"Successful investing is going against the momentum and against the things that seem most logical in the present space."

Thursday, June 18, 2009

EUR/USD Below The Trend Line

I'm holding a short EUR/USD trade to the 38.6 retracement of the last up trend. A stop would be on a close above the trend line.

Daily Trend Line on GBP/USD

I'm going to be keeping an eye on this trend line-a break and close below it signals further weakness for the pound.

Monday, May 25, 2009

The Crisis and How to Deal with It

Bill Bradley, Niall Ferguson, Paul Krugman, Nouriel Roubini, George Soros and Robin Wells offer their insights on the economic crisis. What I took from this are 2 things:

1. The "medicine" administered by governments and central banks, while necessary, is likely to make us very sick.

2. Nouriel Roubini seems to be the only one offering a clearer solution (nationalization of insolvent banks) but one which is not likely to be implemented.

Sunday, May 24, 2009

S&P: Corner Turned To The Downside

The S&P 500 looks as if it has already turned the corner to the downside. The red trend line, which follows the March 6 rally, acted as support on 5 separate days before finally being breached on May 13. Five days later, it acted as resistance and on that day, price formed an bearish inverted hammer (pin bar). Conformation of the downside move will be seen as the index declines and closes below 875, which is just below recent support.

The big question now is how falling equity markets will affect Treasuries and the dollar. Under normal circumstances, the dollar trends higher against the better-yielding currencies while bond prices gain, but if there truly is a crisis of confidence in the credit rating of the U.S. we could see the opposite occur.

Thursday, May 21, 2009

Essential Reads

China Grows More Picky About Debt by Keith Bradsher

"New data shows that China is also trading long-term Treasuries for short-term notes, highlighting Beijing’s concerns that inflation will erode the dollar’s value in the long run as America amasses record debt."

Green Shoots or Yellow Weeds? by Nouriel Roubini

"Medium term risks and vulnerabilities imply a mediocre, sub-par, weak and well below potential growth recovery in 2010-2011," as the "lack of true deleveraging – or appropriate debt restructuring – will lead to a corrosive debt deflation and limit the ability of households to spend, of firms to invest and of banks and other financial institutions to lend."

Monday, May 18, 2009

A Feast For Thought

If financial crises were distributed along a bell curve — like traffic accidents or people’s heights — really big ones wouldn’t happen very often. When the hedge fund Long-Term Capital Management lost 44 percent of its value in August 1998, its managers were flabbergasted. According to their value-at-risk models, a loss of this magnitude in a single month was so unlikely that it ought never to have happened in the entire life of the universe. Just over a decade later, many more of us now know what it’s like to lose 44 percent of our money. Even after the recent stock-market rally, that’s about how much the Standard & Poor’s 500 index is down compared with October 2007.

Financial crises will happen. In the 1340s, a sovereign-debt crisis wiped out the leading Florentine banks of Bardi, Peruzzi and Acciaiuoli. Between December 1719 and December 1720, the price of shares in John Law’s Mississippi Company fell 90 percent. Such crashes can also happen to real estate: in Japan, property prices fell by more than 60 percent during the ’90s.

For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. As a result, 9 times out of 10 we overreact. The usual response is to introduce a raft of new laws and regulations designed to prevent the crisis from repeating itself. In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets, so that (for example) the ratio of Citigroup’s tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

All of these were sins of commission, not omission, by Washington, and some at least were not unrelated to the very considerable political contributions and lobbying expenditures of the financial sector. Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Niall Ferguson is a professor at Harvard University and the Harvard Business School and the author most recently of “The Ascent of Money: A Financial History of the World.”