Why Shouldn’t You Profit from the Currency Wars Too?

Wednesday, 21st October, 2015
Melbourne, Australia
By Kris Sayce

More from the currency wars front.

As Bloomberg reports:

Traders betting Australia’s central bank will cut interest rates as early as next month are being reined in by Governor Glenn Stevens.

Far from laying the groundwork for near-term easing, policy makers struck an upbeat tone on the domestic economy in minutes of this month’s meeting released Tuesday. That spurred the market to reduce wagers on a November easing, with swaps showing 29 percent odds as of 12 p.m. on Wednesday in Sydney, down from 46 percent on Monday.

The Aussie dollar has barely moved from where it was yesterday.

The Aussie S&P/ASX 200 index has gained more than 1% from the intraday low.

It may not seem like it, but the currency wars are a daily occurrence.

Every time central bankers open their mouths or release a statement, it has a huge impact on the markets.

It impacts the interest rate markets, the stock markets, the currency markets, and the commodity markets.

Check out this hodge-podge of market volatility:

Source: Bloomberg

The white line is the Aussie stock index. The yellow line is the Aussie dollar. The green line is the Australian government 10 year bond index, and the pink line is the Thomson Reuters CRB Commodity Index.

All of that volatility — pin it on the currency wars and market manipulation by central banks.

Make no mistake, this volatility isn’t about to end anytime soon.

It’s for that reason I’ve been working on a deal with global intelligence strategist, James G Rickards, to launch a trading service in Australia that will help investors potentially profit from the ongoing currency wars.

The name of the service is Currency Wars Trader.

It launches this weekend. At the helm of the service here in Australia is my colleague, Shae Russell. Shae will work closely with Jim and a US-based analyst to identify key trading opportunities that are a result of the ongoing currency wars.

It’s a unique service, and it will no doubt be controversial.

For a start, unlike most trading services, Currency Wars Trader doesn’t rely on charts or typical technical analysis indicators.

Shae and Jim aren’t looking for a stock in an uptrend (or downtrend)…or a stock that’s about to breakout from a particular trading range.

Yet, this service isn’t based around fundamental analysis either. Shae and Jim won’t look for a stock that’s fundamentally undervalued (or overvalued) and look to profit from a change in investor sentiment.

Currency Wars Trader involves a whole new type of trading. It’s a service that aims to predict and respond to changing events in the global currency wars.

For instance, Jim’s analysis may suggest that South East Asia is heading for trouble, based on his experience working with the CIA and other US intelligence organisations.

Jim may suggest that a certain economy is more at risk than others. Armed with this information, Shae and our US-based analyst will work with Jim to find the best way to play this scenario.

It could be a recommendation to short sell an Indonesian index. Or conversely, if Jim believes that the currency wars could have a positive impact on an asset price (say, gold), our analysts will work with Jim to find the best way to buy into that asset.

As I say, it’s an entirely new approach to trading. It’s something I believe is not only fascinating, but it’s also crucial for investors to understand.

Look, you’ve got to know that Wall Street and the City of London are playing the global currency wars every minute of every day.

They’re buying one thing and selling another. They’re hedging one asset against another. They’re looking for trends and anomalies in the market in order to make themselves and their banking insiders millions, if not billions, of dollars.

Until now, the ordinary investor has been left out of these trades because the ordinary investor doesn’t have the wherewithal to understand how the global currency wars work.

That changed the moment Jim Rickards joined our team. Now we can help put you, maybe not on a level playing field with Wall Street, but pretty darn close to it.

I’ll have more details tomorrow.

Until then, check out Jim’s latest essay below…

Cheers,
Kris

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You Are Not an Economic Robot
Jim Rickards, Strategist, Strategic Intelligence

Many observers look at misguided Fed policy and assume the policymakers in charge must either be stupid or engaged in a conspiracy to destroy the country.

I’ve actually met a fair number of current and former Fed governors, reserve bank presidents, staff economists and other insiders. They are definitely not stupid. If we lined up IQ test results, I’d be at the bottom of the class.

