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Euro Optimism: Pavlov would be proud

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Posted by Jack Crooks - Black Swan Capital

on Saturday, 01 September 2012 08:55

It’s a common lament.  The fundamental economic picture for the Eurozone single currency countries appears much worse, on a relative basis, than what we see in the United States, yet the euro currency doesn’t seem to reflect that reality.   After much reflection on this topic, I think I finally figured it out—it’s a Pavlovian reflex response!  Let me explain…

There was once a man named Pavlov.  He had a dog.  Being of the scientific bent, Pavlov decided to use his dog in an experiment.  It was a conditioned reflex experiment.  Pavlov hypothesized (which is what scientists do; investors guess as they cannot control their experiments) that if he rang a bell, then brought his dog a bowl of food, the dog would become conditioned to the bell ringing.  Pavlov’s hypothesis proved correct for as soon as he rang the bell, the dog began to salivate in expectation of the food to follow.  Thus it wasn’t the food itself that engendered the reflex, but the expectation of the food.

Insert European Central Bank, the European Union, and International Monetary Fund, collectively known as the “Troika” in place of Pavlov and “your average punter” in place of the dog and now you can understand why the euro is being supported—it is an expectation the future will be like the past. 

The last time the power of ECB market intervention on a broad scale was put on display, bond yields fell and the euro rose sharply. The catalyst was the announcement of a Long Term Refinancing Operation (LTRO) announced back in October 2011.  The LTRO was designed to provide the European banking system with a significant dose of liquidity.  It succeeded, for a while, as you can see clearly in the chart below: 

Picture 2

Below is the price action in the euro highlighted after the LTRO was announced on October 6th 2011; the euro rallied about 10 cents against the US dollar over the following two-week period:

Picture 3

So, will it be déjà vu all over again when Mr. Draghi announces bond-buying plans next week? 

Bond buying, or put another way—the transfer of wealth from richer, more productive, taxpayers in the North to less productive more corrupt taxpayers in the South, will not change the core problem at the heart of the euro, which is this: the weaker countries cannot compete against Germany when they all use the same currency.  If they try, it will mean decades of internal adjustment for the likes of Italy, Spain, Greece, and Portugal.  It will mean lurching from one crisis to another, and muddling through at best.   

For about seven years the periphery countries were able to borrow at interest rates on par with Germany. What good did that do other than allow consumers in the periphery to buy a whole lot of German made goods?

The Southern states, including Italy, Spain, and France, with the full support of the European Central Bank (ECB), now believe Germany needs the Eurozone to survive (because Germany’s growth model is one of export-dependence) and therefore will ultimately agree with the idea of making the ECB a tool for socializing risk—distributing more Northern wealth. 

But, as the Eurozone recession deepens, I suspect Germany’s political and economic incentives to keep funding the single currency project will fade in direct proportion to the country’s falling trade surplus, falling industrial order book, and rising unemployment rate; all of which are now underway. 

In short, the future may not be like the past.  If the euro has already discounted what I’ve shared here, then there is a bell ringing, and it doesn’t mean food is on the way.  It means the 600 pip rally we’ve seen in the euro from the July 24th low at 1.2041 is likely over and the long march down to par will continue in earnest. 

Picture 4

Note: If you would like more information on this publication you can contact us at info@blackswantrading.com or view our offerings at our website: www.blackswantrading.com 

 

Black Swan Capital’s Currency Currents is strictly an informational publication and does not provide personalized or individualized investment or trading advice. Commodity futures and forex trading involves substantial risk of loss and may not be suitable for you. The money you allocate to futures or forex trading should be money that you can afford to lose. Please carefully read Black Swan’s full disclaimer, which is available at http://www.blackswantrading.com/disclaimer 



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Currency

The Case: Why the US is on the brink of the greatest Depression of all time

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Posted by Wayne Allyn Root via Peter Grandich

on Thursday, 30 August 2012 09:30

"This time we are in such deep trouble. This time the results are going to be dramatically worse than 1929. In 1929 America was not $16 trillion in debt,  facing $100 trillion in unfunded liabilities,  over $360,000 in debt per citizen. In 1929, most states were not bankrupt, insolvent and dependent on federal government handouts to survive. One county owes over $108 billion in debt , the biggest part of it in unfunded government employee pensions. Today, 77,000 federal employees earn more than the governors of their states". The American Petroleum Institute reports that demand for oil in July was at the lowest level since 1995.

