Tuesday, 19 June 2012

Paul Jones vs Hegel on a purist approach to fundamentals

I see the younger generation hampered by the need to understand and rationalize why something should go up or down.  Usually, by the time that becomes self-evident, the move is already over…  These days there are many more deep intellectuals in the business, and that, coupled with the explosion of information on the Internet, creates the illusion that there is an explanation for everything and that the primary task is simply to find that explanation.

Of course, Hegel made what is in essence a similar point a couple of centuries previously:

Only one word more concerning the desire to teach the world what it ought to be. For such a purpose philosophy at least always comes too late. Philosophy, as the thought of the world, does not appear until reality has completed its formative process, and made itself ready. History thus corroborates the teaching of the conception that only in the maturity of reality does the ideal appear as counterpart to the real, apprehends the real world in its substance, and shapes it into an intellectual kingdom. When philosophy paints its grey in grey, one form of life has become old, and by means of grey it cannot be rejuvenated, but only known. The owl of Minerva, takes its flight only when the shades of night are gathering.

Sunday, 17 June 2012

Lord Shaftesbury on Inspiration

from Characteristicks of Men, Manners, Opinions


..why may not a Heathen Poet, in the ordinary way of his Religion, be allow’d to believe in Muses? For these, your Lordship knows, were so many Divine Persons in the Heathen Creed, and were essential in their System of Theology. The Goddesses had their Temples and Worship, the same as the other Deitys: And to disbelieve the Holy Nine, or their Apollo, was the same as to deny Jove himself; and must have been esteem’d equally profane and atheistical by the generality of sober Men.

Now what a mighty advantage must it have been to an antient Poet to be thus orthodox, and by the help of his Education, and a Good-will into the bargain, to work himself up to the Belief of a Divine Presence and Heavenly Inspiration? It was never surely the business of Poets in those days to call Revelation in question, when it evidently made so well for their Art. On the contrary, they cou’d not fail to animate their Faith as much as possible; when by a single Act of it, well inforc’d, they cou’d raise themselves into such Angelical Company.

How much the Imagination of such a Presence must exalt a Genius, we may observe merely from the Influence which an ordinary Presence has over Men. Our modern Wits are more or less rais’d by the Opinion they have of their Company, and the Idea they form to themselves of the Persons to whom they make their Addresses. A common Actor of the Stage will inform us how much a full Audience of the Better Sort exalts him above the common[8] pitch. And you, my Lord, who are the noblest Actor, and of the noblest Part assign’d to any Mortal on this earthly Stage, when you are acting for Liberty and Mankind; does not the publick Presence, that of your Friends, and the Well-wishers to your Cause, add something to your Thought and Genius? Or is that Sublime of Reason, and that Power of Eloquence, which you discover in publick, no more than what you are equally Master of, in private; and can command at any time, alone, or with indifferent Company, or in any easy or cool hour? This indeed were more Godlike; but ordinary Humanity, I think, reaches not so high.

For my own part, my Lord, I have really so much need of some considerable Presence or Company to raise my Thoughts on any occasion, that when alone, I must endeavour by strength of Fancy to supply this want; and in default of a Muse, must inquire out some Great Man of a more than ordinary Genius, whose imagin’d Presence may inspire me with more than what I feel at ordinary hours. And thus, my Lord, have I chosen to address my-self to your Lordship; tho without subscribing my Name: allowing you as a Stranger, the full liberty of reading no more than what you may have a fansy for; but reserving to my-self the privilege of imagining you[9] read all, with particular notice, as a Friend, and one whom I may justifiably treat with the Intimacy and Freedom which follows.

Saturday, 28 January 2012

Updated Views

For a variety of reasons, I shall only be updating this blog occasionally. Please email me at laeeth at kaleidicassociates.com if you would like to get in touch. Some brief thoughts follow.

