This narrative, in turn, now underpins mainstream discussion of territorial issues.

“The 4m sq km sea is crossed by ships carrying $5tn worth of cargo every year and also has large energy reserves, including an estimated 11bn barrels of oil and 190tn cubic feet of natural gas,” according to the Financial Times.

There is a lot at stake here.  But China has legitimate strategic rationales for pressing its questionable claims, which suggest its goals won’t change despite a UN ruling. [Bill Haden. The South China Sea, Yale University Press.]

Broadly speaking, there are four main strands to China's interests: a sense of historic entitlement to the South China Sea combined with a desire for national prestige, the need for ‘strategic depth’ to protect China's coastal cities, the desire to guarantee strategic access to the open waters of the Indian and Pacific oceans, and the wish to have access to the resources of the Sea itself – particularly its fish and hydrocarbons.

China’s rise also suggests the South China Sea conflict will be part and parcel to political-military discussions/actions for years to come and keep policy wonks and the US Pacific Command busy for some time [John Mersheimer, Can China Rise Peacefully?, The National Interest, Oct. 2014]:

Offensive realism offers important insights into China’s rise. My argument in a nutshell is that if China continues to grow economically, it will attempt to dominate Asia the way the United States dominates the Western Hemisphere. The United States, however, will go to enormous lengths to prevent China from achieving regional hegemony. Most of Beijing’s neighbors, including India, Japan, Singapore, South Korea, Russia, and Vietnam, will join with the United States to contain Chinese power. The result will be an intense security competition with considerable potential for war. In short, China’s rise is unlikely to be tranquil.

Many US strategists tell us the islands being built up by China have no real military consequence—they cannot be defended.  But there is a strategic vision here, it seems.  

In his brilliant book, titled, On China, Henry Kissinger used board games as examples of competing strategic vision among China and the West.

China plays wei qi; which translates into the “game of surrounding pieces” (pronounced “way chee” and in Japan known as Go).  This game is about “the concept of strategic encirclement.” 

“Chess, on the other hand, is about total victory,” says Kissinger.  “The vast majority of games end in total victory achieved by attrition or, more rarely, a dramatic, skillful maneuver. 

So, “if chess is about the decisive battle, wei qi is about the protracted campaign.  The chess player aims for total victory.  The wei qi player seeks relative advantage.  In chess, the player always has the capability of the adversary in front of him; all the pieces are always fully deployed.  The wei qi player needs to assess not only the pieces on the board but the reinforcements that adversary is in a position to deploy. 

So let’s think of the South China Sea as a broadening encirclement strategy by China towards its South China Sea neighbors and also a test of the West’s resolve, resources, and commitment to its allies in the region. 

The West is about Clausewitz and China is about Sun Tzu.  Game on says Mr. Haden.

Two strategic imperatives and many regional interests collide in the South China Sea. The dispute is so dangerous because it crystallises two nations’ ideas of who they are. Both the United States of America and the People's Republic of China are founded upon, and their elites are imbued with, a mighty sense of purpose. For China's Communist Party rulers, legitimacy comes from a history of anti-imperialist struggle and an ongoing campaign to recover territories hacked from the national corpus by colonists and traitors. However historically mistaken the belief, those territories include the Sea. The United States’ elite has an implicit belief in its manifest destiny too: America as an ‘exceptional country’, the world's ‘last best hope’, an ‘indispensable power’, an upholder of the norms and rules of the international system. The South China Sea is the first place where those norms and rules are being challenged. If the United States loses access to those waters it loses its global role and becomes just another power. The shock would be profound and the consequences for American identity, prosperity and security devastating. It could be something worth fighting for. And, as we shall see, plans are already being made.

Thus, there are reasons the US is growing closer to the Philippines and Japan.   And why we will likely see a change in Japan’s pacifist constitution, especially now that Japanese Prime Minister Shinzo Abe has gained power in the recent elections. 

The Chinese government has used the islands before to stoke nationalism.  We saw this back in 2010 and again in 2012 during the protests in China over the Senkaku and Dioyu Islands. 

Another well-known television pundit is Air Force Colonel Dai Xu. On 28 August 2012, the Global Times published an article of Dai's calling Vietnam, the Philippines and Japan ‘the three running dogs of the United States in Asia’. ‘We only need to kill one, and it will immediately bring the others to heel,’ he claimed.

Now that Brexit is off the front burner, China may be back on.  One major implication: If China presses this issue now, it will not be good for the global economy.  It will exacerbate trade tensions and investment flow into, and out hot money out of, China.  We are keeping an eye on the yuan—which as you can see in the chart below has weakened sharply against the US dollar (with potential for a lot more)—putting pressure on export competitors in Asia and elsewhere.

