CURRENCY CURRENTS

A free global-macro & market newsletter

Tuesday 11 August 2015

Quotable
If you are going to use probability to model a financial market, you had better use the right kind of
probability. Real markets are wild. Their price fluctuations can be hair-raisingfar greater and more
damaging than the mild variations of orthodox finance.
Benoit Mandelbrot, The Misbehavior of Markets.
Commentary & Analysis
Oil $10 per barrelAre you nuts? Not if stocks help the process along
The news concerning Chinas decision to devalue its currency could have broad implications for the
global economy. The key question is will stocks wake to the reality of the growing disconnect between
the financial and real economyhas the valuation rubber-band stretched far enough?
Todays devaluation comes on the heels of the Chinese being iced out by the International Monetary Fund
for inclusion of its currencythe yuaninto that all important basket bundled by the IMF call Special
Drawing Rights (who even has a clue what that stuff is or used for). So, instead of global reserve
managers having to shift a wole bunch of captial into the yuan, we may witness a whole bunch of
portfolio managers shifing a whole bunch of capital out of China. Can you say hot money flow to the US
dollar via US Treasuries to hide? 30-year Treasury futures jumped a whopping 2 points today, i.e. long
bond yields fell.
Todays action by the Chinese seems a bit of capitulation on their part to the powerful deflationary forces
eating away at themovercapacity (read malinvestment), tepid global demand and rising debt (with all its
juicy feedback loop growth crushing implications) are not what keeps hundreds of millions of Chinese
people fully employed. Of course the mere mention of China problems leads to thinking about
commodities; and commodity currencies. Given the battering commodities have already seen (the
Thomson Reuters Commodities index has made a round trip since the central banks started stimulating in
an effort to help the real economy), the question is can the major commodities, thinking primarily
industrial metals and energy, go much lower?
The short answer is yes.

Weekly .TRJCRB

4/5/1991 - 4/6/2018 (NYC)

Price
USD
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440

TR Commodities Index

420
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199.0146

Sitting on swing support

180
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Auto

1992

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2008

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The real economy continues to get whacked realtive to the financial side. Todays announcement by
China, relatively more dependent on the real economy, is an exclamation point on the massive disconnect
between the fiancial and real economy.

Black Swan Capitals 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 Swans full disclaimer, which is available at
http://www.blackswantrading.com/disclaimer

Yesterday a friend sent me a private global macro newsletter written by a man who has been doing this
this stuff for over sixty years at his own investment firm. This advistor said he is expecting it all to end in
calamityand soon.
He believes stocks are close to a supercycle top, evidenced by massive distribution of stock by insiders for
the last few years and his own form of wave analysis applied over a very long timeframe (I do not have
permission to share his charts unfortuantely).
For grins, I have taken the cash S&P 500 index monthly chart measured from the 1987 crash low (the
end of the world as we knew it at the time; at least for the mortals such as me) and counted up in an A-BC pattern. Wave C is slightly longer than A, which targeted to 2,056 (I am not pretending any validity
here, just playing with charts; but it gives you a clear indication of just how massive this rally has been
since the central banks got busy after the credit crunch in 2008). Is there any doubt after viewing this
chart where most of the money and credit created globally went?

My investment advisor friend thinks oil will visit the $10 per barrel level before this is over (back to the
mid-1980s prices); a fresh new low in oil today by the way. Is he nuts?
$10 oil seems extreme, but there is a lot of air between $43 and $10 even though there has already been
massive damage to the sector since those heydays of Peak Oil worship when black gold hovered near
$150 per barrel (all the cheerleaders for Peak Oil promised us that $200 oil was here to stay). If China
leaves the building, oil could go a lot lower.
Black Swan Capitals 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 Swans full disclaimer, which is available at
http://www.blackswantrading.com/disclaimer

The reason China is so important for oil prices at this juncture is because it doesnt seem the US
recovery is quite strong enough to pull the global wagon alone. From Russ Koesterich, global chief
investment strategist at BlackRock, writing in the Financial Times recently:
Even if you optimistically assume some acceleration in borrowing as income growth rises, an
older, more indebted consumer is unlikely to borrow at the same rate as pre-crisis. Assuming the
pace of household debt accumulation converges to a level consistent with nominal income growth,
this alone would suggest a 1 percentage point reduction in the rate of household spending relative
to the historical average.
The obvious way out of this dilemma is faster income growth. Not surprisingly, income growth
has historically been the single largest driver of changes in consumption. Looking at 20 years of
US retail sales data, the year-over-year change in personal income explains roughly 50 per cent of
the variation in retail sales growth.
The challenge is that a sustained acceleration in income growth is unlikely without stronger
productivity. Unfortunately, the latter is either proving elusive or, at the very least, more difficult
to measure in todays service-driven economy.

