Mr. Xi Jinping’s Deflation

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Quotable

“Panics do not destroy capital. They merely reveal the extent to which it has been previously destroyed by its betrayal into hopelessly unproductive works.”  

                        John Stuart Mill

Commentary & Analysis

Mr. Xi Jinping’s Deflation

Today’s short story starts with China’s investment overhang…or malinvestment for lack of a better term…

In the chart below from Morgan Stanley, it suggests China hasn’t changed much, i.e. it is still trying to keep growth alive through its tried and true capital investment model.

 

The chart above reveals each new dollar invested has a decreasing stimulative impact on GDP; i.e. the efficiency of capital employed in China has fallen dramatically.  Is it a classic case of malinvestment?

“Malinvestment is a mistaken investment in wrong lines of production, which inevitably lead to wasted capital and economic losses, subsequently requiring the reallocation of resources to more productive uses.  Austrians believe systemic malinvestments occur because of unnecessary and counterproductive intervention in the free market, distorting price signals and misleading investors and entrepreneurs. For Austrians, prices are an essential information channel through which market participants communicate their demands and cause resources to be allocated to satisfy those demands appropriately. If the government or banks distort, confuse or mislead investors and market participants by not permitting the price mechanism to work appropriately, unsustainable malinvestment will be the inevitable result.”

            Wickipedia

Given the secular decline in both consumer demand and globalization itself, recent attempts by the Chinese authorities to revive its capital investment growth model (stimulate exporters), evidenced by another massive surge of credit, seems likely to fail. 

Source: Leto Postcripts, Criton Zoakos

[Note: The G-7 is concerned; but the latest pronouncements suggest our heroes don’t believe much can be done on a coordinated basis.  It brings to mind the “rats scurrying off a sinking ship” analogy.  If trade growth continues to plummet there is little doubt trade tensions and currency manipulations will grow.]

it would be silly to try to predict China’s political future, or suggest there will be some major crisis, but there is a roadmap for Leninist party states past.  China is approaching a critical stage…

“…revolution and seizure of power →transformation and mobilization of society → consolidation of state power and extension over all aspects of society → extraction of resources and capital from society for state purposes → bureaucratization and “Brezhnevization” of state power → adaptation and limited pluralism to cope with stagnation and ossification → ?”

                                    David Shambaugh, China’s Future

…the case for increasing pluralism anytime soon does seem on the horizon given the massive malinvestment and increasing authoritarian rule by Chinese President Xi Jingping…

"Since Xi Jinping came to power at the Eighteenth CCP Congress in November 2012, the reign of the Conservatives has continued. Xi has proven to be a very anti-liberal leader and he has overseen an even greater intensification of the repression evident since 2009. There has been an unremitting crackdown on all forms of dissent and social activists; the internet and social media have been subjected to much tighter controls (see chapter 3); Christian crosses and churches are being demolished; Uighurs and Tibetans have been subject to ever-greater persecution; hundreds of rights lawyers have been detained and put on trial; public gatherings are restricted; a wide range of publications are censored; foreign textbooks have been officially banned from university classrooms; intellectuals are under tight scrutiny; foreign and domestic NGOs have been subjected to unprecedented governmental regulatory pressures and many have been forced to leave China; attacks on “foreign hostile forces” occur with regularity; and the “stability maintenance” security apparatchiks have blanketed the country. A swath of intrusive new regulations and laws concerning national security, cyber security, terrorism, and nongovernmental organizations have been drafted and enacted. China is today more repressive than at any time since the post-Tiananmen 1989–1992 period."

"Many members of Jiang Zemin’s factional network, and a rising number of Hu Jintao’s, have been brought down—yet none of Xi’s own princeling associates have been touched."

"The regime’s repression is symptomatic of its deep and profound insecurity."

                                    David Shambaugh, China’s Future

…a wrong turn here by China’s leaders can threaten, or at least postpone, China’s development into a normally functioning modern state…

“The key issue for nations like China at this stage of development is not just the economic growth model and its declining efficacy, but precisely the relationship between economics and politics. For economies to transition up the added-value ladder, break through the developmental ceiling, and make the kinds of qualitative transitions necessary to become truly modern and developed, political institutions must be facilitative. They must cease being ‘extractive’ states and become what scholars Daron Acemoglu and James Robinson describe in their insightful book Why Nations Fail as “inclusive states.” This requires tolerance— even facilitation— of autonomous actors within society.”