Why we are on the brink of the greatest

Depression of all time 

 

Everywhere from FoxNews.com to CNBC.com, I suddenly see commentators warning of pending doom, economic collapse, and a new Great Depression. Welcome to my club. Perhaps America's politicians and economists should have paid attention to an entrepreneur and small businessman that has been warning of economic collapse and a new Great Depression publicly for over two years. 

More importantly, none of the current commentaries mention the "why's" of this slow motion economic collapse...beyond the obvious -- mountains of deficit and debt. None of them mention the dysfunctional structure of the current U.S. economy and the massive changes in the work ethic and mindset of the average American. 

I am a successful small businessman and a patriot who loves America and always sees its greatness. I am also an optimistic, positive thinker who always sees the glass half full. 

But not this time. 

This time we are in such deep trouble, the only solution is a radical restructuring of the politicians, the economy, and the way we view personal responsibility versus government handouts. If those changes don't come then we are facing a long decline and the eventual end of America. 

This time the results are going to be dramatically worse than 1929. This time we are facing The Greatest Depression ever.

Why? Because The Great Depression had NONE of the structural, economic, and social problems, nor the massive obligations we are now facing. Read the facts:

In 1929 America was not $16 trillion in debt, plus facing over $100 trillion in unfunded liabilities. That’s over $360,000 in debt per citizen. 

In 1929, most of our states were not bankrupt, insolvent and dependent on federal government handouts to survive. One county (Cook County which includes Chicago, Illinois) now owes over $108 billion in debt (the biggest part of it in unfunded government employee pensions). 

In 1929, we did not have 21 million government employees with bloated salaries, obscene pensions, and free health care for life. Today 1 out of 5 federal employees earn over $100,000

Today, 77,000 federal employees earn more than the governors of their states

Staggering numbers of federal government employees retire at a young age with $100,000 pensions for life. 

Unfortunately on the state and local levels it’s even worse. There is now nearly $4 trillion in unfunded pension liabilities for state government employees. 

Protected by their unions and the politicians they elect, government employees are bankrupting America. In Illinois there are retired government employees making over $425,000 per year

No one could have imagined any of this in 1929. There is no possible way to pay these bills moving forward.

In 1929, Social Security, Medicare, and Medicaid didn’t exist. The federal government had no such obligations threatening to consume the entire federal budget within a few years. 

In 1929, there was no such thing as welfare, food stamps, aid to dependent children, or English as a second language programs. American’s didn’t consider it the responsibility of government to pay for breakfast and lunch for school students -- let alone for illegal immigrants at school.

Who could have imagined back in 1929 that one seventh of America's population would be on food stamps…and the federal government would ADVERTISE to encourage even more Americans to sign up for food stamps and welfare. 

Who could imagine back then that the federal government would team up with the President of Mexico to encourage Mexicans living illegally in America to sign up for food stamps

Who could have imagined back then that the president would offer not just welfare, but waivers to allow any state to opt out of requiring work to receive welfare? 

Back in 1929, who could have imagined 86 pregnant teenage girls all in one Memphis high school? 

In 1929 we had families, moral codes, and churches to prevent this kind of tragedy. Do you actually believe this is just one abnormal high school? There must be record numbers of pregnant teens all over America. They have figured out that the choice is to either work a drab, depressing job paying minimum wage, or pump out babies and have government pay your bills for decades to come. But where will the money come from? This will overwhelm the system with generations of massive debt. This is a nightmare.

