FX 20140925

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FX CONCEPTS FX CONCEPTS

GLOBAL MACRO RESEARCH
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CURRENCIES INTEREST RATES EQUITIES COMMODITIES

WEEKLY INDEX

MARKET INSIGHT REPORT............................................................. 2
The Wind Down of the Colonial Era Gets Messy ..................... 2

CURRENCY Europe Long-Term View.......................................... 3
Back to Par in 2016 ..................................................................... 3

INTEREST RATES Long-Term View............................................. 4
End of the Road for Peripheral Bonds...................................... 4

COMMODITY Long-Term View..................................................... 5
No Silver Lining........................................................................... 5

Under no circumstances should any material in this newsletter be used or considered as an offer to sell or a solicitation of any offer to
buy an interest in any security or investment managed by FX Concepts or its affiliates or any other product or service to any person in
any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the laws of such jurisdiction. Access to
information about specific products are limited to investors who, among other requirements, either qualify as "accredited investors"
within the meaning of the Securities Act of 1933, as amended, or who meet any other eligibility and investment requirements and
generally are sophisticated in financial matters, such that they are capable of evaluating the merits and risks of prospective
investments.
September 25, 2014

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MARKET INSIGHT REPORT
The Wind Down of the Colonial Era Gets Messy
September 25, 2014
By John R. Taylor, Jr.
Chief Investment Officer

Last Friday I was privileged to ride back from Washington on the Acela - the only nice American
train - with a Kenyan diplomat, an Indian global food expert and an American export consultant (I
never knew there was such a thing). The three hours never passed so quickly. The Kenyan, an
old close friend, was a wonderful surprise, and the other two were happenstance. The
discussion soon focused on the disintegration of the West, the new inward turning of the United
States, and the horribly unfinished re-structuring of the post-colonial world. The colonial powers
have lost their vigor, which in most ways is a great thing for the African world, but not for the Mid-
East, we thought, and this is resulting in the unearthing of many regional wrongs, most of which
are very deeply imbedded in the societies and the economies involved. Basically a century's
worth of history is being rewritten in the Arab and North African world, where the current social
organization has more to do with the colonial occupiers than with the ancient local ways. In the
African case this new post-colonial weakness has led to expanding local civil strife and social
disruption, but with opportunity as well. With no pre-colonial structure to fall back on and use as
a base to battle today's world, Africa must reinvent itself, perhaps an easier job than in the Mid-
East where the ancient ways are seen as conflicting with the foreign-imposed, and therefore
despised, modernism. Africa is open and will end up stronger, but the Arab world is not and the
deterioration will impact them for generations.
For us on the train and the rest of the developed world, the trauma throughout Islamic society
would be our problem. In Africa, we could help, or meddle, but its way forward would really be
decided locally. The sub-Saharan continent would end up complimenting the ways of the rest of
the modern world. In the Arab world, the weakness of the major powers and their dependence
upon the region for their own well-being could lead to decades of brutal struggle. The language
and the 'soul' of the leaders was now fatally compromised by their association with the old
powers, plus Russia and the US, so the 'street' had gained undo importance and those who most
rejected modernization had captured the leadership. Fanciful, fatalistic ancient religious concepts
could continue to gain adherents in a region where there is a void of legitimate power. A total
lack of trust means that even outside mediators are impossible and the best alternative might be
to let these brutal anti-modern armies fight to the death. After all, that has been Assad's strategy
with ISIS. We feared that without boots-on-the-ground, fighting brutality with the only thing it
understands, and winning despite the horror of the process, there could be no success. The US,
after suffering defeat in Iraq and Afghanistan in the eyes of the locals and in that of a wide
swathe of world and US opinion, was retreating into its shell like it did after World War I and the
Vietnam War. Bombing does no good and reinforces the 'satanic' perception the locals have of
the US and others by raining bombs and death upon them for no discernable reason other than
death and destruction. But, battling the forces of ISIS would prove impossible, unless the war
were total, and even then the civilian population would be extremely distrustful of the foreign
armed presence. A victory would depend on a welcoming population, but history takes that
option away in most - and perhaps now all - parts of the Arab world. With the US turning inward,
probably an inevitable conclusion after its recent military disasters, the NATO alliance will be
toothless and can only lose to the Chinese and Russians by attempting to militarily influence the
outcome when it has no power, no conviction, and has no plausible success or exit strategy. Oil
prices and the world economy will be hostage for a long time.

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CURRENCY Europe Long-Term View

Back to Par in 2016

The euro has made its turn lower and
our cycles say we will see the decline
last at least another year, and more
likely around 18 months before it
bottoms around 1.00. Our forecast of a
decline of this type should not be startling
as the euro will not be breaking into any
new ground but will only retrace about
75% of the upmove from the EUR/USD
lows between 2000 and 2002. The Dollar
Index shows a very similar move and
exactly the same cycle, as the Index has
a high percentage of the euro, Swiss and
Sterling in its composition. Despite the
Index being dragged down by the yen in the last two years, the fact that the picture is so similar
is reassuring even if it only adds a bit to our analysis.

We feel extremely comfortable with this forecast, as there is no political or economic reason to
fight it. Furthermore, the nature of Draghis decision and his first loosening moves is such that
they will only have significant impact in a year or so because of the lags involved in the economic
process itself. Because of that a reversal of these changes is almost impossible to contemplate.
If anything, the ECB and the various finance ministers of the member countries are likely to put
more measures of this nature in place in a further attempt to stimulate the Eurozone economies.

