Global Macro Questions Friday

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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

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“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?

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“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?

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“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

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Hodgepodge – US Dollar Index & Dow Theory Non-Confirmation

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“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

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

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“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

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…

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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 


Jack Crooks

Black Swan Capital LLC 


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