In 1929, legal immigrants wanted only to work. My grandparents, who came to this country from Russia and Germany, received no government benefits. They worked day and night to provide for their family and become American citizens. It was sink or swim. My grandmother Anna Root never took a penny in welfare, even when my grandfather died and left her with no job, no money, and 7 young children. So back in 1929 immigrants cost us very little.

Today we have millions of illegal immigrants and their children collecting billions of dollars in entitlements from U.S. taxpayers. 

In one state (California) illegal aliens cost taxpayers over $10.5 billion annually just for education, health care and incarceration. Do you now understand why California is bankrupt and insolvent? This is spreading across the country. 

More dysfunction? Today new studies show that almost 20% of American children under age 18 are obese and therefore prone to suffer pre-diabetes, diabetes, or cardiovascular disease. 

Even worse, by 2020 experts predict that 52% of the adult population of America will have either pre-diabetes or diabetes. 

Do you understand the cost of diabetes? This alone will overwhelm and bankrupt America's health care system.

In 1929 we had no federal disability program. Today almost 11 million Americans are on disability. There are more citizens on the disabled rolls than the population of 39 of our 50 states. This is far worse than the welfare or unemployment rolls- which have time limits. Disability is forever. The ratio of able-bodied workers to disabled in 1967 was 41 to 1. As of June 2012 it is now 16 to 1. It is impossible to pay this bill long term.

But wait...it gets worse. Now soldiers are in on the act. Are you aware 45% of returning vets are claiming "disability" -- a number that dwarfs all prior records in the history of warfare. No nation can afford this. 

In 1929, we had an education system that was the envy of the world. Today our public schools are in shambles. We spend the most money in the world, and get among the worst results. The difference today? Teachers unions are in charge, instead of parents. Our students graduate with few skills, are qualified only for low paying manufacturing jobs that no longer exist -- they've been shipped to China and India. What will this workforce do for the rest of their lives? Live off the government dole? Who will pay for it?

In 1929 taxes were much lower. Forget the tax rates -- they were meaningless. In those days we had a cash economy, so most businesses paid little or no taxes. Sales and FICA taxes didn’t exist. Today the combined local, state, property, gas, sales, FICA and federal taxes are the highest burden in history. 

Unconvinced? 

When income taxes started in 1913, the average American was untouched. Only the richest 350,000 Americans paid a 2% income tax. Today the average American works until April 12th just to pay his or her taxes. 

This stifles entrepreneurship and hinders the financial risk-taking necessary to create jobs and get out of a Great Depression.

New numbers just out for July back up my contention that disaster looms. Sales tax revenues plunged an alarming $539 million below expectations in California last month. The jobless rate rose in July in 9 out of 10 battleground states -- Iowa, Florida, Michigan, Nevada, New Hampshire, Pennsylvania, Virginia, Colorado and North Carolina all had higher unemployment (while Ohio held steady). They say bad news comes in threes. Well here's the worst news of all- the American Petroleum Institute reports that demand for oil in July was at the lowest level since 1995. These figures are alarming -- to say the least.

Do you get the picture? Our country is staring at the Greatest Depression ever. We face a  long slow decline towards the end of America -- unless we change paths and policy quickly.

The economy is crumbling. The situation is turning more hopeless by the hour. The more government gets involved, the worse it gets. Coincidence?

The solution is actually simple: dramatically cut the size, scope and power of government; cut spending; cut entitlements; cut taxes; cut government rules and regulations that smother, damage and destroy businesses, prevent startups, and kill jobs; reform Social Security, Medicare and Medicaid; reform public employee pensions; stop the wars (we can no longer afford to police the world); end or reform the Fed; end bailouts and stimulus (ask Japan about the failures of repeated stimulus); end the Democratic obsession with green energy and high speed rail (ask Spain about the waste in those two programs); encourage oil and energy exploration; encourage job creation by small business and the private sector; term limit politicians; institute school choice; and back the dollar with a gold standard. 

