For the past couple of years the European Central Bank has been the only sane inmate in the asylum. Unfortunately, in a crazy world being sane just gets you into trouble. Sound monetary policy leads to a strong currency, which in a currency war is tantamount to unilateral disarmament. Unable to export sufficiently to a world of weak currencies, the eurozone is tipping into deflationary depression (with several members already there and unable to get out). So…

….continue reading about Draghi’s plan HERE

Here’s what FX traders should do in the meantime …

The euro has been strong this year against the US dollar. 

The rationale for euro strength? Money flow into Europe, both speculative and longer-term portfolio flow as the European banking system deleverages global credit lines and brings money home. 

But, over the intermediate- to long-term, the strongest driver for the euro and US dollar relationship has been relative yield, with expectations impacted by relative economic growth forecasts. 

Things will change …

Presently, there is quite a large divergence in play, i.e. the path of euro-US dollar has tightly followed the yield differential. If it is rising in favor of the Eurozone, then the EUR/USD pair tends to follow in similar fashion, and vice versa.

This year, however, the yield differential is moving strongly in favor of the US which is to be expected given the relative growth forecasts comparing the US and Eurozone, but EUR/USD continues to rise. 

I believe this divergence gap will be closed,

I believe we’ll see a sharp decline in the EUR/USD rate in the months ahead as price turns to reflect the value suggested by the yield differential.

What should we do now?

Well, long-term minded investors could sell short immediately using a euro ETF. But the real money to be made is directly through the forex market.

Now one probably shouldn’t short EUR/USD and then just forget about it. That’s an easy way to get burned. Rather, one should be prepared for a substantial euro decline without necessarily betting on it.

That means trust the short-term technical setups. Make money based on what the charts say NOW. And let the big trades (like a euro implosion) happen when they may. If you’re consistently applying a proven and structured trading framework, I can assure you you’re not going to miss the bus on the euro trade.

If you don’t consider yourself equipped, then start preparing.

Jack Crooks

Black Swan Capital

About Jack Crooks

President & Chief Trading Officer

Jack has over 25 years of experience in the currency, equity, and futures arena. He has held key positions in brokerage, investment research, money management, and trading.

Jack is founder and president of Black Swan Capital LLC. He was also founder of Ross International Asset Management (a Registered Investment Advisory firm specializing in global stock, bond, and currency asset management for retail clients), General Manager of Plexus Trading (specializing in currency futures and commodities trading) and Black Swan Capital Management (a commodities advisor trading firm specializing in foreign exchange trading).

He’s recently outlined my entire personal trading framework, the nuts and bolts of what helped my members harness the potential to make as much as 42% ROI last year. And He’s sharing it with those who are committing themselves to improving their trading.
 
Click HERE to find out how you can (and should) jump at this opportunity to map out trading success and profit in forex.

On Tuesday I shared with you an equation which sufficiently explained why capital flow was a valid rationale for the rally in the euro against the US dollar.with you an equation which sufficiently explained why capital flow was a valid rationale for the rally in the euro against the US dollar.
 
But what if the capital flow equation was simply an analytical fit to a flawed story? 
 
I ask because there is another equation I want to share with you today. And I believe it boils all this stuff to its essence: Sentiment based on our flawed forecasts of the future. 

CLICK THE LINK BELOW TO READ MORE …

https://jack-crooks-jw02.squarespace.com/currency-currents/2014/4/3/euro-is-an-overvalued-momentum-trade-equation-2-says-so

Major Crisis Coming

Investors should take every precaution right now to protect their money from a major market disaster that will destroy the economy and impoverish millions of Americans.

That’s according to legendary investor Jim Rogers, who delivered his frightening warning recently on Yahoo! Finance.

Rogers believes we’re heading for a massive collapse of the dollar which will cause interest rates to soar to record levels. He warned investors should stay clear of the dollar and other fiat currencies.

“There is no sound currency anymore, “Rogers stated.

“There’s no paper money in 2014 and 2015 that’s going to be worth much of anything,” he added.

According to Bloomberg, the U.S. dollar has indeed reached a startling two-year low – its weakest since November 2011 – with consumer confidence dropping like a rock.

And the U.S. dollar has lost 38.5% of its value since 2002.

“For the first time in recorded history we have all major banks and central governments around the world printing huge amounts of money,” Rogers said. “This has never happened in world history and so the world is floating on an artificial ocean… of lots and lots of printed money,” said Rogers.

Rogers noted that the situation will only get worse if the government continues to “kick the can down the road.”

“When the can goes over the road, we’re all going to go with it,” he said.

“The debt is going higher and higher. The money printing is going higher and higher.  We’ve had 50 or 60 years of success in America,” he said. “You’ve got to pay the price someday whether you like it or not. The longer you delay the day of reckoning, the worse the day of reckoning is going to be.  This is not going to be fun.”

He added that the problems will not be solved with the Federal Reserve intact.

“Abolish the Federal Reserve,” Rogers stated. “The world has gotten along quite famously and well without central banks for most of world history.”

“America has had three central banks in our history, the first two disappeared,” he said. “This one’s going to disappear too because they keep taking on huge amounts of debt… they keep leveraging up the balance sheet… they keep making mistake after mistake… they’re printing money, it’s going to self-destruct before it’s over.”

He argued, “We’d be better off with no central bank than this central bank.”

Finally, Rogers predicted that Americans will soon abandon the dollar for an alternative currency.

“Maybe it will be Bitcoins,” Rogers predicted referring to the digital currency that’s been taking the world by storm.

also:

While the dollar continues to lose value, this alternative currency has skyrocketed in popularity…and value.