                                    David Shambaugh, China’s Future

…more muddling through decreases the chance China will escape the “middle income trap” which has plagued developing economies in the past?  Just and FYI: The theory of convergence so talked about by emerging market mutual fund salesman is more the exception than the rule. [Does anyone remember the acronym BRICs?] …the probability of “Japanification” of the Chinese economy is rising.  Consider the similarities…

“During the 1980s it appeared Japan as the Creditor Superpower was going to gobble up the world with their powerful export machine and massive current account surpluses rolling in.  Then a little thing called the US stock market crash in 1987 changed the game.  Dollar credit flowed from the global system triggering an improvement in the US current account balance (first gold box left in chart below) which was followed by a US recession.  This came as the Japanese yen was appreciating in value, thanks to the G-7 Plaza Accord to pressure the yen higher because of all those Japanese exports. 

“The litany:

1)      Japan’s very hot stock market broke in 1989.

2)     Then its extremely over-priced real estate bubble started its collapse (remember when the Imperial Palace in Tokyo was worth more than the entire state of California).

3)     Japanese authorities did all they could in the form of stimulus to try to keep air in the bubble.

a.       They pumped more money into the stock and property markets in order to revive the wealth effect for domestic consumers.

b.      They subsidized export companies to keep exports flowing (but the world’s major consumer—the US economy—was entering recession and not there to buy).

c.       They lowered interest rates to zero.

d.      They continued massive fiscal stimulus by building infrastructure across the country.

“But, it didn’t work.  The massive dislocations caused by artificial channeling of credit within the Japanese economy in order to focus almost entirely on building a global export machine created the malinvestment that has taken years to work off precisely because the Japanese economy was so imbalanced—production versus consumption.  Attempts to change this model were scant at best; instead they kept morbid companies alive, and forced its consumers to save thanks to artificially low interest rates. “

Jack Crooks, “The Japanese-China Parallel: Eerie and Scary Combined,” Forex Journal July 2010

At the very least, we would expect another wave of deflation to flow out of Asia.  Directly impacting the emerging markets in terms of trade through falling commodity prices and leading to another flow of capital from the periphery (developing world economies) to the center (developed world economies); it would be a negative reinforcing feedback loop for the emerging markets (risk off and possibly contagion)…

The deflationary impact to the developed world from China would be more implicit (as the brunt of falling commodities prices has already been discounted to a large degree) seen through falling final goods and material prices.  Interestingly, despite negative interest rates in Japan and Europe, those countries should receive their fair share of money flow from Asia because increased deflation will push up real yields in both places; i.e. nominal yield minus inflation rate. 

But given the estimated $3 trillion emerging market dollar denominated debt, the dollar will likely win the global money flow game:  1) a risk bid for the world reserve currency; and 2) yield on the premise the Fed will be the only major world central bank to hike in 2016.    

So, to summarize potential takeaways:

1.       Increased Chinese stimulus will most likely increase deflationary pressures down the road.

2.      Increased repression and external belligerence (Can you say: South China Sea?) from Chinese President Xi will likely prolong the downturn in the Chinese economy.

3.      Despite the excitement about oil being back at $50 per barrel, the global macro environment may not be a fertile backdrop for a continued run in commodity prices.

4.      The currency order under this scenario: Dollar is most favored; other developed economies second; commodity currencies third; emerging market currencies last

Editor’s Note: I am preparing a detailed special report and specific trading/investing ideas as related to the scenario summarized in today’s missive; along with a voiced-over PowerPoint presentation.  It will be used as a promotion for our new service: Key Market Strategies.  I should have that available early next week.

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

 

Comment

Credit induced bounce or something more?

Click here to view the PDF version

Quotable

“It's always darkest before it becomes totally black.”

― Mao Zedong

Commentary & Analysis

Credit induced bounce or something more? 

Commodities prices have staged a nice bounce.  We have been long in our Key Market Strategies service and captured some decent gains.  

Our target for oil (WTI) has been 50.88 on oil for some time; we are getting close and seeing some waning in momentum as oil tests its first swing high level at 48.28; next swing comes in at 50.92 [just 4 cents above our 50.00 target achieved as Wave A=C].  Lots of bullish sentiment growing here…hmmm…

Gold has made a nice move and many expect gold to continue to rally if stocks come off.  We are skeptical.  We expect gold to play its usual role and fall along with commodities on a major risk off event. The chart below compares gold and the US dollar index.  We are expecting a yield-driven risk off rally in the dollar and gold to correct, or consolidate, recent gains. 

Iron ore; turning over?

The question is:  Is the move in commodities just a bounce?  We think so.  Why?  For the same reason we think we got the bounce: China.

China’s massive stimulus this year is yet another page out of the old playbook of the capital investment model; at the expense of delaying the economy’s transition to a more consumer-based model and adding to the towering debt load, which will ultimately further depress cash flows and corporate profits.  We think there will be blow-back and it will take a major bite out of the run up in commodities we have seen.  It will likely be especially bad news for the emerging market economies in Asia. 