Or, like so many other great empires of history, America may never recover from this Greatest Depression of All Time.

US Unemployment_1910-1960

Wayne Allyn Root is a capitalist evangelist and serial entrepreneur. He is a former Libertarian vice presidential nominee. He now serves as chairman of the Libertarian National Campaign Committee. He is the best-selling author of "The Conscience of a Libertarian: Empowering the Citizen Revolution with God, Guns, Gold & Tax Cuts." For more, visit his website:www.ROOTforAmerica.com.



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Currency

US dollar starts to breakdown as gold and silver surge ahead

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Posted by Arabian Money

on Monday, 27 August 2012 16:41

A head-and-shoulders pattern in the US dollar chart has broken down and it looks like a big fall is coming for the greenback (see chart below). The warning indicator is rising gold and silver prices, up three and nine per cent respectively last week, a trend that is likely to continue with some volatility.

In his latest commentary chartist Clive Maund said: ‘As we can see on the 8-month chart for the dollar index its drop last week has brought it down to a clearly defined important support level, with this sharp move towards a rising 200-day moving average creating a considerable degree of ‘compression’ that coupled with the support at the current level is likely to trigger a rebound. It looks like a head-and-shoulders top is forming in the dollar.

‘…so a likely scenario here is that we see a rebound short-term which takes the index back up towards the left shoulder high in the 83 area, and such a rebound would of course be the occasion for a reaction back in gold and silver, which should be jumped on as an opportunity to build positions further ahead of the major breakout. Here we should note that the dollar looks very weak so it might not make it as high as 83 before it turns tail and breaks down.’

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Posted on 27 August 2012Categories: Banking & FinanceBond MarketsGold & SilverUS Dollar via ArabianMoney.net



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Currency

China’s growth model is dead in the water!

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Posted by Jack Crooks - Black Swan Capital

on Saturday, 25 August 2012 07:41

Australian Dollar Danger!

SYDNEY, Aug 24 (Reuters) - …Fuelled by Chinese-led demand for its coal, iron ore and other resources, Australia's economy was one of the few in the developed world to sail through the global financial crisis without sliding into recession.

But questions over whether the decade-long bull run in commodities has ended have become louder in recent weeks as data shows China heading for the slowest pace of annual growth in more than a decade, driving down the prices of copper, iron ore and other raw materials.

We have been very bearish on the Australian dollar.  The reason is a simple one.  It is the belief that as China goes, so goes the Australian economy.  

The rationale is clear: the Australian mining sector is the driving force for GDP growth in Australia.  Continued prosperity in the mining sector is a direct function of demand for commodities from China.  We believe Chinese growth is falling fast, much faster than official statistics indicate.  If this is true, the Australian economy has peaked in this cycle and soon the Australian dollar will feel the pain of this deceleration in growth.  

From Professor Michael Pettis, finance professor at Peking University [our emphasis]:

China’s official GDP growth rate has fallen sharply – … Beijing announced that GDP growth for the second quarter of 2012 was a lower-than-expected 7.6% year on year, the lowest level since 2009 and well below the 8.1% generated in the first quarter. This implies of course that quarterly growth is substantially below 7.6%.  Industrial production was also much lower than expected, at 9.5% year on year. In fact China’s real GDP growth may have been even lower than the official numbers.  This is certainly what electricity consumption numbers, which have been flat, imply, and there have been rumors all year of businesses being advised by local governments to exaggerate their revenue growth numbers in order to provide a better picture of the economy.

Some analysts believe China’s growth was flat for the second quarter.  But China never lets its official numbers get in the way of a good story. As you can see in the chart below, exports are tumbling across all regions.  We expect this to continue.  Not only because of a deepening recession shaping up in the Eurozone – the largest customer for China – but because of a secular change in consumer demand globally. 