Just a year ago it was trading under $20. Yet its price recently topped $1,200 for a single Bitcoin, turning many smart investors into instant millionaires.

Bitcoin has become so popular that Congress recently held hearings to determine if they were safe and legitimate.

They voted resoundingly YES.  Ron Paul, the senior U.S. Representative from Texas, said, “Bitcoins are fantastic.”

Microsoft founder Bill Gates called Bitcoin a “Techno-tour-de-force.”

And Google executive chairman Eric Schmidt said point blank: “It’s changing society.”

The White House has also taken notice.

In October, President Obama summoned Google CEO Schmidt to the Oval Office and asked him if Bitcoin was “something he has to worry about.” Attending this meeting was an advisor to the Secretary of State, a Director of the International Crisis Group, and the Vice President of the Council on Foreign Relations.

They discussed this new form of money and how they believed it was “changing society.”

And judging from what is taking place in America and all over the world that is exactly what’s happening.

Already, 200,000 companies in the United States can currently pay their employees with it, while 700,000 American businesses accept them as payment, including Walmart, CVS, Lowe’s, and NIKE.

You can use Bitcoin to buy gold & silver…. Or even Domino’s pizza and have it delivered.

In Texas, a man who recently converted 1,200 U.S. dollars into this new money because of its rapid rise in value, turned around and bought a Porsche with it.

In New York, a luxurious condo in the exclusive, Trump Soho complex was recently listed for $1.9 million.  But you couldn’t pay for it with dollars, a check or wire transfer.  The seller would only accept Bitcoin.

In France, you can have your salary paid in it, in Finland, dentists will accept payment in it. And in New Zealand, one company will even let you pay for a private flight to outer space with Bitcoin.

It’s seems to be creating a new, international monetary system that some economists believe could solve all the problems we face with fiat currencies – including the kind of devastating collapse predicted by Jim Rogers.

The founders and financial backers of Facebook, Skype, Yahoo…Major players in natural gas and oil…As well as with AT&T and Fidelity… are all moving into Bitcoin.

Some eBay auctions are now being held in it.  MoneyGram is using it to facilitate millions upon millions of dollars’ worth of financial transactions.

Western Union is beginning to assess the technology necessary to harness it. 

Quotable

“In finance you are playing against God’s creatures, whose feelings are ephemeral, at best unstable, and the news on which they are based keeps streaming in.”

                                                                                                       – Taken from Why Markets Crash, Didier Sornette                                                                 

Commentary & Analysis

Euro Morphing Into the Old Yen—the Equation Says So

What if the euro is morphing into the old Japanese yen?  The Japanese yen which continued to rally for years against other major currencies despite Japan remaining tightly in the bear-hug of deflation for over a decade and nominal rates at zero (ZIRP) for many years?

There is growing concern the Eurozone is falling into a Japanese-style deflationary trap as the headline inflation rate across the zone continues to decline.  Many expect the European Central Bank will be forced to cut interest rates. 

I’m not sure declining headline inflation should be a big surprise given the unleashed domestic deflationary powers of austerity in an effort to save the single currency regime.  But one interesting aspect of this is the surprising strength of the euro even though the Eurozone is losing the yield and growth game to the United States.

I want to share with you an equation I took from George Soros’s book, The Alchemy of Finance, when I read it back in 1987; which is doing a pretty job of justifying the path of the euro. 

↑ T – Trade Surplus

↑ N – Non-speculative Capital

↑ S – Speculative Capital

↑ e – Exchange Rate

1.     The Eurozone is still sporting a nice trade surplus.

2.     Non-speculative capital flow seems to be increasing as banks in Europe delever outside of Europe in order to bolster domestic capital.

3.     Speculative capital flow into periphery bonds, turnaround assets, and buying bad debt (vulture funds) has been brisk, as international fund managers find opportunity across Europe. 

4.     Therefore, the exchange rate is rising despite what from the outside appears to a relatively bad economy.

Is it that easy?  No.    

Markets are full of rational and irrational beings; and those beings can quickly move through various stages of rationality when it comes to money decisions.  So, if we consider a situation whereby irrational beings are participating and impacting on the outcome they are also attempting to forecast (Soros’ Theory of Reflexivity), you can see the difficulty in using equations to determine outcomes.  It’s highly unlikely any Holy Grail-type equation will emerge until Chaos theory and computing power are much further advanced. (That’s a story for another day.)

Despite their limitation in predictive power, I do think equations play an important role as a framework for scenario analysis (I create my own homegrown equations to try to better understand money flow; all are flawed to one degree or another).  In the case of the equation I shared above, even if it breaks down as a rationale for the euro, i.e. the euro tanks, I do think it is helpful for thinking about how much flow impacts a currency and can run contradictory to the usual consensus regarding headline GDP or levels of interest rates. 

In retrospect, Soros’ equation was an excellent framework for understanding why the Japanese yen remained strong despite Japan’s dismal economic woes.  At the moment, it seems to be doing a pretty good job of defining rationales for euro strength.  But Mr. Draghi is back behind the microphone on Thursday; so stay tuned.

INTERESTED IN THE BLACK SWAN FOREX SERVICE ?  IF YOU WISH TO SAMPLE THE SERVICE, JUST SEND US AS NOTE – HERE

Regards,

Jack Crooks

Black Swan Capital

www.blackswantrading.com

info@blackswantrading.com

Phone: 772-349-6883

….more

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Jack Crooks
Black Swan Capital