From a rather complacent spring 2011, we saw the developments I had been expecting - the market awoke rather suddenly to the deteriorating situation in peripheral Europe and the broader implications for global growth associated with both the direct economic impact, and more importantly, with the deterioration in risk appetite. So peripheral spreads in Europe widened, fixed income markets globally rallied, with 2-5y German performing exceptionally well, the US dollar experienced a broad rally (except vs the yen), we saw a correction in commodity prices, and a sharp underperformance of emerging markets.

I thought at the time that my central case would be that it would be a nasty slowdown (something more than a midcycle pause, but less than a re-entry into recession), but that one could not rule out a repeat of July 2008 with the ECB hiking into a rather evident slowdown. Well it seems clear to me now that my primary scenario was correct, but that many commentators lacking in restraint and grasp of the present and historical context have, spooked by price action, jumped to the conclusion that we have a depression ahead, with supposedly quite sensible and well-respected commentators assigning very high probabilities to the possibility of an EMU breakup.

I think it is unfortunate that regulators have decided to enforce tighter capital requirements for European banks that will take effect by June. A perfect instance of shutting the stable door after the horse has bolted. Clearly, given the rather weak possibilities for shoring up bank balance sheets via retained earnings, this has led to some forced asset sales. European banks are active in c. 30% of cross-border financing, and this has likely weighed most of all on emerging markets (Eastern Europe, but possibly some others - LatAm included). One might infer the wrong thing from watching price action of assets under pressure for this reason if one does not take into account the forced selling which will come to an end in just a few months. Typically in this scenario, the low tends to be made some time before the deadline.

In the bigger picture, I think we are at a buying opportunity for many equity markets comparable to the pricing of a few weeks after the March 2009 low. Price is higher in many markets, but so are earnings and sales. There are certain specific reasons why I do not believe we are in for a Great Depression 2.0, and that I think the bear market for US and other equity valuations that began in 1999/2000 is now over.

So I expect US equities to outperform gold from here, and I am constructive in particular on Indian equities, German equities, US financials, US homebuilders. I liked buying the SMI and FTSE in September last year, and see no reason to change my mind. I am positive on agricultural commodities - corn and wheat, and think platinum, silver and copper can outperform gold. I believe that there is a significant risk that crude is in the process of making a very major high that may hold for a few years. Even if the structural story about peak oil and BRIC demand is correct, we can certainly see a major retracement of the entire rally since 1998 given the tremendous increase in energy supply we have seen from shale oil and shale gas. Price does lead to a supply response, but sometimes the lags can be significant, and commentators, becoming impatient, think that there will never be a response. So if I am right, this would be very negative for NOK, CAD, and RUB. It is interesting in this context to note how beloved the former two currencies are amongst conventional macro investors. I am bigger picture bullish the US dollar (on a multi-year horizon), but think in the near-term it has further to correct against NZD, MXN and INR. It is not because I hate the EUR that I like the dollar - I think the EUR itself has made a major low on a trade-weighted basis. JPY looks interesting to line up for shorts. I am bearish fixed income - 10 year gilts, 10 year bunds and 30 year UST.

Wednesday, 8 June 2011

Dollar Bullish Thesis

I am very grateful to Marc Faber for the mention in the June edition of his Gloom, Boom and Doom report.

If anyone would like to receive a write-up of my bullish case for the dollar (and the associated bearish prospects for industrial commodities, emerging markets and hard assets ex US real estate), please do email me.

My address is laeeth2 at gmail dot com.


Laeeth Isharc

Sunday, 8 May 2011

Bling is Dead?

In August 2008, I suggested that the trend towards materialism and display of wealth manifesting as ‘bling’ was exhausted.  (We see from the research of the Foundation of the Study of Cycles that there are 9 year and 30 year cycles in church membership reflecting an underlying social oscillation between materialism and idealism/spirituality.  A study written up in the 1991 Jan/Feb edition of Cycles Magazine explores this in more detail.