It has been about four years since the credit crunch crisis, and the US consumer is still deleveraging, i.e. paying down debt despite the fact the US government is creating more debt in a desperate attempt to maintain growth. 

Though we don’t have the number for European consumers, but given how badly their economies are performing, you can expect this pattern to be similar across Europe.  In fact, we suspect it could be worse as unemployment across the Eurozone is now at an all-time high and rising.   So, it is quite plausible to believe the trend in China’s GDP growth will continue to fall…

…especially when you consider that Chinese manufacturing is now shrinking based on the latest Purchasing Managers Index numbers (below 50 represents contraction).  Though US PMI is still expanding slightly, PMI numbers are falling for all three of the globes major growth and demand drivers:

China’s Model is flawed for the Shape of Global Economy

The reason a secular decline in global consumption is so dangerous for China is because its entire model is predicated on a sustained rise in external demand.  No longer can the world absorb China’s trade surplus. [According to Professor Pettis, China’s trade surplus by 2007 as a share of global GDP “had become the highest recorded in 100 years, perhaps ever, and the rest of world found it increasingly difficult to absorb it.]

China has made massive internal infrastructure investments over the years.  And this internal investment ramped up dramatically after crisis of 2008 in an effort to sustain growth.  Instead, it has created huge levels of excess production capacity across many of its key industries leading to a surge in debt and bad loans not yet realized. 

China's business conditions continue to deteriorate. Cement, coal and steel prices are still falling. Overcapacity is severe in most industries. Local governments pressure loss-making enterprises to continue production to sustain local GDP. Hence, commodity prices are falling below total costs. Soon the prices may fall below variable costs. 

There is another testing point ahead. If local governments want to sustain production levels, they have to arrange bank loans to support loss-making production. The central government has loosened up liquidity control. Bank lending conditions have been eased. Approvals for corporate bonds have been accelerated. It is possible that production levels would be sustained into the fourth quarter despite falling commodity prices. Of course, the financial system will suffer bad assets from propping up loss-making production.

Andy Xie, Caixin Online

The natural transition for China would be more dependence on internal consumer demand, since external demand it falling.  But it is not that simple. 

Keep in mind that massive internal investment is effectively a transfer of wealth from the household sector of the economy (China has lowest percentage of consumer demand relative to GDP than any country in history).  This is done by artificially lowering deposit rates, and forcing consumers to keep money inside the country.  This is a standard developing country model.  But it is extreme in China.  

The winners in such a system, known as financial repression, are the net borrowers.  In China this is local governments, state owned enterprises, and real estate developers.  The losers are consumers.  This should help explain why consumption penetration is so low.  

The reason this model is now becoming untenable is because external demand is not creating the wealth necessary to keep household income growth rising.  It is why we are seeing increasing levels of unrest throughout China.  But the powers-that-be, who have benefitted mightily from this growth model, have a vested interest to keep things as they are.  Just keep lowering interest rates and providing us more credit, we will keep building… 

But credit allocation to the already powerful players means income inequality is soaring in China.  Those with political power do well, those without it do badly. More from Andy Xie [our emphasis]:  

Addressing income inequality has become fashionable. There is speculation that the government will unleash a plan for improving income and wealth inequality. Unfortunately, the discussions so far are misleading at best and could incite social conflicts. Rapidly rising income inequality in China is not a result of market competition. It cannot be compared to what occurred in mature market economies at all. The rising inequality is due to asset bubbles and gray income. Both are due to rapidly rising money supply that has increased government's role in the economy and fueled asset bubbles.

The concentration of monetary resources in the state sector has led to surging gray income. It is the other important factor in income inequality. It translates monetary growth into inflation. The cost of inflation has been spread among the general population whose fruits from labor have been devalued against rising prices. One could argue that China's rising inequality is a policy result.