There are significant currency implications and opportunities if this view proves correct.  I will be discussing those trading ideas and providing a bit more in the way of global macro at a webinar tomorrow scheduled by Trader’s Exclusive.  If you would like to attend, please click on the registration link in the webinar summary and invite from Trader’s Exclusive below:

 

-----Free Webinar----

A lot has been going on in the markets! What do you need to know right now to stay ahead of the curve? Join us on May 18, 2016, to hear what five different market commentators have to say regarding current trade ideas, strategies and the most profitable ways to make money in the current market environment. 

 Register Here for the Trader’s Exclusive Event!

 12:00 PM to 12:45 PM CT— Price Headley of BigTrends.com on “My Top 3 Technical Analysis Techniques"

 You're invited to join BigTrends.com CEO and Founder, Price Headley as he packs 25+ years of trading experience into a fast-paced "cliff notes" summary of his top strategies that are still consistently producing results in today's markets, including:

·         Bullish and Bearish Entries and Exits with Williams' %R, Acceleration Bands and CCI

·         "Triple Confirmation" in Multiple Time Frames with %R - on a Single Chart

·         How to Find the Next Mega-Trend on Long-Term Charts with Acceleration Bands

·         Why CCI is My Favorite Indicator for Option Charts

·         Case Studies on Both Winners and Losers to Show You What Works Best in this Market and Much More!

12:45 to 1:30 PM CT—Matt Davio and Josh Schuler of Market Profile Trading Academy on “7 Secrets of Trading Success”

 Many traders are looking for the trading holy grail that will lead to perpetual success. Unfortunately, a holy grail does not exist for trading. However, there are 7 simple principles that are at play in every successful trader. This presentation will reveal these principles and provide participants ideas for activating them in their own trading businesses.

 Matt Davio is a veteran trader of 20+ years.  He has traded for firms like parallax and peak 6 in Chicago. 

 1:30 PM to 2:15 PM CT— John L. Person III of John Person Inc. dba/ Personsplanet.com on “New Millennium Scanning & Screening Tools for Quality Stock Picking

 John Person will explain what he’s discovered as some of the best indicators and tools used to identify high probability trades. This session will walk you through the process and the best technical indicators used to select stocks for swing and position traders between five days to ten weeks.

Here’s what you will learn in this session:

1.) How and When to determine which sector to scan for stock trades.

2.)  Where to define when to cut the trade if the signals fail.

3.) Anticipating the time horizon for the expected outcome and exit targets.

2:15 PM to 3:00 PM CT— Roy Swanson of SteadyTrader.com on “Where Are the Gains in Today's Market?

 Roy Swanson, is a veteran trader and math geek.  He started trading at the dawn of the online brokerage era.

 We are now 2 years into a "flat" market, and many traders are frustrated. The good news is that double-digit annual gains are entirely possible, as long as traders adjust their strategies to trade the market "as it is today" and not as it was a few years ago. In this presentation, you will learn simple steps that anyone can take to trade the new market conditions. We'll look at how to apply professional disciplines to generate and select "buy signals", as well as specific trade management techniques can maintain a very high winning trade rate.

 3:00 PM to 3:45 PM CT—Jack Crooks of Black Swan Capital, LLC on “Macro Themes and Trade Setups in the Major FX Pairs”

 Jack will examine the key global economic themes in play and the potential intermediate-term impact on the US dollar. Jack will also take a look at some key forex trading opportunities—in intermediate- and near-term timeframes—based on our pattern analysis which utilizes key Fibonacci levels and Elliott Wave.

 Jack has over 25 years of experience in the currency, equity, and futures arena. He has held key positions in brokerage, investment research, money management, and trading.

 ***Incredibly, there is no registration fee to attend this event. But, our space on the webinar is limited to 1,000 people. Since we cant go over that limit, please be sure to register early and enter the room 15 minutes before the scheduled time (12:00 pm Central Time [1:00 pm Eastern] on May 18, 2016).***

 REGISTER HERE for the Trader's Exclusive Event!

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 Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

Comment

Currency perversity or dimension reduction?

Quotable Note: A long quote today, but thought it too brilliant not to share in its entirety for those of us sickened by the “liberal elite” no-holds-barred attack on what remains of our culture and the ongoing destruction of our universities. 

“It is worth acknowledging that the demand for ‘safe spaces’ has a deep moral or intellectual component. What these battalions of crybullies want is to be protected not only from physical harm but also from anything that would challenge their settled ideas of virtue regarding race, sexuality, ‘the environment,’ political responsibility, the Second Amendment (and, increasingly, the First), and so much more. It used to be that the very pattern of a liberal arts education was set by the figure of Socrates calling his interlocutors to debate about essential questions. What is the good life? What is virtue? Can it be taught? What is truth? How do we recognize it? How can one justify going to war? What is the best way to organize society?