This was picked up in the mass media a few months later in Jan 2009 as Karl Lagerfeld prophesied an era of the ‘new modest’ ahead.

Lagerfeld said: "This whole crisis is like a big spring house-cleaning - both moral and physical.

"There is no creative evolution if you don't have dramatic moments like this. Bling is over. Red carpetry covered with rhine-stones is out. I call it 'the new modesty'."

Bling is a type of ostentatious fashion. The word was coined by hip hop stars to mean flashy, in a good way, but has come to be used in wider culture as a general term for the overt demonstration of wealth.

His comments follow those he made earlier this month to BBC Radio 4's Today programme, when he said he believed the recession was more like "a cleaning out".

"It was too rotten anyway," he said.

He thought the recession could affect fashion and design "in a good way".

"I do not think we were on the best way," he said. "I think it's a difficult moment for a lot of people and a lot of things, but in the end it was really needed, because it was really gone too far."

He concluded: "I see it like a healthy thing, a horrible but healthy thing. It's a medical treatment of the world, I see it like this."

Fashion in architecture is rather slower moving than in clothing, and so it is not surprising to see the architect of the hideous Gherkin building only now catching up with developments.

"The age of bling is over," said Shuttleworth, who led the team at Norman Foster's firm that designed the 7-year-old tower in the City of London financial district. He said it would never get off the ground today. "Money now drives everything, so if you can build something for half the price, you will," he said.

By the time a trend reaches mainstream media, it is rarely early in its development.  It will be interesting to see how this develops.

Thursday, 28 January 2010

Hiatus from posting

Bloomberg have asked me not to post Bloomberg charts here.  It is a mystery to me as to why my posting images from their system should be of concern when there are hundreds of thousands of Bloomberg charts posted on other financial blogs – mostly without explicit permission.

In the medium term I shall likely move to a competitor – CQG are very much less restrictive, and in my experience very oriented towards the needs of their user base.  In the short term, please contact me directly if you would like to receive my thoughts on markets.  For now at least, I do not think Bloomberg objects to their own users sharing Bloomberg charts amongst themselves.

Thursday, 16 April 2009

Time for a pause

There have been ample trading opportunities since my last post of early January, but nothing truly worth blogging about.  We have indeed seen the pickup in growth rate of leading indicators of economic activity that I thought we might.  Economic data have also surprised persistently to the upside since the gloomy days of November 2008.

Commodity-related stocks, short bonds and long break-evens have all performed well since early Jan.

image FCX - copper

image RSX - Russia ETF

image 5y US breakevens

image TBT short bond fund

I have also been involved on the short side of EUR/GBP fx, thinking that we might have seen a significant top in the Euro against other European crosses.  Eurozone countries that relied on credit-driven domestic demand growth during the previous era will find it difficult to maintain adequate levels of demand without a very pronounced depreciation in their real exchange rate.  Given the poor flexibility of these economies, this is not likely to come about via the deflationist route and so it seems to me more likely that they lower their nominal exchange rate (ie the Euro) with inflation in Germany allowed to pick up over time.  Germans are unlikely to be thrilled by higher inflation, but this is not a concern for the moment given the cyclical situation and is likely to be politically more acceptable and feasible than a fiscal bailout of PIGS + E Europe.

A policy of wage restraint has allowed German relative unit labour costs to be competitive even with EUR/USD very strong.  Despite the national pessimism over the economy (it is interesting to note that house prices are not much higher than the previous 18 year cycle high in 1992), the undercurrents are shifting and one might expect significantly brighter relative performance over the next 10-20 years once global growth starts to pick up.  Possibly German exporters might start to look interesting.  I will also explore plays on domestic demand.

image EUR/GBP FX

image Trade-weighted Euro ex USD

image BMW


The consensus now starts to realize that it is likely we will avoid a repeat of the Great Depression of the 1930s, at least for now.  There have been many stories on Bloomberg the past few days making this observation and pointing to the sharp rises in commodity prices and global equities since the lows.  Interestingly this coincides with various Demarkian signs of price exhaustion as we approach the April 19th-23rd cyclically important date.

image ECRI Weekly Leading Indicator Growth Rate

image Citi Index of Econ Surprises (Major Economies)

So I feel it is now time to lighten up on risk, express tactical bearish trades and start thinking about which securities should be bought in the event there is a wobble in risk aversion.