Speculative gains and gray income are a form of inflation tax on the people. They are sustained by rapid monetary growth. Hence, China's rising inequality is a policy choice, not a consequence of market competition.

The discussions over inequality are misconstrued as rich vs. poor, as in other countries. This is totally wrong. It should be about asset bubbles, excessive monetary growth, the excessively big government role in the economy and the resulting surging gray income. There is a widely circulated view that Chinese people hate the rich. This is totally wrong, too. It is not about who is rich, but about how one becomes rich. Chinese people suspect that most riches in China are ill gotten. Unfortunately, this view is true. With widespread excess capacity, few entrepreneurs can get rich through normal market competition.

Thus, attempts for real reform in the Chinese model will be met with strong resistance from the most powerful within the country. 

There are three likely outcomes here:

  • A hard landing as all this wasteful spending is finally marked to market as export growth continues to deteriorate. But another jolt of credit to the system will prolong this final outcome; and only make it worse.  So it is possible we see growth rebound slightly on more credit near-term.  
  • A lost decade situation similar to Japan’s bubble pop back in 1989. Growth and income fade’s together as policymakers and the powerful players refuse to unleash the household sector. 
  • A rebalancing and transition to more domestic-driven demand.  This would require freeing up interest rates, letting the currency rise, and opening the capital account to allow consumers to invest outside the country.  This would mean lower GDP growth for sure, but rising household income is more important to the average Chinese citizen.  They would be quite happy with that tradeoff, and it would insure rising social stability.  

 

If the US economy and European economy—China’s customers—do not recover soon, we expect a hard landing will be the path for the Chinese economy.  We are not optimistic that China will be able to overcome powerful internal interests in order to follow the best path, option #3.  

So, either way, we see China’s growth continuing to decelerate.  It’ current growth model is dead in the water and will have to change either the easy way or the hard way.  Therefore, this deceleration or crash in growth will hit the Australian economy hard.  It is why we continue to believe the Australian dollar is trading at an extraordinary premium to reality.  

 

Note: This article was originally sent to Jack and JR’s subscribers of the World Currency Trader which covers currency ETF and currency ETF Options trading ideas.  It is a publication of Weiss Research and edited by Jack and JR Crooks. If you would like more information on this publication you can contact Jack and JR at info@blackswantrading.com 

www.blackswantrading.com 

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Currency

Fed Minutes & the US Dollar

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Posted by Jon Vialoux - EquityClock.com

on Thursday, 23 August 2012 16:44

"With the Fed’s suggestion of further monetary easing, commodities rallied, breaking firmly above the 200-day moving average, according to the CRB Commodity Index.   And while commodities rallied, the US Dollar Index plunged, coming close to achieving the target suggested by the short-term head-and-shoulders top of 81.   This bearish setup for the US Dollar was pointed out on this site at the beginning of the week, however, thoughts were that the move would play out over a matter of weeks rather than days.   With the US Dollar nearing that downside target, the long-term rising trend-line could soon be tested, potentially offering a hindrance to this commodity rally.   Despite the significant dollar decline over the past two sessions, equity markets have failed to move higher, hinting of equity market exhaustion at current overbought levels.   The US Dollar Index remains seasonally negative through September before stabilizing into October and November".

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.....for more of Jon Vailoux's analysis of the Markets go HERE

 

Equity Clock is a division of the Tech Talk Financial Network, a market analysis company that provides technical, fundamental and seasonality analysis on a daily basis via TimingTheMarkets.com and EquityClock.com.   Equity Clock’s mission is to identify periods of reoccurring strength among individual equities in the market using methodologies presented by some of the top analysts in the industry, including that of Don Vialoux, author of TimingTheMarkets.com.

Feel free to use any of the content or seasonality studies (charts, timelines, or otherwise) presented as long as a link-back to this site at EquityClock.com is provided.

For further information on indicators used in reports presented on this site, please visit our reference page.



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