“Those were the sorts of questions that, once upon a time, those who were privileged enough to go to college paid good money to think about seriously. By acquainting one with the great debate conducted from the dawn of recorded history until the day before yesterday, a liberal education initiated one into a never-ending conversation. ‘Being educated’ meant immersing oneself into the stream, if not the scrum, of that debate and understanding that one’s own position on the tiny lip of the present moment offered but a poor resource for understanding the important questions that confront us all as imperfect and mortal creatures.

It used to be that the very pattern of a liberal arts education was set by the figure of Socrates calling his interlocutors to debate about essential questions.

“Today, by contrast, a college education, apart from whatever technical or administrative skills it may impart, seems geared to reinforcing a set of intellectual and moral clichés and protecting its charges from confronting any idea that has not received its Good Housekeeping Seal of political correctitude. Enforcing a regimen of intellectual timidity fired by ravenous moral resentment, today’s colleges are in fact factories for the production of sclerotic, politically correct conformity on any contentious moral or intellectual issue. The spectacle of college administrations first inculcating and abetting this timidity and then capitulating to the groundless anger that it feeds upon would be comical if it were not blighting the lives of those it pretends to help. ‘We are,’ as G. K. Chesterton observed in another context, ‘on the road to producing a race of men too mentally modest to believe in the multiplication table.’”

--Roger Kimble, The New Criterion

Commentary & Analysis

Currency perversity or dimension reduction? 

 What if a central bank said the following?

  1. Risks to the financial stability outlook have increased further in the past six months…
  2. Many farmers now face a third season of negative cash flow with heavy demand for working capital.
  3. Imbalances in the housing market are increasing.
  4. A future sharp slowdown could challenge financial stability given the large exposure of the banking system.
  5. Internationally, credit spreads have widened, placing upward pressure on the cost of funds.
  6. The level of problem loans in the dairy sector is expected to increase significantly over the coming year.
  7. But don’t worry, the system is resilient.

If you haven’t already guessed, these were my selected excerpts from the Reserve Bank of New Zealand news release yesterday: Housing and dairy risks to financial stability. It hit my email box at 5:02 p.m. ET. 

Given the set of goodies laid out by the RBNZ, you would of course expected the currency to surge, right?  Say what? 

Well, the New Zealand dollar did surge last night (as I was enjoying my second attempt at a frittata with my wife) and continues to rally today. 

Buy the rumor sell the news, you might say.  But there was no rumor RBNZ was going to “sound” so negative.  Maybe a rally because we all know the downside, so any surprise will likely be positive, so why not buy.  Well, hmmm….

I noticed this comment from the Bank of Canada today:

11-May-2016 09:03:54 AM - BOC'S WILKINS: FOCUS IS ON DOWNSIDE RISKS TO ECONOMY, BECAUSE THERE SEEMS TO BE SO MANY OF THEM

That is the point: There are so many reasons why the economy in New Zealand can get a lot worse (did I mention China?).  And watching the price action in the New Zealand 10-year benchmark interest rate, I thought that was what was happening…

Maybe it’s just a random technical retracement, allowing Mr. Market to suck in more longs near-term.  But a close above the 21-day moving average at 0.6863 might be problematic to the retracement idea:

You might imagine from this rationalization I am short NZD/USD.  You would be right.  My narrative--this is perverse—is another way of me talking my book.  Post-facto attempt to provide causation from what we can see. 

Nassim Taleb, in his book, The Black Swan, did a good job of summarizing what we do as traders every day in markets. 

 Remembrance of Things Not Quite Past

Our tendency to perceive—to impose—narrativity and causality are symptoms of the same disease—dimension reduction.

By a mental mechanism I call naïve empiricism, we have a natural tendency to look for instances that confirm our story and our vision of the world—these instances are always easy to find.  Alas, with tools, and fools, anything can be easy to find.

[W]e will tend to more easily remember those facts from our past that fit a narrative, while we tend to neglect others that do not appear to play a causal role in that narrative.

…So we pull memories along causative lines, revising them involuntarily and unconsciously.  We continuously renarrate past events in the light of what appears to make what we think of as logical sense after these events occur.

Consider that two people can hold incompatible beliefs based on the exact same data.

Well, based on the price action today, it is clear at least two people hold incompatible beliefs based on the same set of pronouncements from the RBNZ. 

But here is the rub: if we didn’t develop narratives (fundamental, technical, astrological, etc.) we wouldn’t have anything known as a trading edge. 

So if you accept we are all stricken with dimension reduction, and I don’t know how one can argue otherwise, assuming one isn’t a politician or lawyer, we should accept what the late great Mark Douglas, author of Trading in the Zone, told us:

We need to develop a probabilistic mindset.

A probabilistic mind-set means you don’t know what will happen next.  Every edge has a unique outcome that we don’t know, so you should have no expectations; therefore it is simply a probability bet, you are risking a certain amount of money to play a future outcome.

