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  • The Three Best Spots To Buy The US Dollar
    What the weekly charts say as worries about US economy fade.

    The dollar turned around in a big way on Thursday and Friday. The Fed held steady with its optimistic outlook and a slight uptick in economic data was all it took to reverse the dollar slump after the post-GDP slump.

    Looking at the weekly charts, a few look awfully attractive for US dollar buyers.

    1) AUD/USD

    There's a gravestone doji in what looks like a false breakout above 0.8000. The Australian economy is still very-much slowing. But in the week ahead it's all about the RBA. Stevens is one of the toughest G10 central banks to read. The latest chatter has been about cuts. I don't think they will happen and a bounce afterwards will provide a fresh opportunity to sell.

    AUDUSD weekly

    2) GBP/USD

    The cable chart is very similar as it topped out ahead of 1.5500 and then reversed in a gravestone doji. As Ryan wrote about earlier,the wheels are not coming off of the UK recovery yet but they're looking rather wobbly.

    The nearly-200 pip drop in the pound today is too much to chase but even a 50 pip bounce is enough to sell as election jitters ramp up early next week.

    Cable weekly

    3) USD/CAD

    There are a few reasons for not liking the Canadian dollar in the week ahead.

    1. Poloz is wildly over-optimistic about the economy.
    2. Canadian data on the Ivey PMI, housing starts and April jobs likely to be weak.
    3. Oil has risen in 7 straight weeks and is due for a pullback

    The third one is the main reason I like the trade in the week ahead. Oil companies reported earnings this week and there is absolutely no sign of slowing production. If anything, it was just the opposite. The risk I see is that WTI blows off to $65 and then starts lower but for all the declines in oil, the spec data still shows a very crowded long trade.

    There's probably a bit more time for patience in this one, perhaps even waiting for a retest of 1.2000 but I think an opportunity for longs is coming in the week ahead.

    USDCAD weekly

    Tags: FXC, FXA, FXB, Forex, USD
    May 01 6:11 PM | Link | Comment!
  • How Central Banks Are Fighting An Unwinnable War

    People will look back at the current period in economics and be aghast that policymakers were fretting about inflation.

    This is an age of unprecedented technological innovation aimed at driving down costs and boosting productivity along with totally free movement of capital and production to wherever employees will work for the least. And the private-sector organized labor movement has been obliterated.

    Anyone worried about any developed-world inflation is out of their mind.

    There are two power structures in Western economics that have been shaped by history into a perfect storm of stupidity.

    1. Germany, where some kind of mass-psychosis, Weimar Republic, WWII-guilt has manifest itself into near-biological fears of "zeee inflation".
    2. The United States, where current policy-makers came of age in the Volcker era. Economists build mental monuments to him and associate the following 20-year Golden Age in the US economy to his breaking the back of inflation. They want to be him.

    They're generals fighting the last war.

    (click to enlarge)German children playing with worthless money

    There's one Former Fed policymaker who gets it. Who sees the enemy at the gates -- 84-year-old former Fed Vice-Chair Alice Rivlin.

    She received a lifetime achievement award last month and had one of the clearest, most-succinct attacks on the baffling collective blindness.

    Rivlin: I don't think inflation is a threat for the foreseeable future. We used to think of inflation as the major thing that central banks had to guard against, but that was back when our economy was much more inflation-prone than I perceive it to be right now. Inflation happens when you have a roaring boom - wages are rising, labor markets are tight - and wages and prices get into a spiral. We're not in that situation right now at all. We have a slow-growth economy, slow growth in wages, considerable slack in the labor market. unemployment rates have come down but we still have very low labor force participation, and that is partly because our population is aging, but it isn't all because of that. Rates for prime-age men are unusually low- we don't know exactly why that is, but it indicates that there is slack in the labor market.

    So I don't see inflation as something we need to worry about right now. And even if it happened, even if we had some kind of shock that sent prices up for some reason, the Fed has the tools to stop inflation. That's not very hard. And we're unlikely to get into a self-perpetuating spiral because the economy is much more competitive than it used to be and because we haven't had inflation for such a long time. There is a whole generation of people who don't remember inflation. They don't know what it is. And so I think inflation is a non-existent threat.

    Here's the scariest thing.

    Central banks are fighting an unwinnable battle. The only way they can create the illusion of inflation is by artificially driving down currencies and fuelling an insane credit bubble.

    The truth about central banks is that they're a power structure. They can preach a brand of academic independence all day long but one thing is true about power: The aim and the always-corrupted purpose of power is to get more power; to hold onto power.

    If policymakers accept they will never meaningfully hike rates then the Fed is an afterthought -- a glorified bank regulator. A power structure simply cannot do that because it would destroy its power. It's impossible to abandon the power of markets hanging on your every word. Fed officials are forced to delude themselves that things will 'go back to normal' by putting blue dots on a chart predicting a 3.75% longer-run Fed funds target.

    (click to enlarge)Universal forecasts for 3%+ Fed funds in the longer term

    What's the solution?

    Accept that inflation isn't coming back, at least without a near-total structural economic overhaul. Central bank leaders need to look politicians in the eye and say "we've done all we can, it's your turn."

    Politicians have cowered since the crisis. Aside from a few Eurozone periphery countries with a metaphorical German gun to their heads, no one has done anything except pretending the good times are coming back again and trying to get re-elected.

    Cutting interest rates are a powerful tool but controlling an entire government is an order of magnitude more powerful. Where are the leaders?

    Apr 28 9:08 PM | Link | Comment!
  • In Defense Of Pumping Up The Stock Market

    Let's say that the most outlandish critics of the Fed are right -- that the Fed's number one priority is boosting the stock market. After all, Bernanke himself said the first thing he checks in the morning are futures prices on the S&P 500.

    Maybe pumping up the stock market isn't such a bad idea? Bloomberg's Tom Keene highlighted this chart.

    (click to enlarge)
    US gross private domestic investment

    It shows corporate America's unwillingness to invest. If spending had followed the trend it would have meant billions of job-creating projects.

    My theory on why companies haven't invested? They haven't had to. By cutting costs and sucking on the tit of low rates, executives have watched the S&P 500 rise 148% since the 2009 lows. That kind of rally gives CEOs job security and makes for some fat bonus payments. Shareholders are happy too.

    Despite the rally in stocks, the S&P 500 is still trading at a reasonably low P/E. Just on a normalization, prices of stocks can continue to rise without earnings growth (something we've certainly seen over the past year).

    P/E - green, S&P 500 - white

    What happens when P/E gets closer to the long-run average of 18-20? For one thing, shares will no longer rise unless companies can boost earnings. Executives will feel the pressure from stockholders to stop playing it safe and build earnings. What's one way to do that? By making investments in new infrastructure and equipment.

    The stock market always demands more and if Bernanke can pump it high enough, shareholders will demand that businesses start spending. The sooner we get there the better.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Jul 10 10:37 PM | Link | Comment!
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