In the longer term Japanese small caps start to look interesting - particularly growth.  They have performed horribly over the past three years, but represent outright value here and on a longer term basis the chart shows positive divergence vs the NKY.  Elliott Wave International published a piece recently suggesting the JSDA might be entering wave 3 up on a longer term basis.  I have been playing via JOF, JSC and JPS LN - none of these are very liquid.  Possibly easier to wait to establish a full position till the uptrend is established but maybe okay to have a small position now.


Saturday, 3 January 2009

Buy commodity-related equities, buy breakevens and sell global fixed income. Why? Maybe It's just time.

[First draft of my post; Bloomberg charting is not functioning so rest will follow].

Bonds and economic activity

Since I turned bullish on European fixed income on the 3rd of July ahead of the ECB meeting, fixed income markets globally have seen a wondrous rally with market commentators expecting quantitative easing to be implemented across regions.  I initially expected upside for ERZ9 from 94.63 towards the 95.77/96.00 level, but that proved much too conservative and the contract settled on Friday at 97.795.

I think it is now time to exit longs and look for opportunities to establish shorts (either near current levels via options, or using countertrend technical indicators to short outright with a tight step making several attempts, if necessary).  Time horizon for the shorts will be initially tactical, but as the trade proceeds evidence may emerge to suggest that it is a turn of a more significant order.

Why be bearish?  After all, the change in Nonfarm Payrolls for November was a shocking -533K (vs survey -335) and prior month was revised down from -240k to -320K.  This is pretty consistent with poor factory orders and sentiment surveys in Europe and Asia and at this juncture it is very hard to imagine the economic situation not continuing to deteriorate.  More forward-looking survey data paints a similarly horrific picture.

Perhaps there is scope for a recovery in sentiment similar to what occurred in March 2008.  I do think it is likely that we remain in a twelve year bear market associated with a period of economic depression in the developed world (with perhaps the post 1837 and post 1873 periods providing alternative templates to the overused example of the Great Depression of the 1930s).  That clearly does not mean one extended period of negative or even sub-trend economic growth - there will be periods of ebb and flow within this secular bear.

On 1st December, the NBER officially recognised the current recession and found it to have commenced in Dec 2007.   I do not have access to the study I wanted to post a summary of, but recognition of the recession has often (thought not in all cases) within weeks to months of the end, and as Hussman funds research point out,  returns for asset markets following recognition tend to be much better than for the period between the start and recognition.

I think it is entirely possible global yields end up sub 1% as they did during the worst period of Japan's depression.  However, at this juncture  I believe that a great deal is discounted and that there is a good chance we see a very substantial selloff associated with an improvement in animal spirits from their present state of unrelenting gloom and despondency.

Ben Stein, who seems to have few redeeming features as an economic commentator,  having been adamant for some months at the beginning of the recession that everything would be fine recently wrote an article for the New York Times arguing that without _further_ unprecedented massive government intervention, the economy might _never_ recover.  So even the permabulls have come round to the depression scenario, it seems.

It's not at all my central case, but I suppose that one year from now looking back at the present time it is possible that the panic over a possible depression may be seen as an ill-founded hysterical response to shocking market declines that was not in the end based upon a well-tempered assessment of likely scenarios for economic activity.  The response of the authorities has been without precedent - the US has a new president, and perhaps confidence in the new administration may stave off the worst consequences of the epidemic contagion of fear - for now, at least.