Damn I hope I’m right. :)

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

 

 

Comment

Chart View: A look at some charts we follow which may be of interest…

Please click here to view the PDF version

Quotable

What is our life? A play of passion,
Our mirth the music of division,
Our mother's wombs the tiring-houses be,
Where we are dressed for this short comedy.
Heaven the judicious sharp spectator is,
That sits and marks still who doth act amiss.
Our graves that hide us from the setting sun
Are like drawn curtains when the play is done.
Thus march we, playing, to our latest rest,
Only we die in earnest, that's no jest.

 --Sir Walter Raleigh, Life

Commentary & Analysis

Chart View: A look at some charts we follow which may be of interest…

Page 2: Commodities/Stock Ratio

Page 3: Inflation in stocks versus commodities

Page 4: Japanese stocks versus the yen

Page 5: Copper as a bell whether?

Page 6: Silver looking good  

Page 7: GBP/USD Weekly

Page 8: UK gaping current account deficit

 

 

 

Stocks/Commodities Ratio:  We shared this chart many moons ago in Currency Currents.  Just checking in; nothing profound to add here other than to suggest how interesting the symmetry of this pattern.  From left to right viewing the chart below, we saw a 10-year bear market move in the ratio (i.e. commodities outperformed stocks); and now we are in 8-years bull market move in the ratio, i.e. stocks have outperformed commodities).  Obviously we don’t need to see a big bull move in commodities for this ratio to work lower; we only need to see stocks underperform. 

 

 Inflation?  You bet.  Not in real goods (yet) but definitely in stock prices (financial assets—money has to go somewhere).  This is why the 1% are happy with the status quo.  This is why those with professional jobs with access to capital are happy and asking: What recession?  So all you brainiac’s who read The New York Times, The Wall Street Journal, or The Washington Post and actually believe the pap printed, and can’t quite figure out why all those stupid hicks in the hinterlands (I am happy to be among them) are voting the way they do—take a look.  Real economy in the toilet.  The financial economy for those educated in the right places, and those who believe they are but are simply lucky, is doing very well. 

 

Japanese Stocks versus the Japanese yen: Gosh the yen looks expensive and overdone.  The Bank of Japan policy backfired relative to the needs of Japan when NIRP (Negative Interest Rate Policy) was announced.  We want to load up long on $/yen, but this chart gives us pause.  It shows Japanese stocks, measured by the Nikkei 225 Index (black line), and USD/JPY currency pair (red line).  Visually, a pretty tight correlation—weak stocks and strong yen.  It is interesting because the Japanese government already owns a huge amount of major listed stocks—what will it take to drive the Nikkei 225 higher?  We aren’t sure, but when we see it I think we should get long USD/JPY.  Note: A fresh swing low in USD/JPY, but not yet for the Nikkei.  Maybe a non-confirmation setting up?  Stay tuned.

Copper, the big question.  Real demand or Chinese speculation accounting for the recent “rally”?  If global growth is indeed on the wane yet again, and the IMF is so warning, as data across the board isn’t encouraging, we would expect copper to tumble again.  Maybe it isn’t over till we see a round trip in the metal (labeled at Alt 2).  This may very well be the bell whether for the rest of the commodities pack.  Worth watching even if you don’t care to play.  Note the retracement down to yet another key level—78.6% (1.9665)--before turning higher.  Obviously hindsight makes all of us geniuses, but it is interesting how often these key levels are respected.

Silver looking good.  We got a trend break higher in silver back on February 2nd, 2016 and we got some confirmation on a move above 15.90 [a la Victor Sperandeo trend line technique].  Now looking for at least 21.53 if this move is for real.  Resistance becomes support, so a close back below 15.90 concerns.

GBP/USD Weekly:  We shared this chart with our subscribers yesterday, in support of our short position in the pound.  I won’t belabor the Brexit issue, you all know the status and the propaganda so associated.  I do wish to add: Why the Brits would ever listen to anything President Obama says regarding Brexit is beyond my comprehension—Mr. Meddler he was on his latest trip to Europe.  You’ve got enough of your own problems here at home Mr. President, in case you haven’t noticed.  And now that you are playing the role of Hillary Clinton’s full-time mouthpiece and hit man, just open up a can of STHU when it comes to Brexit and let the Brits decide for themselves what they care to do.  And on that score, it seems, based on the latest data, the UK economy is slowing.  Whether Brexit related or not, no matter.  The pound seems to be losing yield coverage as growth fades; and as you can see in the chart below, there seems a pretty good correlation with the direction of the UK 10-year benchmark yield (green dotted line) and GBP/USD.  The chart on the next page is the UK current account. It shows massive red ink. Not sure it this matters.  But if it does start to matter, it likely won’t be good for British pound sentiment. 

UK Currency Account Quarterly:  Ugly to uglier!