Black Swan Capitals 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 Swans full disclaimer, which is available at
http://www.blackswantrading.com/disclaimer

Without higher productivity, investors probably need to lower their expectations of what the US
consumer can deliver. To paraphrase Mark Twain, rumours of the rude health of the US consumer
may have been somewhat exaggerated.
In short, if the US consumer cant do it, there isnt anyone left who can trigger an uptick in global
demand. And all those cash flows supporting stock prices will likely start to wilt under the pressure of
falling top-line growth.
I realize even verbalizing the idea of $10 oil prices means thinking about a massive global deflatonary
scenariogreat depression type of stuff. This fear may seems the justifiction for central banks to keep on
doing what they are doing in an effort to keep hope alive.
But if the stock guys get spooked by China the rationale of the massive financial-to-real economy
disconnect may become the new investment theme instead of the dont fight the Fed theme. Of course
Chinese concerns have been in the market for a while and it hasnt seemed a big deal. But todays
devaluation adds a layer of complexity. Will central banks now backtrack on rate threats? Will emerging
market currencies get hammered more on the back of Chinese export competition al la a lower currency?
If China does export more, is it only stealing demand from other Asian competitors? Will Chinese
regulators clampdown on captial flowing out of China? Will the Chinese stock market benefit from
todays action given Chinese stocks look a bit cheaper in yuan terms? Will further official devaluation
trigger trader tarriffs? Will the Japanese yen rise in value on repatriaton flow?
How perfect would it be if Warren Buffets biggest acquisition to dateannounced yesterdayis the bell
ringing at the top?
As I have talked about many times before in these pages, the stock market is a massive repository of real
economy collateral value (on which many $s worth of lending depends); thus a fall in stocks will have in
a direct and immediate negative feedback loop into an already relatively weak real economy. Part of the
financial bubble game was triggering the positive feedback of the wealth effect. That is what central
banks were counting on when they became stock market cheerleaders instead of boring central bankers.
I am not arguing all the juice into financial assets hasnt had some residual benefit for the real economy
it certainly has. But I believe its fair to say the impact hasnt been as expected given the historical
weakness of the current so-called recovery. It seems to me the balance sheet recession is alive and well
and financial repression isnt the way to set the stage for fresh growth especially given the world lurched
from overleveragedthe credit crunchto even more over leveraged thanks to QE.
The negative feedback loop of falling stocks in a world of extremely tepid global demand might just make
the crazy idea of $10 oil a lot less crazy sounding. Stay tuned.

Three announcements from Black Swan Capital:

1. We have expanded our trade ideas to include currency futures traded on the CME in
addition to spot forex (we provide the side-by-side levels for spot and the nearby currency futures
equivalent).

Black Swan Capitals 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 Swans full disclaimer, which is available at
http://www.blackswantrading.com/disclaimer

2. We are starting a new Letter of Direction Program through JH Darbie & Company. It is
designed to allow JH Darbie & Co. execute the trade ideas offered in our Black Swan Forex (and
currency futures) service on your behalf.
3. We will be hosting a webinar, likely next week, where we will share our global macro view and
its impact on the major currencies in light of the Chinese devaluation, sharing some of our latest
ideas and our long-term global macro currency trading idea. Stay tune for registration in Currency
Currents this week. [Dan Uslander from Darbie & Co. will be on hand to briefly describe the
Letter of Direction Program and answer any questions.]
Regards,
Jack Crooks
President, Black Swan Capital
www.blackswantrading.com
info@blackswantrading.com
Twitter: @bswancap

Black Swan Capitals 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 Swans full disclaimer, which is available at
http://www.blackswantrading.com/disclaimer