Broad credit growth, properly measured, will likely never return to the previous heights for a couple of generations (provided we avoid roaring inflation).  But it is certain that for the time being we shall avoid the 29-33 collapse that was associated with every sovereign issuer in Europe except Britain, and much of Latin America and Asia defaulting as well as large numbers of banks in the US (in the days before deposit insurance).

I have written before about the importance of the state of animal spirits as at times the only fundamental that matters, and thought the Sidney Homer quote below was pertinent (via Bill Meridian and, indirectly, Paul Montgomery).

“With no change at all in the money supply or in tax rates, the American people at almost any
time are capable of putting on a roaring inflation or alternatively a roaring deflation.”

One way to measure risk appetite and velocity (the demand for money) is to look at desired balance sheet size in relation to cash holdings.  The Fed is now expanding base money at an annual rate of 105% - a rate not normally seen outside of hyperinflationary economies.  To date this has been more than offset by deleveraging by the financial and non-financial private sectors.  At some point, should risk appetite pick up, the excess money created will likely find its way into asset, commodity and consumer prices.

imageUS Base money growth (ADIMBSY)

Various cycle analysts have established a somewhat esoteric connection between the sunspot cycle and risk appetite (with risk appetite being coincident with the rate of change of solar activity and the causal mechanism being via electromagnetic influence on the human organism).  The sunspot cycle is almost three years late and some discussion relates this to the possibility that the next cycle may be very weak, even forming part of a new extended period of low solar activity such as that of the Dalton minimum.  However some work suggests a bottom in the first quarter of next year, and that might be coincident with a pick in risk appetite of intermediate magnitude and duration.

My central scenario is that, although we will likely see a tradable bounce now, the cyclical bear market within the bear saeculum might last around 1000 days or so, suggesting a low in summer 2010.  This might also coincide with a more durable low for industrial commodities and a broad commodity index.  However as a trader I do not have the luxury of investing based upon a very long term roadmap, and I will try to respond to events as they unfold.  A roadmap can enable primed recognition of emerging themes, but it can be dangerous to stick to it stubbornly.  (As we saw with the roaring inflation theme that climaxed in summer 2008).

As I wrote a few weeks ago, The Economist magazine recently announced 'all you need is cash' on its front cover having prematurely heralded the end of the cash era at the top of the bull market in credit.  A study by Paul Macrae Montgomery on mainstream magazine cover stories suggests that although the trend in force at the time the cover is published continues for some weeks it is often very substantially reversed after a few months.

   Nov 2008                                     Feb 2007

allyouneedjpg       endofcashera


Here is a chart of the Weekly ECRI US Leading Indicators Index for Growth.  I posted it in March 2008, around the time of the PEI cycledate, and of course the subsequent bounce in the index - although arguably based on very thin foundations  indeed - was associated with a substantial rally in risk assets and brutal correction in fixed income.


We have completed 5 waves down and hit confluence of lower wave 3 and wave 5 targets.  We had a 13 combo on the 11th Oct whose risk level has been taken out, but we now have a 13 seq as of the close of week ending 5th Dec followed by a price flip.

It's certainly possible for wave 5 down to extend but, should this turn here prove sustainable, it could be a turn of some magnitude given the complete wave structure.  I am not predicting it, but certainly there is nothing wrong with this picture if we were looking to assess the likelihood that the first recession will soon be over (which would not rule out a deterioration a few months later).

