South China Sea Heating Up


“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



Abandon Ship – Brexit implications

Click here to view the PDF version


“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




Why stay UK?

Click here to view the pdf version


“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.”


Jack Crooks, President, Black Swan Capital,


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

Click here to view pdf version


“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


Global Macro Questions Friday

Click here to view the PDF version


Row gently here,

My gondolier,

So softly wake the tide,

That not an ear,

On earth, may hear,

But hers to whom we glide.

Had Heaven but tongues to speak, as well

As starry eyes to see,

Oh, think what tales ’twould have to tell

Of wandering youths like me!


Now rest thee here.

My gondolier;

Hush, hush, for up I go,

To climb yon light

Balcony’s height,

While thou keep’st watch below.

Ah! did we take for Heaven above

But half such pains as we

Take, day and night, for woman’s love,

What Angels we should be.

             ---Thomas Moore, Venetian Air                     

Commentary & Analysis

Global Macro Questions Friday

 #1: If staying in the EU is so good for UK exports, why is it running a gaping current account deficit and ever-widening current account deficit? 

UK Quarterly Current Account Balance 1969-2016:

Interestingly, Germany’s current account balance has done a bit better than the UK’s since the introduction of the euro…

nd the argument: “Trade will suffer” if not part of the EU doesn’t seem to apply to non-EU Switzerland

Nor does it seem to be hurting non-EU Norway (granted oil a big driver here; but still):

#2: Why is European Union Chief Jean-Claude Junker so hubris-filled that he can offer to educate ex-London mayor Boris Johnson about the EU? 

“In my February 4 blog entry I argued that while German institutions and policymakers are as responsible as those in peripheral Europe for the debt crisis, in fact it was German and peripheral European workers who ultimately bear the cost of the distortions, and it will be German households who will pay to clean up German banks as, one after another, the debts of peripheral European countries are explicitly or implicitly written down. The overwhelming, and overwhelmingly favorable, response I received makes it clear to me that far more Europeans understand this than perhaps their political leaders want to believe. Among other things this suggests that it does not require lack of solidarity with their fellow Europeans to drive ordinary Germans to refuse to pay for the worsening crisis. It could just as easily be their unwillingness to continue to participate in a process in which workers and middle class households in Europe are being forced to pay to maintain policy mistakes that have benefitted mainly wealthy owners of European assets.”

            Professor Michael Pettis;

“While European leaders are focused on the upcoming Brexit referendum, Greece’s seemingly never-ending debt negotiations and the migration issue, buried in the reports of national banks across southern Europe is a trend that should be triggering alarm bells throughout Europe. Southern European economies have been grappling with the problem of non-performing loans, which stand at around 18.1 percent of all debt in Italy (360 billion euros or $403 billion), 12 percent in Portugal (33.7 billion euros) and 10 percent in Spain (129.2 billion euros).”

            Lili Bayer, 

“The European Union has fragmented with the decline of coherent decision-making and the unwillingness of individual states to adhere to any central authority. Meanwhile, southern Europe remains in a deep depression with more than 20 percent unemployment in Greece. Britain will hold a referendum on whether to leave the EU while independence movements in places like Catalonia have strengthened. On issues ranging from economic dysfunction to the migration problem, Europe’s central crisis has been political. The EU has been unable to make, implement, and enforce effective decisions. As a result, it is facing informal dissolution—a situation where the EU exists, but it is increasingly ignored.”

            Geopolitical Futures Special Report on Germany, “Germany’s Invisible Crisis”

#3: If “free-trade” is so good, why does US GDP fall when we have “free-trade” and rise when the US increases tariffs?

 “In short, America’s adoption of free trade policies for itself in the seventy years since the Second World War gave rise to protectionist vested interests in the societies of its trading partners.  Today, the more that the US continues on the same free trade path the more it will encourage protectionism abroad and the worse that the global imbalances will become.

 There is overwhelming historical evidence that links protectionism with rapid growth, especially in US economic history:

·        Alexander Hamilton’s Tariff Act of 1789 launched the United States as an unapologetically protectionist economy with a 15% average ad valorem tariff imposed “for the encouragement and protection of manufactures.” Between that year and 1827, the average annual GDP growth rate was 4.5%.

·        The 1828 Tariff Act (dubbed “Tariff of Abominations” by the slave-owning southern United States) raised tariffs dramatically (to a 25% ad valorem rate and to 50% on dutiable items). Between 1828 and 1857, this high level of tariffs was maintained virtually intact.  The average annual GDP growth rate soared to 5.3% for the 30-year period.

