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Daily Forex
Commentary
By Jack Crooks
Key News
- On an annual basis, UK house prices are
growing at their slowest rate in four
years, showing a 5.7% rise in May. (BBC)
Key Reports due Tuesday
(WSJ)
7:45am: ICSC-UBS store sales index for
the week of June 4. Previous: -1.0.
8:55am:
Redbook retail sales index for the week of June 4.
Previous: 2.5%.
3pm: April consumer credit.
Consensus: +$7.0 billion. Previous: +$5.5
billion.
5pm: ABC/Money consumer confidence for
the week of June 4. Previous: -13
Quotable
"Just as one day
some primitive tribesman scratched his nose, saw
rain falling, and developed an elaborate method of
scratching his nose to bring on the much-needed
rain, we link economic prosperity to some rate cut
by the Federal Reserve Board, or the success of a
company with the appointment of the new president
at the helm." - Nassim Taleb,
Fooled by Randomness
FX Trading
This is from the Financial Times
on Tuesday morning:
Alan Greenspan, Federal Reserve
chairman, on Monday night highlighted the
unusual behavior of global bond markets, and
acknowledged that investors might be correctly
signaling a period of economic weakness ahead.
""The economic and financial world is changing
in ways that we still do not fully comprehend,"
Mr Greenspan said.
And it goes to the point we tried to make about
economics on Monday - science it is not. If the
world's top economist doesn't fully comprehend,
how are we supposed to?
Now that we know
science and economics are not, shall we say,
closely linked fields, let's take one step further
toward the end of the diving board with the help
of Benoit Mandelbrot, the fractal master, from his
book, The Misbehavior of Markets (our
emphasis):
... The implicit assumptions in all
this: If one knows the cause, one can forecast
the event and manage the risk. Wish it were so
simple. In the real world, causes are usually
obscure. Critical information is often unknown
or unknowable, as when the Russian economy
trembled in August 1998. It can be concealed or
misrepresented, as during the Internet bubble or
the Enron and Parmalat corporate scandals. And
it can be misunderstood: The precise market
mechanism that links news to price, cause to
effect, is mysterious and seems
inconsistent. Threat of war: dollar falls.
Threat of war: dollar rises. Which of the two
will actually happen? After the fact, it seems
obvious; in hindsight, fundamental analysis can
be reconstituted and is always brilliant. But
before the fact, both outcomes may seem equally
likely. So how can one base an investment
strategy and a risk profile entirely on this one
dubious principle: I can know more than
anybody else?
In response, the financial
industry has developed other tools. The
second-oldest form of analysis, after
fundamental, is "technical". This is a craft of
recognizing patterns, real or spurious ... This
discipline, in disfavor during the 1980s,
expanded in the 1990s as thousands of neophytes
took to the Internet to trade stocks and
insights. It truly thrives, however in currency
markets. There, all major "forex" houses employ
technical analysis to find "support points",
"trading ranges". And other patterns in the
tick-by-tick data of the world's biggest and
fastest market. And in the fun-house mirror
logic of markets, the chartists can at times be
correct. Sterling/dollar quotes really can
approach a barrier. But this is a confidence
trick: everybody knows that everybody else knows
about the support points, so they place their
bets accordingly. It beggars believe that
vast sums can change hands on the basis of such
financial astrology. It may work at times,
but it is not a foundation on which to build a
global risk-management system.
Wow! Game, set and match goes to Mandelbrot.
His point, and though it may be refuted, makes
eminent sense to us: financial theory is badly
flawed. One only need view reality to see theory
get crushed daily. Mandelbrot believes there is a
lot more risk in the system, at times, than we
realize. Bingo!
So now we debate the risk
and virtues of low long-term interest rates. Is it
a harbinger of recession? Or will it juice the
wheels of industry? And because it is so difficult
to even forecast rates, let alone the eventual
impact, let's all go one step further (we plead
guilty) and use this flawed forecast to then
decide how it will impact currency markets. We
couldn't make this stuff up if we tried.
Dollar correction day two! Or is it a new
trend? Step right up and place your
bets!
Jack Crooks has actively traded in global equity,
fixed income, commodity, and currency markets for more than 20 years. He is
president of Black Swan Capital, a currency and commodities market advisory
firm - BlackSwanTrading.com
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