Here is the picture during the last recession


The first 13 following a 5 wave move down that hit targets appeared 30 Mar 2001 - this continued to a setup 22 Jun 2001 but then made a new low and did not put in a base till some time later.  This was associated with a 24.6% rally in the Dow from 9106.54 on 22nd March to 11350.05 on 22nd May 2001.  Of course the equity market is a component of the leading indicators, so this is somewhat self-referential.  (Ideally one should look at the various sub components individually, but I don't subscribe to the ECRI data).


image NAPM PMI monthly - 12 combo/4 setup

image ISM non-manuf PMI - 6 setup at wave 3 target

image Coincident:Lagging ratio monthly - wave 5 down, 9 setup

image US Existing Home Sales Inventory Qtly - 13 at the high

image US Existing Home Sales SAAR Mthly - 11 combo

image Case Shiller Composite 20 City Home Price YoY Mthly

image 30y FNMA current coupon


Monday 8th December 2008 is part of the PEI 8.6 month cycle series (the last turn being late March this year).  It is interesting then that a range of markets at various horizons are at important junctures from a wave structure  and price exhaustion perspective.  One might expect a significant regime shift in which many of the recent moves are unwound.

Firstly an annual continuation chart of the US bond future -


We had a 13 combo sell dec 2005 with an overlapping setup.  The setup completed and perfected last year and this year's bar is a seq 13 (with termination count=open)..  Price exceeds the TD Channel by tens of points, and we might expect consider plays for price to close back within the channel this year.  So we are potentially set up for a turn of very important magnitude indeed, although in theory we should be prepared to wait twelve bars for a possible response to the signal.  That might suggest a response window between now and 2021 - not so helpful - but of course, as Gann said, the longer term cycles are triggered by shorter term ones , and one can wait for these to turn.  For example the annual Dow sell from 2004 can be said to have been triggered by the May 2007 first valid monthly combo since the 2002 low (the signal in Feb 2006 was recycled).

The annual yield chart for the ten year is less clear -


Significantly below the channel, and disqual TD line break.  Qualified break of TDST support at 6.8020% would suggest completion to a 13 countdown, which would require years more of a rally.  But not every qualified TDST break completes that far.  There is also an unmet TD Line target at 1.4320 (again, not every target is met).  [This is an old chart from Dec 2008 - Bloomberg is malfunctioning and won't produce an updated one]

Quarterly chart


9-13-9.  Has pretty much met old TD Line targets (although there are some unhelpful negative yield targets outstanding).




5 waves down complete and has met old TD Lines target and close enough to higher wave 5 target (2.51 vs 2.03).  Unmet TD Line target of 1.2416




5 waves down complete and has met lower target for wave 3 and higher target for wave 5.  9-13-9 with perfected recent setup.  yields now testing disqual prop trigger up.



5 waves down complete and has met confluence of higher target for wave 5, prop down and TD Line target.  Dual 13 combos completed near low with prop trigger up.  Subsequent qual break of refclose up on 31dec 08.


bondsentiment extreme bullish bond sentiment



image US 10y breakevens (weekly)

5 waves down, at confluence of wave 5 target and wave 3 4.25 extension.  Weekly 13 combo/8 setup.

image US 10y breakevens (daily)

scope for sideways to lower to trigger pending combo and seq?

image US 20y breakevens (daily)

Long end looks more compelling (fundamentally too).

image TIP/TLT ratio of ETFs - weekly

image TIP/TLT daily


image TIP/TLT duration weighted?


Commodities and related equities

Saturday, 27 December 2008

Our Subprime Leadership

Technological advances have dramatically transformed the provision of financial services in our economy. Notably, increasingly sophisticated information technologies enable lenders to collect and process data necessary to evaluate and price risk much more efficiently than in the past. For example, the expanded use of credit-scoring models, by reducing the costs of making loans and by increasing the range of assets that can be securitized, has facilitated greater extension of credit to a larger group of borrowers. Indeed, we have seen an increasingly wide array of products being offered to consumers across a range of incomes, leading to what has been called the democratization of credit.

-- Ben Bernanke testimony before Congress May 23, 2006


Although the severity of the financial stresses became apparent only in August [2007], several longer-term developments served as prologue for the recent turmoil ... The first of these was the U.S. housing boom, which began in the mid-1990s ... A second critical development was an even broader credit boom, in which lenders and investors aggressively sought out new opportunities to take credit risk even as market risk premiums contracted ... he explosive growth of subprime mortgage lending in recent years was yet another facet of the broader credit boom.  Expanding access to homeownership is an important social goal ... But, clearly, much of the subprime lending that took place during the latter stages of the credit boom in 2005 and 2006 was done very poorly.