Happy Friday.  Now the really tough question: Gin and tonic (Beefeater 24), or single malt (Glenmorangie 10 year)?   

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

 

 

Comment

Will The Reserve Bank of Australia Cut Rates Tomorrow?

Click here to view PDF version

Quotable

“The key to being a good manager is keeping the people who hate me away from those who are still undecided.

 --Casey Stengel

Commentary & Analysis

Will The Reserve Bank of Australia Cut Rates Tomorrow? 

 This would be a good place for the Aussie to take a rest. 

AUD/USD Weekly: Resistance at 0.7857 swing and retracement level; momentum fading…

Two headlines today:

 1)      “Australia's No.3 lender Westpac Banking Corp missed forecasts with a 3 percent rise in first-half cash profit as bad debt charges soared to a six-year high while stricter capital rules pinched shareholder returns, sending its shares skidding.” (Reuters)

2)     China’s banking regulator is cracking down on financial engineering that Chinese banks have used to disguise trillions of dollars in risky loans as investment products.

 But…

 [Sent to Black Swan subscribers today]

 According to Reuters, “The Reserve Bank of Australia (RBA) is expected to keep its cash rate unchanged at a record low of 2.0 percent at a policy review on May 3, though a growing number of economists expect a cut, an updated Reuters poll released on Monday showed.

Thirty-three out of 51 economists polled expect the RBA to keep its policy rate on hold this week, while 18 see a 25 basis point (bps) reduction following surprisingly low inflation figures for the first quarter.

Last week's poll had 11 economists out of 50 forecasting a move.

Reserve Bank of Australia Cash Rate: Now at 2.0%...

It is hotly debated whether or not we see a cut tomorrow in rates (release is due out at 12:30 a.m. ET).  Here some rationales to suggest a bit of surprise, i.e. a cut:

1)     The currency seems too high relative to the deteriorating trade account:

Australia Month Trade Balance – This would suggest the RBA would be happy with a lower currency value.

2)    Real Interest Rates are high given the latest price data:

Latest monthly data showed deflation, with a -0.2% decline in prices

2-year Australian dollar yields are near 2%; if we add back in the latest negative data that makes real yield grow to 2.2%, which towers over the G-7 countries. 

Interestingly, the 2-year Australia – United States yield spread is falling in front of tomorrow’s meeting.  Are expectations for a cut rising in real time?

3)     The currency is being bid up along with commodities prices, which makes sense; but it is heading into technical resistance at swing and retracement levels which come in at 0.7848 and 0.7877, respectively:

AUD/USD (0.7628) vs. Iron Ore Futures vs. Crude Oil Futures Daily:

4)     Sentiment is increasingly bullish, as speculative open interest show Aussie bulls versus bears 69% vs. 31%, based on the latest Commitment of Traders Report dated 4/26/16:

Commercials are heavily short at 86% bearish based on open interest data.

Does any of this matter in what the market is increasingly perceiving as a Fed weak dollar policy that could have some legs?  Maybe not; but oil is turning over a bit today. Stay tuned.

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

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Comment

Hodgepodge – US Dollar Index & Dow Theory Non-Confirmation

Click here to view the PDF version

Quotable

“Our knowledge can only be finite, while our ignorance must necessarily be infinite.”

            Karl Popper

Commentary & Analysis

Hodgepodge – US Dollar Index & Dow Theory Non-Confirmation

 US Dollar Index – Two Views

Some of the best pieces of advice traders can find come from an unlikely place—poetry.  In these two lines from T.S. Eliot’s brilliant poem, “Ash Wednesday,” he effectively summarizes two key tenets needed to be successful in trading:

Teach us to care and not to care

Teach us to sit still.

Put another way, this means to me: 1) trade your edge and only that; don’t get all wrapped up in being “right;” don’t believe too much in your own story because Nemeses—the spirit of divine retribution against those who succumb to hubris—will soon be paying you a visit; and 2) know your time frame; a good idea based on a multi-week view can be a very bad idea if you trade it using hourly time frames for levels.

When it comes to playing the direction of the US dollar over the past few weeks, I have been able to make both mistakes in a big way proven again that knowing and doing are two very different things.  So, let’s take a fresh look at the dollar index and consider two scenarios. 

The US dollar, based on the US dollar index, has been in a range for last 13 months. I have been working off the view we are simply in a correction lower with another bull market leg due to take the US dollar index to new cycle highs.  But as much as I do expect yet another leg up in the dollar, there is another plausible scenario.