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

 

Comment

Abandon Ship – Brexit implications

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Quotable

“The decentralization of power away from hubristic central planners is exactly what the world needs more of.  The centralization of power is the source of the very risky environment we’re in, not the decentralization.”

                         Mark Spitznagel

Commentary & Analysis

Abandon Ship – Brexit implications

Well, the Brits decided to leave.  Those of us who prefer smaller government to bigger; prefer more liberty to less; prefer greater economic freedoms than fewer; prefer entrepreneurism to big business cronyism; and prefer sovereign nation states to supra-national authorities are very happy right now.  Once this transitionary phase (of elite panic, which is just priceless to watch) and market volatility is behind us, the UK economy will most likely rock and roll; freed from the shackles of 13,000 edicts and regulations drawn up by wine and cheese eaters inside labyrinth in Brussels—aka EU headquarters; it’s a Franz Kafka wet dream for feckless bureaucrats.    

Return of the UK fishing fleet might be good for jobs.  A Cambridge/Oxford research park to challenge Silicon Valley would be a nice start. Five and ten man manufacturing shops across the UK freed from the burden of regulation and massive overhead could lead to something extraordinary.  The realization there is no reason for the talented financial people of London to climb aboard the Frankfurt-Titanic will surprise.  I think you get where I am going here…

The rationales for the UK leaving have been hashed over pretty well, especially now with the gift of hindsight.  Despite seemingly the entire staff of the Financial Times still in denial, with commentary bordering on bitter, there is a clear broad rational for all of this; I return to a commentary from Citron Zoakos once again, from May 2016:

In recent years, economists have debated fruitlessly over the importance or lack thereof of financial imbalances and excessive debt. To no avail, they have sought answers to the question of what happens if these problems are not addressed by policymakers. Now we know: Voter insurgencies happen; revolts happen that topple the established policymaking elites.

In short, the inability of authorities to deal with the credit crisis (not to suggest an easy task) and their decision to “save” the global financial system through massive injections of liquidity (at the expense of rising public debt) to save legacy (read: crony capital protected assets) and apply severe financial repression (zero and negative interest rates) has benefited owners of capital through the massive inflation of financial assets; yet those owners of labor (regular people who do real things for money—build stuff and serve) have wallowed with high unemployment, no return on savings, a decline of their largest asset (their home), and loss of real income.  The UK lesson is a microcosm of this strident difference in world view between the elites and the average guy on the street (in every developed country it seems)—those in London (insert New York) love the EU (insert US Federal power); those serfs in the Northern England hinterlands (insert US fly-over country) do not.

Here’s the rub, again from Mr. Zoakos, and it dovetails on those who are urging the EU to re-invent itself immediately [my emphasis]…

In Europe at the moment, both the owners of capital and the owners of labor oppose vigorously these types of structural reforms (severe entrepreneurial structural changes) But without such reform, the politics of introducing Brady-style debt relief conferences will be reduced to struggles between those two groups over who will to pay for debt relief: the owners of capital or the owners of labor. The only outcome of debt relief without revolutionary, entrepreneurial structural reforms in the markets for goods and services (rather than in the labor market) will be the typical European class struggle. History has shown how dangerous this can be.

 Is this message clear to the one who matters most, German President Angela Merkel? And even if it is, is it too late to reform given the turmoil inflicted on the lives and cultures of the EU states?  How does one trust President Merkel given the debacle she magnified with her unconditional support of refugees who are destroying thousands of years of Western culture in very short order?

A list of some off the cuff implications of Brexit (this is far from exhaustive):

  1. Germany lost a key ally in helping reform the EU with more market-based solutions.
  2. German will likely have to take up the fiscal slack after losing the UK’s estimated 18 billion dollar euro per year commitment to the EU.
  3. The EU loses its military muscle with the UK exit.  Rebuilding that will be costly.
  4. Henry Kissinger’s comment about Germany becomes increasingly apt: “Germany is too big for Europe and too small for the world.” 
  5. The EU loses clout to help shape world affairs with the UK gone. 
  6. Regardless of Germany’s honest and proper attempts to right the ship with appropriate reform, it will be sniped at by others inside the zone who will complain the Germans are exerting too much “control.”     
  7. Anti-EU forces in many other countries (e.g. France, Italy, Spain, Netherlands, Austria, Sweden, and Denmark) have been emboldened.  Italy’s constitutional referendum in October will be a major test.
  8. The pan-European capital markets project will most likely be abandoned without UK involvement.  Thus, the ECB will have to continue its stop-gap measures.  How much more can the German government expose German taxpayers?
  9. The euro loses a significant amount of status as a world reserve currency challenger to the US dollar; we will likely see a big shift in structural reserve allocations among global central banks away from the euro.

