“If the U.S. inflates and devalues the dollar, gold will go much higher in price”  Jim Rickards. (See here).

The last dollar devaluation took place under President Roosevelt in 1934, when from being worth 1/20.67th of an ounce of gold in 1933, the dollar was devalued to 1/35th of an ounce of gold.

The last opportunity for devaluing the dollar took place in August 1971, when the dollar was still pegged at 1/35th of an ounce of gold. Nixon took the advice of Milton Friedman and made the worst mistake in history; Nixon did not devalue the dollar as he should have done, but simply took the US off the gold standard, such as it was, and thence forth the US refused to redeem dollars held by Central Banks around the world at any price.

Since August 15, 1971, the dollar can no longer be devalued.

Since the dollar is the reserve currency of all Central Banks in the world, all other currencies – the euro included – are only derivatives of the dollar. The proof of this statement is that the value of each and every currency in the world is calculated in dollars,

The world’s currencies are devalued or revalued against the dollar in the world’s currency markets every day of the year.

There is a “Dollar Index” which shows a value of the dollar against a basket of other currencies. However….continue reading HERE

“Nothing in the world can one imagine beforehand, not the least thing, everything is made up of so many unique particulars that cannot be foreseen.”

                                                                              Nostradamus

Friday Ramble: Do I believe in cycles?

I was asked if I believe in the cycle stuff: The cycles of war, business cycles, investment cycles, etc.  My answer was: The more and more I look and study this world and investment stuff—the more and more I believe in the cycle stuff.  The seeming irrationality of investors and world “leaders” suggests to me there are a lot more forces operating on human psyche than our Western-educated cause and effect minds can comprehend.

When I talk about technical analysis, to people such as my father in law, they usually consider it some type of black magic, because to them it is all about the fundamentals.  Give me hard reasons.  In short, people use fundamentals to forecast the future.  The problem:  What is fundamental today can be farcical tomorrow. 

Who in 1913 would have forecasted the horrors ahead starting in 1914? 

[I am reading Christopher Clark’s brilliant book, “The Sleepwalkers: How Europe went to War in 1914.” And I recently finished “1913: The year before the storm,” by Florian Illies; interesting anecdotes set chronologically during 1913.  One comes away thinking just how wonderful life was in Europe before the folly of war; and asking just how the politicos could screw it up so royally.  If you want a good recent rumination of some growing dangers, I suggest today’s article by Phillip Stephens, columnist for the Financial Times, “How the best of times is making way for the worst.”]

I often pontificate about global macro events and what it will mean for a specific investment class.  Sometimes I am right about how these events play out.  But even then, my investment idea may end up moving in exactly the opposite direction I anticipated.  And of course, the better outcome is when my event forecasting proves horribly wrong, but the investment idea attached (cause and effect of course) proves perfectly right. 

So how much confidence should I really have in this process of relying on global macro thematics to predict how investments will react?  I would submit any confidence level should be very far away from 100%. 

I thought this summary from Robert Prechter’s book, “The Wave Principal of Human Social Behavior,” was an excellent criticism of macroeconomic fundamental analysis:

“Economists devise today’s macroeconomic formulations under the presumption that people act like billiard balls following physical laws.  Unlike physics formulae, though, the concepts represented by the variables in these equations are often imprecise.  Many that are considered precise are not because they ignore the varying mental states of people. Often, the equations do not relate very well to the real world. 

“…The biggest flaw is macroeconomic formulations is their underlying assumption that the ‘billiard ball’ has a fixed mental state. However, the mental states of people vary, so their ‘reaction’ to a ‘cause’ will be different at different times.”

[Keep in mind this is Keynesian stuff Mr. Prechter is talking about.  The Austrian School of Economics advanced by von Mises makes it very clear equations have little value in the field of economics; it is about human action and subjective valuation; thus, the namesake for von Mises’ masterpiece–“Human Action.”] 

This is why when I am asked on occasion:  Are you sure X will fall or Y will rally?  My short answer is this: I am sure about nothing in the future.  What I am most sure about, because I hate to exercise and love to eat and drink, is that I will most likely be as fat tomorrow as I am today.  But God-forbid I contract some horrible disease; it will throw me off my routine and I might lose weight.  So, what I tend to be most certain about is uncertain.  I am forecasting myself enjoying a single-malt today—10-year Glenmorangie—once the market closes.  Cheers if I get there.

In the investment world, the only thing we can be somewhat sure about is how much risk we choose to take to bet on a particular idea.  [Granted this doesn’t ensure our risk will be limited: Can you say Lehman Brothers, MF Global, and Peregrine Futures?  Incidentally, all of which I have had some working relationship in the past.  Now there is an interesting correlation.]

My growing lack of faith in forecasting is why I have developed a particularly strong B/S filter when it comes to all those wizards out there who are able to talk about this stuff with such certainty; it is equivalent of the sound of fingernails against a blackboard for me.  Here is what I mean…

If you listen to one of the legendary investor types (the real deals) on television, or at a conference, where he is asked to express his market view, you will notice he likely stutters and hesitates and clarifies and questions his own views and sites other plausible scenarios as reasons why he might be wrong.  In comparison, the charlatan always appears certain about his market views. 

I think the legendary investor type understands he cannot forecast.  This is not to say he doesn’t have a tried and true system (edge) he confidently trades.  But it is to say he knows, in the end, this game of investing and trading is nothing more than a simple probability bet whether you are using fundamentals or technicals or a combination of the two.  And if the legendary type sees it this way, why do we think those who believe in the cyclical nature of collective human behavior to support investment ideas are nuts?