There’s no conspiracy either. There are a lot of well-intentioned individuals in the US government, but when it comes to inter-agency coordination the bureaucracies can barely tie their shoes let alone manage the entire economy with bad intent. So, what’s the problem?

The Fed is a model-based institution, and their models are obsolete. As a result, forecasts based on these models are persistently misguided, and policies based on these forecasts damage the real economy. Bad models beget bad results every time.

Subscribers of Strategic Intelligence, know that I am a persistent critic of the economic models used by all central banks, especially the Federal Reserve. My criticism is not limited to the big econometric models used in forecasting the economy as a whole. It applies to a wide range of micro-models that allegedly explain particular parts of consumer behaviour. One of the most defective models has just shown its flaws in a dramatic way. This model involves the ‘marginal propensity to consume’ or MPC.

The idea behind MPC is simple. If you give the middle-class and the rich an extra dollar of income each, the middle-class American will spend more of that dollar than the rich American. The rich American will save more of that dollar than the middle-class American. Basically, rich people already have everything they want, but the middle-class wishes they could afford an extra vacation or fancy dinner.

A rich person may buy the most expensive steak dinner in town, but if you give him more money he won’t eat two steaks. He’ll put the extra money into stocks. The middle-class person has been eating at home, and if you give her more money she might go out for that steak dinner. So, steering more money to the middle-class (and poor) is a way to stimulate the economy. You sell an extra steak dinner, and a lot else including new cars, appliances, and furniture. That’s all there is to the theory of MPC.

MPC has a powerful influence on policy. This is why so-called ‘stimulus’ programs were passed by the US. It’s why US Congress often push for cuts in payroll taxes.

Payroll tax cuts go straight into the pockets of everyday Americans who will go out and spend it. Rich people don’t even notice a cut in payroll taxes because they always pay the maximum amount regardless of the payroll tax rate.

When oil prices collapsed in late 2014, Fed economists and Wall Street analysts jumped for joy.

The US$2 drop per gallon would give the average consumer an extra $100 in their pockets. This adds up to US$5,000 per year.

Using MPC models, economists expected that the extra cash would translate into more spending which would boost the economy.

These MPC models were the basis for the Fed’s rosy 2015 growth forecasts.

Then a funny thing happened. Everyday Americans did not act like consumer robots. They did not do what the economists expected.

Consumers were getting the extra money, but they weren’t spending it. They were paying off debt and adding to savings. In technical terms, consumers were deleveraging their personal balance sheets.

Data in the chart below shoes that retail sales plunged from November 2014 to February 2015.

Source: FRED

This is not encouraging for Fed policy makers.

One-by-one their favourite models are crashing and burning. Quantitative easing (QE) was supposed to create a ‘wealth effect’ through higher stock and home prices. The theory was that people would ‘feel richer’ because of the paper gains and would then spend more. That wealth effect never materialised.

When it comes to models, the Fed’s theme song should be Queen’s, Another One Bites the Dust. It turns out that people are not the robots Fed economists imagined them to be.

People have real concerns and behave in ways that make sense to them. The economy is uncertain, and the wipe-out of 2008 is still fresh in consumer’s minds. In these circumstances, consumers will take prudent actions like saving more and spending less.

There is a model for this behaviour, but it’s not MPC or the wealth effect. The model is the global Great Depression that lasted from 1926 to 1940.

Fed models use regressions of time series that in most cases don’t go back before the 1950s or later. Their models are not behavioural, and do not account for the 1930s. The Fed is slowly waking up to the fact that we are not robots.

Regards,
Jim

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End of day market data

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52-week highs: 27 stocks, including Fisher & Paykel Healthcare Co [ASX:FPH], Onevue Holdings Ltd [ASX:OVH], and The Reject Shop Ltd [ASX:TRS].

52-week lows: 16 stocks, including Boom Logistics Ltd [ASX:BOL], Godfreys Group Ltd [ASX:GFY], and OM Holdings Ltd [ASX:OMH].