Scenario #1: Correcting in Wave 4 as seen in the chart below:

Key points supporting the correction scenario:

·   Yield matters.  Despite the fact the US dollar has fallen about 6.5% from its high back in Feb 2016, the yield spread (measured here by the difference between the 2-yr benchmark United States versus Eurozone) will matter.  Despite relative tepidness of the Fed Reserve Bank, it is the only major central bank likely to raise interest rates during 2016, suggesting the relative yield will go even higher in favor of the US dollar. Thus, we should expect the dollar to rally once again in Wave 5, i.e. this bull market isn’t over. Correction support areas come in at 92.20 (38% retracement of Wave 3); then 89.60 (50%) retracement of Wave 3.  [Alternative bull resumption view: The dollar gets a major risk bid on another credit crunch like crisis selloff in global stock markets.]

Scenario #2: The dollar bull market is over—the top is in place.

Key points supporting the dollar bull market over view:

·  Yield matters and the dollar will lose the relative yield support which sustained the bull market rally to date.  Why?  Because the US Fed will soon signal it will not hike rates during 2016; plus indicate the FOMC is seriously considering following down the monetary path blazed by Europe and Japan into negative rate territory.  This in turn will intensify the now budding recovery in commodities and the US dollar will play the mirror image roll again, i.e. commodities up and dollar down, as was the case during those pre-credit crunch “boom” years.  

I am still in the dollar bull market to resume camp.  But I am no longer in love with the story.

Dow Theory Non-Confirmation

I shared this with our Key Market Strategist (KMS) subscribers yesterday.  We changed our view on stocks Monday at the close and told our KMS subscribers to get short.  So far so good. 

Dow Theory Non-Confirmation Weekly View:  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.

Happy Friday. 

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

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Reaction to the Bank of Japan Decision to “do nothing”…

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Quotable

“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn't. And contrary wise, what is, it wouldn't be. And what it wouldn't be, it would. You see?” 

--Lewis Carroll, Alice’s Adventures in Wonderland & Through the Looking Glass

Commentary & Analysis

Reaction to the Bank of Japan Decision to “do nothing”…

 Mr. Carroll, I think we have entered the world of nonsense; it seems pervasive, but as it applies to monetary and fiscal policy nonsense is the word.  For the down the rabbit hole we have gone.  How else can one explain the fact central banks have completely lost their rudders yet markets turn on every utterance of useless gibberish?  

It seems clear to me our central bank “leaders” are making this stuff up on the fly.  I would suggest these new market master manipulators request a refund from whichever illustrious institution charged them for earning a Ph.D. in economics.  To torture this further, it reminds me of the movie “Good Will Hunting.”  It starred Matt Damon playing the role of the local “uneducated” South Boston toughie/genius.  In the movie he confronted a crowd of cocky Harvard elites in a bar showing everyone how smart they were.  Damon chopped them down to their proper intellectual size and showed them they weren’t quite as smart as they pretended.  He then told them if they would have spent $2 on a library card, and used it, they could have saved their parents tens of thousands of dollars on their vaunted Harvard education.  A perfect analogy I believe for our central bank Ph.Ds.

Had our CB masters shunned Ph.Ds. and the econometric nonsense so associated and instead concentrated solely on Ludwig von Mises magnum opus, “Human Action,” they would not only have saved their parents big money, but saved us from the ongoing shit-show they call monetary policy.   

But it seems traders and investors are enjoying the show and playing their roles nicely—hanging on every central bank utterance as if its mana from heaven.  How can it be other than a world of nonsense considering the reaction to the Bank of Japan’s decision to do nothing?   

Empirical evidence suggests what the BOJ has been doing isn’t working.   So, when the BOJ stops doing something that isn’t working and finally shows some degree of what we might define as rationality, what does Mr. Market (which I define as a group of highly irrational people) do—it violently reacts as if “something” should have been done.  If that isn’t nonsense I am not sure what is. 

But of course, today, in retrospect, there is likely some pundit, somewhere, explaining the reaction to the poor decision by the BOJ as completely “rational” based on his knowledge of monetary policy and its proper application for maximum efficiency in transmission of all that is good for the real economy, etc. etc. etc.  Barf!

Said pundit likely has two things to fall back on to help justify his analysis: 1) an advanced degree of some kind from an Ivy League institution; and 2) never traded his own money in highly leveraged markets.

It’s not a stretch to suggest short USD/JPY (long JPY/USD) is a very crowded trade now.  And if so, just maybe we are getting close to the end of this move.  Next key support at 106.60; then the swing low at 105.18…will the oscillator pattern repeat as seen in the weekly USD/JPY chart below?  Stay tuned. 

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

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GBP/USD Daily: A Brexit Anxiety Breakdown?

Brexit talk is everywhere.  Even President Obama can't help himself from meddling into UK politics on the issue. Despite the scary talk from the Bank of England, it doesn't seem to have hurt the pound.  Will that change soon?  Here is our primary technical view on the pound--it's bearish. Seems a good risk/reward setup.   