-- Ben Bernanke, International Monetary Conference June 3, 2008


(via Richebacher letter)

Still Delusional

From House & Home section in this weekend's FT

Why anyone should listen to real estate industry analysts is a fairly important question.  None of the agencies or organisations that regularly comment on the housing market predicted the 2008 crash so why should we think we know any more now?

But we are in a very different situation than we were a year ago.  In 2007 we were at the top of the boom and the question was when it would turn to crash.  Now we are in the crash and whether prices fall 30 percent or 50 per cent, at some point in 2009 the market is likely to hit bottom or be close to it.  This is the time to prepare to buy before the herd moves in.

No mention of valuation, credit conditions or the 18 year real estate cycle.

The Financial Times was once a good newspaper...

Monday, 22 December 2008

Do Fight the Fed

Some charts/commentary from s.d. rock - demarkian commentary coming up soon.



From: sjrock (Steven Rock)
Date Posted: December 15, 2008 at 10:20:13
Subject: XAU, Fibonacci and Thyme

Coming up......
1. '06 top + 2.618 yrs = 12/22
2. '04 low + 4.618 yrs = 12/22
3. ATH + 199 t = 12/26 or 12/29
4. ATH + 288 c = 12/27
5. ATH + .786 yr = 12/27
6. '05 low +3.618 yrs = 12/28
7. '02 low + 1618 t = 12/29-12/30
8. '00 low + 1618*root(1.618) t = 12/31
9. 10/24 low + 2*34c = 12/31
10. 10/24 low + 47 (Lucas)t =around 12/30


Wednesday, 10 December 2008

Could Civil War be ahead of us?

Disturbing note by Walter Molano of BCP Securities - friend of Marc Faber.

Overview: Feuding Swans
The onset of the global credit crisis and the deepening of the U.S.  recession make people wonder if a conflict is on the horizon. History tells us that the demise of a hegemonic power is accompanied by military confrontation, as the rising aspirants elbow for position in the new global order. With Russia and China, two historical rivals of the U.S., moving into stronger positions, many people wonder if the next global engagement will be with be them? However, a quick look at the order of battle will tell you that such a possibility is ludicrous. The U.S. has more ships, aircraft and weapons than the rest of the world combined. A conflict with either one would be over in a very a short time, with the U.S. as the victor. Some people reply, that the deepening of the economic crisis could erode U.S. military resources and eventually put it on a level playing field. That may, and will probably, be the case, but such a rebalancing process could take a long time to implement without a major catalyst. A mechanism that could hasten such a transformation is a radicalization of domestic environments.

Hegemonic powers are always considered to be homogenous structures. However, they are not. They are usually an amalgamation of feuding factions.  Hegemonic powers often implode, especially after they defeat competing rivals. Ancient Greece was a case in point. The defeat of the Persians in 479 BC left Greece as the single most powerful nation on the earth. However, with no external enemies to fight, the city-states turned on each other, bringing the empire to its knees during the Peloponnesian War. Rome was another example. The empire was under constant attack from the barbarian tribes that inhabited the northern reaches of Western Europe, but it was the internecine wars that dismembered the empire and made it vulnerable.

Civil wars can appear in the most unlikely of places. Spain was an important case in point. The unification of Spain under the Catholic Kings was such a powerful catalyst that it catapulted the Iberian nation into the vanguard of the global economy. For the next two centuries, Spain controlled the globe.  Through its navies and the vast wealth generated by its colonies, Spain was the deciding force on the global political stage. Napoleon's invasion at the start of the 19th century brought the country closer together, with Spanish guerillas fighting savagely to rid themselves of the French invaders.