·        The Tariff Act of 1857 reduced tariffs to 15%-18% ad valorem for four years until 1861, during which time the average annual GDP growth rate collapsed to 1.8%.

·        The 1861 Morrill Tariff raised tariffs initially to 26% overall ad valorem and 36% on dutiable items. These were later raised to 38% and 48%, respectively, and inaugurated an era of high protectionism that lasted until 1913.  That was the year in which the US became the world’s largest exporter, surpassing Great Britain and Germany.  For the half century from 1861 to 1913, the average annual GDP growth rate was 4.53%.

·        The 1913 Underwood-Simmons Tariff reduced rates to 26% on dutiable items and to 12.5% overall ad valorem. The effect of these tariff reductions on GDP cannot be estimated because the First World War intervened. During the war years, GDP growth average 15% but was fueled by a fivefold increase of federal debt.  (In the Second World War, with much higher tariffs, GDP growth averaged 16.2% with only a twofold increase in debt).

·        The end of the First War was followed by an economic depression in 1920-22, with a GDP decline of 17% from $88.4 billion to $73.4 billion.  That depression ended suddenly and sharply, partly as a result of aggressive protectionist measures.

·        The September 1922 Fordney-McCumber Tariff Act raised the tariff of dutiable items to 39% (from 26%) and the overall ad valorem tariff to 14% (from 12%). What followed was the era of the Roaring Twenties from 1922 to 1929, with an average annual GDP growth rate of 5.7% and a huge reduction of the federal debt.  The massive growth that followed these 1922 tariff hikes took place despite the fact that America’s trading partners retaliated with massive tariff hikes of their own.

·        The notorious June 1930 Smoot-Hawley Act, the supposed harbinger of all sorts of Great Depression evils, had much less of a bite than the 1922 Fordney-McCumber tariff hike: by 1935, the overall average ad valorem tariff was 15.6% (up from 14% in the previous tariff regime). Moreover, it can be argued that Smoot-Hawley was enacted by President Hoover as a defensive reaction to boycotts and rate hikes against American exports promoted by foreign governments before Congress passed Smoot-Hawley.

“After the end of the Second World War, the US led the liberal reorganization of world trade under the Bretton Woods Agreements (IMF and GATT).  The US opened its hitherto protected domestic markets to imports from war-torn Europe and Japan, at the same time allowing those destroyed economies to raise protective barriers against US exports until such time as their economies recovered.”

                        Criton Zoakos,

#4: Can there be such a thing as a “currency war” in a world of free-floating rates?

There are lots of people making money by writing books proclaiming “currency wars” will destroy the world.  But it is so confusing.  These same charlatans analysts said it was a ‘currency war’ when the US dollar was falling; but to them it is a “currency war” still while the US dollar is rising.  Hmm…I guess saying there is a global “stimulus war” just doesn’t sell as many books or newsletters.

#5: Why is Paul Krugman, economist extraordinaire and New York Times columnist, still gainfully employed? 

 It is too perplexing to comprehend.


 Happy Friday!  Enjoy your weekend. 

FYI for my fellow scotch-lovers in the midst: I will be sipping a dram or two of Glenlivet Nadurra later this afternoon—one my all-time favorites (a review from Ralfy).  You may wish to add it to your radar screen.  And I want to thank Jerry for the Dalwhinnie 15 reco—good stuff indeed.

Jack Crooks

President, Black Swan Capital



Mr. Xi Jinping’s Deflation

Click here to view the pdf version


“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.”


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



Credit induced bounce or something more?

Click here to view the PDF version


“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 on “My Top 3 Technical Analysis Techniques"

 You're invited to join 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/ 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 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!

 Registration URL:

 Jack Crooks

President, Black Swan Capital


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:


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




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

Please click here to view the PDF version


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




Will The Reserve Bank of Australia Cut Rates Tomorrow?

Click here to view PDF version


“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.


 [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

Black Swan Capital Newest Service

Key Market Strategies

 For just $89 per year, our new service will help you anticipate trends in US stocks, emerging market stocks, US long bonds, gold, oil, and the US dollar…

Delivered to your email box twice a week…so you can act and profit on key market moves utilizing six actively traded ETFs which are representative of the major asset classes we follow…

Don’t miss another issue—you can subscribe here at our website.