“In the wrong hands,” Leto said, “monolithic centralized power is a dangerous and volatile instrument [Frank Herbert].”  So more than likely it’s unraveling can be expected to be equally dangerous and volatile.

At the very least we should expect elevated levels of market volatility in the months ahead.  And we shouldn’t be surprised if the whole single currency experiment comes unglued.  At some point, it will no longer be in Germany’s best interest to hold this thing together.

Stay tuned. 

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

 

 

Comment

Why stay UK?

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Quotable

“It was a bright cold day in April, and the clocks were striking thirteen.”

                        George Orwell                  

Commentary & Analysis

Why stay UK?

 “Given that the aim of the European Union is to eliminate democracy by reversing the result, as perceived by the European Union, of the Second World War—supposedly a victory for the sadly mythical ‘Anglo-Saxon model’—it is not surprising that Britain is a primary target and that the EU nomenklatura—and indeed the global nomenklatura— is so desperate to retain control over it. The ultimate intention is to establish anti-democratic rule, and the ‘Rhenish’ model of crony capitalism, globally. But Britain has been the low-hanging fruit. That is why it is so important for the world for Britain to be allowed to regain its freedom and to re-establish democracy.”

           Bernard Connolly, Don’t Trust the European Union, International Economy

Whether you like him or not, and I do, Nigel Farage nails it once again in this clip from the European Parliament as he expounds on the dangers and failures of the EU—the look on the faces of German President Merkel and French President Holland are priceless.

One has to ask:  What really does the UK have to lose if they decide to leave?  Well according to Citron Zoakos, possibly the smartest global macro analysts in the game, here is what the UK has to lose:

If Britain votes to exit the European Union, it will be voting to get rid of the 13,000-plus acts, rules, and regulations of the acquis communautaire, but otherwise to continue Britain’s economic relations with the Continent.

And one wonders why the UK should love this “economic arrangement “ anyway considering it looks very one-sided in favor of Germany, based on the trade numbers as you can see in the charts below:

German Exports to the UK versus UK Exports to Germany Monthly: At current exchange rates (converting back to USD), the UK is effectively running a $4.4 billion dollar monthly trade deficit with Germany. 

Now I think you can better understand why Angela Merkel’s’ resident “hit man,” aka Finance Minister Wolfgang Shäuble, says it will be “poison” if the UK leaves.

Is it any wonder why the UK trade deficit has done nothing but widen during its cozy nomenklatura relationship with the EU?

UK Visible Trade Deficit Monthly in GBP from Jan 1996-April 2016: Gulp!

Of course it is primarily the “little people” who feel this burden of real stuff.  All those Eton grads are doing quite well in the “new” economy thank you!

The guy in the middle, circled, is none other than Honorable PM David Cameron with his Eton pals. Not thinking many calluses on the hands of this bunch.  

The guy in the middle, circled, is none other than Honorable PM David Cameron with his Eton pals. Not thinking many calluses on the hands of this bunch.  

So maybe you believe the UK was just an unfortunate victim of the global rebalancing triggered by the credit crunch and the EU has actually softened the blow for the UK.  Well, let me attempt to disabuse you of that notion by sharing the next chart of Germany’s monthly exports.  “Holy towering BMWs Batman!”  Is it any wonder why Germany loves the EU?

This tower of exports leads to a whopping balance of trade for Germany—a county by far more dependent on exports for GDP growth than any other in the world. 

To put some meat on the bones of explanation for this towering German trade surplus comes from Prof. Michael Pettis:

“As German savings rose, eventually exceeding German investment by a wide margin, Germany had to export the difference, which its banks did largely by making loans into the rest of Europe, and especially those countries that were financially ‘shallower’. Declining consumption left Germany producing more goods and services than it could absorb domestically, and it exported excess production as the automatic corollary to its export of savings.

“Of course the rest of the world had to absorb excess German savings and run the current account deficits that corresponded to Germany’s surpluses. This was always likely to be those eurozone countries that joined the monetary union with a history of higher inflation and currency depreciation than Germany – countries which we are here calling ‘Spain’. As monetary policy across Europe was made to fit German needs, which was looser than that required by Spain, and as German savings were intermediated by German banks into Spain, the result was likely to be higher wage growth, higher inflation, and soaring asset prices in Spain.”