  Jack Crooks Black Swan Capital LLC www.blackswntrading.com 

 

Jack Crooks

Black Swan Capital LLC

www.blackswntrading.com 

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USD/JPY Daily: At a critical juncture?

Is the bottom in place for USD/JPY?  Testing key downtrend line resistance and swing resistance in what so far has been a minor three wave move from the 107.61 low.  News flow suggesting Bank of Japan going to negative rates on loans as the driver.  On the radar screen again...

Interested there are a lot of yen bulls expecting the yen to continue to appreciate, as measured by the CFTC Commitment of Traders report on CME open interest, dated 4/12/16:  

Bullish Open Interest:  100,120 = 75%
Bearish Open Interest: 33,930 = 25%

Plenty of power to drive the yen lower, i.e. USD/JPY higher, on a sentiment swing here...

Jack Crooks

Black Swan Capital LLC

www.blackswantrading.com 

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The “Three Calm C’s” suggest the dollar likely ranges for a while still

Please click here to view the PDF version

Quotable

“Every parting gives a foretaste of death, every reunion a hint of the resurrection.”

     --Arthur Schopenhauer

Commentary & Analysis

The “Three Calm C’s” suggest the dollar likely ranges for a while still

If you’re a longer term trend follower, and you trade the US dollar index using an exchange traded fund, or the listed futures contract, you may not be a happy camper.  The dollar index peaked at 99.21 back on the 13th of March 2015, just over a year ago.  Since then, the index has been ensconced in a maddening range.   From a wave perspective, it appears price action is tracing out some type of corrective wedge pattern.  Once completed, it will set the stage for another trend move.  My guess is the bull move will resume once this wedge is complete …

…but this maddening range could be with us for a while. 

Why? Because of the “Three Calm C’s” so well described by Joachim Fels, global strategist for PIMCO, and for many years prior toiled away at Morgan Stanley.  I always liked him.  He seems grounded in reality; and has an excellent grasp of global macro IMHO.

[Note: Though Mr. Fels is better positioned than I am to make such a determination, I disagree with his contention there was some implicit agreement at the G-20 to stabilize the US dollar.  As I said to our subscribers in a recent note—the G-20 can’t even agree on the type of wine and cheese they want on the hors d'oeuvre menu.]

Mr. Fels “Three Calm C’s” make a lot of sense to me; maybe because it dovetails nicely on my current intermediate-term outlook, much of which I have been sharing here lately. The three C’s are:

  1. China
  2. Commodities
  3. Central banks

Unlike some other commentators who seem to believe China crisis is inevitable, I don’t.  For the reasons enumerated in Currency Currents on March 13th;  Lurching from nirvana to crisis; our dogma is barking?  So, if crisis is avoided at least for a while, then it’s unlikely we will see a major risk-bid into the US dollar (which will likely at some point be one of the drivers for the next trend move once this maddening range is complete).

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I have been expecting a playable multi-week or -month move thanks to China stabilizing and prices lurching deep into “oversold” territory, as indicated on our blog post, Commodities Turning? The negative correlation between commodities and dollar remains intact; not anything like it was during those the old “risk on” and “risk off” environment, but still. 

I have shared our $50 oil forecast.  And interestingly the oil-US dollar index 21-day correlation has risen sharply and is now at 87%--that is tight.  So as oil stages a pull-back, in what we expect is a minor correction on the way to $50, we see the dollar strengthening, i.e. moving higher in minor wave D as labeled in the chart above.  So, if oil rallies again, we expect it to coincide with another pull-back in the dollar—tracing out what we have labeled Wave E in the dollar index chart above; it will be a good time to start playing the commodity currencies from the long side once again.  

And of course the last C is central banks.  What more can be said about our illustrious monetary mavens.  I would only add this: I agree we are now off into monetary policy never-never land and the opportunity for unintended consequences abound, but the juice the banks are providing continues to support financial assets.  And though I’m extremely skeptical, it is possible negative interest rate policy may force more money where it is needed, into the real economy. In addition, with global central banks pushing rates deeper into negative territory seeming by the day, it will be hard for the US Fed to be overly aggressive given they signaled their role as defacto world central banker trumps its US role. 

Thus, if financial assets and real estate remain afloat, a panic move into the dollar will be delayed.  Given my bent toward the Austrian School, it’s difficult to watch this monetary madness playing out without thinking the end is near.  But it is quite amazing how long governments and their central bank allies can keep the balls in the air. So far, a lot longer than most concerned citizens expected. And the juggling act is still in session.

Keep in mind, just because the dollar index is ranging doesn’t mean we aren’t seeing excellent short-term trading opportunities in FX—we actually are, evidenced by a very good month for our forex service. But for longer term US dollar index trend followers, the ebb and flow of angst seems likely to continue for a bit.

Jack Crooks

President, Black Swan Capital

info@blackswantrading.com

www.blackswantrading.com

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