As there are no leading indicators anywhere that show a positive economic turn in the
Eurozones future, our expectation is that the next movements will be more stimulative than what
has been done already. The only possible derailment of this train could occur from a collapse in
the US economy and a rush to de-taper and re-stimulate from Yellens Fed. The cycles, which
are showing us the low in the second quarter of 2016 our best guess do bottom for exactly
that reason, as the Fed becomes more stimulative than the other central banks, especially those
in Europe. Again, the cycles try to take into consideration the lag time in these decisions. The
fact that the Yellen Fed is leaning the other way at this point would alone be worth quite a few
months of euro weakness. The best fit is in the spring of 2016, but if we see any change we
certainly will take it into consideration.

The cycles call for two lows in the next few months. The first is in the November-December
timeframe and we expect a move to the 1.2000 area, roughly a 50% retracement of the move
from the .8000 area to the 1.6000 area. The second low should come late in the first quarter or
early in the second quarter of next year and our target is the 1.1200 area. There is little reason
to reverse any short EUR/USD positions at this time, and our feeling gotten from reading
bank and other positioning reports is that the world still is very short dollars and has
only stepped out of a small percent of their position in the last few months. There will be
much more euro liquidation ahead.

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INTEREST RATES Long-Term View

End of the Road for Peripheral Bonds

The very major cycles are arguing more and
more consistently that the tightening of spreads
within Europe is at an end. We cannot be sure
the move is over, but there is a chance that is it
and the longest we expect this long-term trend
to continue is into the second half of October.
We are not saying the Bund rally is over, as we
believe a move to the 0.50% level is not out of
the question in the next few months, but the
Bund-local spreads in almost every case will be
moving up.

The risk-reward of these trades is now very
negative. The reward from here for the Italian
BTPs is perhaps 20 bps at the most, while the risk is something around 250 bps. For the
French, we would put the reward at around 15 bps at the most while the risk is about 170 bps.
You dont have to agree with our assessment of the risk, even though we think we have been
conservative, but any serious analysis of the extent of further tightening must show almost none
ahead. With peripheral bond markets teasing the US 10-years for lower yields, they must be
very near as low as they can go. And, the French OATs are trading at close to their historic
wides below the US rate curve. There is no value there. The only question is how much risk is
there in the next year or two.

With the US Fed nearing the end of its tapering process and the possibility of a rate hike
in the next year more and more real, there is no way the lower ranking Eurozone bond
markets can see a yield decline. Our forecast of a lower yield for the Bunds depends on our
projection of a recession next year (derived entirely through our cycles of prices and economic
data). If the Bunds see their yields drop because of poor economic performance, the yields of
the other bonds will be pushed higher because their economic statistics will deteriorate so
significantly that the risk of default becomes a factor once again. If that does occur, our
projections of the spreads could be way understated.

The cycles for the bad countries see a possible month of further tightening, but for the better
countries France being our example here give signs that this low has already occurred. In
countries with tighter spreads than the French, the probabilities are even better that the low has
been seen, but the widening we would expect in the future is not as severe. The move higher
in spreads should see its first major thrust up into next summer, but we do expect this
widening period to last into the spring of 2016. The only way this widening period would be
shorter at least according to our figures would be if the move were more drastic, more quickly
dramatic, in which case the response of the Eurozone authorities countries, not the ECB alone
would be sufficient enough to restructure the Eurozones financial underpinnings.

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COMMODITY Long-Term View

No Silver Lining
By Joseph Palmisano

While its been a horrid time for Gold bugs
over the past three years, investors in
Silver have fared even worse, with the
metal falling from the dizzy heights of $50
in April of 2011, to currently trade at $18.
At times, when studying the daily, and even
the weekly charts, the big picture becomes
lost in the detail of intraday trading and
slightly longer term investing. Stepping
back for a moment and looking at the very
long-term charts, and cycles, gives us that
longer-term perspective, which then frames
the shorter cyclical time frames of intraday
and daily charts. The chart to the right is a
monthly chart of Silver and the Silver/Gold
ratio, which perhaps provides the perspective we need when considering where the market, and
the global economy, is heading next.

Silvers long-term chart looks worse than gold (gold chart not shown). The containment of
rallies by the monthly blue downtrend resistance and the break below the blue uptrend support
from the low in October 2008 is a strong indication that silver prices are headed lower for several
quarters if not longer! Silver is also much closer to a more sustained breakdown than gold.
Although we are bearish on the yellow metal, it is still holding above major long-term uptrend
support lines.

The close below the monthly blue uptrend support confirms our bearish longer-term view on the
metal. Silver prices need to close above the blue downtrend resistance at $20.45 to give us
hope that a low has been established. If our shorter term cyclical outlook for weakness into the
end of the month is correct then this shouldnt happen and we are in for more weakness,
possibly serious weakness.

Something needs to change in overall sentiment to reverse the current long-term downtrend in
Silver. Right now the Silver/Gold ratio is telling us something obvious: Silver is the primary victim
of the precious metals complex. But something else is also at work here. Silver is generally less
liquid than gold and its price tends to be more volatile. Therefore, when silver underperforms
gold, as it is now, it is often a strong indication that the broad commodities sector will follow suit.
We have repeatedly advertized our bearish view on commodities and if Silver continues to fall,
and the ratio continues to decline, then we could be in for a wild ride in the entire asset class.

Our cycles call for Silver prices to decline into the middle of January for an initial low of
13.50, or roughly the 200-month moving average. There is another low due in April and
we might be testing 10.00!

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