The chart of the German trade balance above may help you understand why some people question the veracity of German politicians when they tell us of their “sacrifice” for the EU.  German taxpayers are no doubt sacrificing, but as Bernerd Connolly says, the nomenklatura isn’t sacrificing; its reaping.

The question is: If the UK decides to leave, can Germany really afford to punish them for doing so?  I share with you the brilliant answer from Citron Zoakos, also from the current edition of International Economy magazine:

“If the European leadership chooses to preserve UKEU economic relations, they will be signaling to the other members of the European Union that it is not necessary to accept the comprehensive supranational overlordship of Brussels in order to enjoy the benefits of international economic integration and free trade. But if, in order to whip into line the remaining EU members, the leadership decides to destroy the hitherto beneficial UK-EU economic relations, the EU leaders will be signaling that their true institutional interest is not international economic integration but the political power of supranational governance arrayed against national sovereignty and the democratic institutions that underlie that sovereignty.

“In opposing Brexit, the ideologues of political Europeanism argued to the British public that their Europeanism is motivated by their solicitous concern to preserve the benefits of international economic integration. If Brexit wins the referendum, these ideologues must either accept that international economic integration can also be served by strengthened national sovereignty without supranational governance, or they must resort to the unintended consequence of demolishing economic integration in order to preserve supranational rule.”

Tick…tick…tick….

Jack Crooks, President, Black Swan Capital, info@blackswantrading.com

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Talk of yen intervention makes sense…but first Brexit to deal with

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Quotable

“I have experienced failure as a politician and for that very reason, I am ready to give everything for Japan.”

                        Shinzo Abe                 

Commentary & Analysis

Talk of yen intervention makes sense…but first Brexit to deal with

 Japanese industry is worried the yen strength will hurt its overseas sales. 

The yen’s recent approach to ¥100 against the dollar has provoked speculation that the Ministry of Finance may be poised to intervene for the first time since 2011.

“We think the time to act has already arrived. It’s already ¥104, ¥105 to the dollar. It was ¥118 in January. From ¥118 to ¥104 — that’s ¥15 in six months,” said Mr [Sadayuki] Sakakibara [chairman of the powerful Keidanren business lobby].

“That is not orderly. Extremely disorderly is all you can call it. To keep it stable in a reasonable range then certainly the Ministry of Finance should act.” 

                                                Financial Times , 20 June 2016 

It used to be no matter how strong the value of the Japanese yen, the country’s trade balance remained quite high; even despite attempts to punish Japan a la the the Plaza Accord [G-5 countries intervening back in September of 1985 to weaken the dollar against both the Japanese yen and Germany mark].

In the chart below I have overlaid the USD/JPY on top of the monthly Japanese Trade Balance going back to 1982.  The yen weakened from a whopping 277 to the dollar during 1982 to just 84 yen per dollar by 1995.  Yet, as said, Japan’s trade balance remained strong. 

In the chart below, I have shifted the USD/JPY by 20 months into the future.  As you can see, the correlation between the value of the yen and trade is seen more clearly.  

The game changer of course was the credit crunch, which altered the supply and demand dynamics in the global economy in a very big way.  As the yen strengthened on haven flow from around USD/JPY 123 to USD/JPY 77 in the midst of the credit crunch, Japan’s trade balance started consistently deteriorating. 

Thus it was the beginning of the three-arrow strategy from Japanese PM Abe—the first arrow was intended to weaken the yen. And as you can see in the chart above (and below) it worked. 

 So, based on the correlation seen above, it seems in this new abnormal world where demand is not quite stagnant, but weak at best, Japanese industry seems right be worried.  It suggests calls for intervention may soon be acted upon. 

However, I suspect Japan is keeping powder dry till after the Brexit vote.  Because if the Brits decided they want sovereignty back, the yen likely rally sharply again on haven flow, similar to what it did during the credit crunch, but in mini-fashion.

 Next stop on haven flow to the yen is likely the 100 target many have discussed.  It represents a 50% retracement from the low going back to November 2015—when the three-arrow strategy got underway.  But after a move to 100, it would seem the potential pressure would be too much for Japan’s government—they would likely decide to step in with barrels blazing. 

USD/JPY Monthly:

If the “remain” block wins the Brexit vote, either $-yen rallies (yen weakens) of its own accord and/or the government helps it along; that seems the consensus bet.  But Mr. Market is likely to be particularly tricky in here so any confidence in the consensus should remain limited.

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

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