However, the humiliating loss of empire and the evaporation of its wealth were too much for Spanish society to swallow. The cultural divisions that always enhanced the patchwork of Spanish identity now became the fissures of social division. The various regions and dialects became reasons for conflict. The social cleavages of urban versus rural, left versus right, and religious versus secular sowed the seeds for one of the cruelest civil conflicts of the 20th century.

The polarization of society is already taking place. The economic downturn is widening the income gap, and the middle class is shrinking. The recent events in India confirm that the violence is on the rise. No country is immune. The fear and hatred that ran down both sides of the aisles during the U.S. presidential elections and the accusations that were thrown showed that the social fabric was ripping. The question is how society will cope once it realizes that credit is gone for a long time. People around the world will have to severely curtail their economic activity. Moreover, they will have to overcompensate in order to build up savings for future acquisitions. This is devastating for a society established on the concepts of reckless consumption. All of this will add to the level of social frustration and humiliation that could eventually be manifested in domestic unrest. Such scenarios are painful to contemplate, and they are improbable.

Nevertheless, in an age where we encounter black swans on almost a daily basis, we need to consider all possibilities.

Thursday, 4 December 2008

What impact would a Chinese deval have on markets?

image CNY Spot Qtly

image CNY Daily

image EURCNY Daily

image AUDCNY Daily

What should one make of the significant appreciation of CNY vs its trading partners?  Not clear China needs a terms of trade appreciation right now.  To some extent, I wonder if inability of administered CNY to depreciate steadily alongside other non-USD currencies has led to pressure building on non-CNY foreign currencies.

Perhaps recognition by policymakers of what is already priced into the NDF (non deliverable forwards) could lead to a jump appreciation in foreign currencies.  Intuitively I would think also a selloff in bonds.

I need to articulate more clearly the logic in a future post.

Tuesday, 2 December 2008

USD/CNY Revisited

I wrote on 30th June about prospects for upside to 1y CNY NDF as we approached the Olympics.  We did pull back to a touch below 6.42 as I suggested was required, and since then we have seen a rally to the current high of 7.325.

Although we have reached confluence of initial target for wave 3 and td prop exhaustion at a time of short-term overbought condition and a pullback would not be surprising, I do expect further substantial upside over time.  Daily wave 5 targets to 7.75 and 8.44 and TD Line targets 8.01 and 8.1057.

image   Daily USDCNY 1y NDF

image Weekly USDCNY 1y NDF

Weekly chart bullish - having completed 5 waves down and hit multiple dwave targets and then made qual break above TDST, one should expect completion to a countdown at least (and at least a decent fibo retracement of the move).  Daily targets above look not implausible.

Monday, 1 December 2008

Still too early to buy Gold?



13 seq at the closing high.  REI arrow down on most recent bar.



Setup bars 8 and 9 need to make a low below low of bars 6 and 7 (682.41) to perfect setup.  Holding above TDST at 418.25 keeps trend bullish (ie plenty of room to correct).



Open on 24 Oct confirmed qualified break of TDST support, suggesting countdown should complete to a 13.  Recent bounce after hittiing confluence of dwave and TD Rel Retrace from the high is retesting confluence of  breakdown level, unqualified TD Prop trigger and TD Trend up (and holding below 885.55 trender level).  Suggests further downside is possible/likely, and one should look for selling opportunities on shorter-term horizon.



Recent bounce unable to break Rel Up in qualified manner.  Market exceeded prop exhaustion but never met prop full range or dwave targets (Dwave 553.77, 330 and potentially lower [!]) and TD lines points to 434.41.  Wave 1/A RSI less overbought than wave 2 or wave 4.


Market unable to hold cloud break on this try; let's see if base line holds as support.  No seq 13 at the low despite qualified break of TDST support.  Not looking very positive for gold here, although that doesn't rule out further near-term bounce.

Sentiment remains bullish


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