“Our idea is to avoid interference with things we don’t understand.  Well, some people are prone to the opposite.  The fragilista belongs to that category of persons who are usually in suit and tie, often on Friday’s: he faces your jokes with icy solemnity, and tends to develop back problems early in life from sitting at a desk, riding airplanes, and studying newspapers.  He is often involved in a strange ritual, something commonly called “a meeting.”  Now, in addition to these traits, he defaults to thinking that what he doesn’t see is not there, or what he does not understand does not exist.  At the core, he tends to mistake the unknown for the nonexistent. 

“… Because of such delusion, he is what is called a naïve rationalist, a rationalizer, or sometimes just a rationalist, in the sense that he believes that the reasons behind things are automatically accessible to him.”

                                                                                                    Nassim Taleb, Antifragile

So, do I believe collective human action often is expressed in a cyclical fashion, which represents repeating patterns?  Yes.  I would add most of these cycles are non-linear in nature (chaos if you will), but cyclical nonetheless. 

I am working on Part II of this Friday ramble and will send to you next week to help clarify my growing cycle view of markets and events with some specific examples.

Happy Friday!

Regards,

Jack Crooks

Black Swan Capital

www.blackswantrading.com

info@blackswantrading.com

Phone: 772-349-6883

As it tries to punish Russia for the latter’s dismemberment of Ukraine, the West is discovering that the balance of power isn’t what it used to be. Russia is a huge supplier of oil and gas — traded in US dollars — which gives it both leverage over near-term energy flows and, far more ominous for the US, the ability to threaten the dollar’s rein as the world’s reserve currency. And it’s taking some big, active steps towards that goal. As Zero Hedge noted on Tuesday:

Russia Prepares Mega-Deal With India After Locking Up China With “Holy Grail” Gas Deal

Last week we reported that while the West was busy alienating Russia in every diplomatic way possible, without of course exposing its crushing overreliance on Russian energy exports to keep European industries alive, Russia was just as busy cementing its ties with China, in this case courtesy of Europe’s most important company, Gazprom, which is preparing to announce the completion of a “holy grail” natural gas supply deal to Beijing. We also noted the following: “And as if pushing Russia into the warm embrace of the world’s most populous nation was not enough, there is also the second most populated country in the world, India.” Today we learn just how prescient this particular comment also was, when Reuters reported that Rosneft, the world’s top listed oil producer by output, may join forces with Indian state-run Oil and Natural Gas Corp to supply oil to India over the long term, the Russian state-controlled company said on Tuesday.

Rosneft CEO Igor Sechin, an ally of President Vladimir Putin, travelled to India on Sunday, part of a wider Asian trip to shore up ties with eastern allies at a time when Moscow is being shunned by the West over its annexation of Crimea. Rosneft said it had also agreed with ONGC they may join forces in Rosneft’s yet-to-be built liquefied natural gas plant in the far east of Russia to the benefit of Indian consumers.

We just have one question: will payment for crude and LNG be made in Rubles or Rupees? Or in gold. Because it certainly won’t be in dollars.

Rosneft, which is increasing oil flows to Asia to diversify away from Europe, did not provide any additional details but said it had discussed potential cooperation with Reliance Industries and Indian Oil.

It did not have to: it is quite clear what is going on. While the US is bumbling every possible foreign policy move in Ukraine (and how could it not with John Kerry at the helm), and certainly in the middle east, where it is alienating Israel and Saudi just to get closer to Iran, Russia is aggressively cementing the next, biggest (certainly in terms of population and natural resources), and most important New Normal geopolitical Eurasian axis: China – Russia – India.

There is only one country missing – Germany. Because while diplomatically Germany is ideologically as close to the US as can be, its economy is far more reliant on China and Russia, something the two nations realize all too well. The second the German industrialists make it clear they are shifting their allegiance to the Eurasian Axis and away from the Group of 6 (ex Germany) most insolvent countries in the world, that will be the moment the days of the current reserve petrocurrency will be numbered.

To understand why trade deals between Russia, China and India are potentially huge, a little history is useful: Back in the 1970s, the US cut a deal with Saudi Arabia — at the time the world’s biggest oil producer — calling for the US to prop up the kingdom’s corrupt monarchy in return for a Saudi pledge that it would accept only dollars in return for oil. The “petrodollar” became the currency in which oil and most other goods were traded internationally, requiring every central bank and major corporation to hold a lot of dollars and cementing the greenback’s status as the world’s reserve currency. This in turn has allowed the US to build a global military empire, a cradle-to-grave entitlement system, and a credit-based consumer culture, without having to worry about where to find the funds. We just borrow from a world voracious for dollars.

But if Russia, China and India decide to start trading oil in their own currencies — or, as Zero Hedge speculates, in gold — then the petrodollar becomes just one of several major currencies. Central banks and trading firms that now hold 60% of their reserves in dollar-denominated bonds would have to rebalance by converting dollars to those other currencies. Trillions of dollars would be dumped on the global market in a very short time, which would lower the dollar’s foreign exchange value in a disruptive rather than advantageous way, raise domestic US interest rates and make it vastly harder for us to bully the rest of the world economically or militarily.

For Russia, China and India this looks like a win/win. Their own currencies gain prestige, giving their governments more political and military muscle. The US, their nemesis in the Great Game, is diminished. And the gold and silver they’ve vacuumed up in recent years rise in value more than enough to offset their depreciating Treasury bonds.

The West seems not to have grasped just how vulnerable it was when it got involved in this latest backyard squabble. But it may be about to find out.

For Part 1-13 of The Currency War read HERE

About Dollar Collapse

It’s amazing how quickly China went from being the world’s savior to its biggest danger. To recap:

When the developed world stepped off a cliff in 2008, China responded by borrowing about $15 trillion and spending most of it on infrastructure. Roads, bridges, skyscrapers, power plants, whole cities went up around the country. The resulting demand for everything from iron ore to wind turbines helped offset contractions in the US and Europe, turning an incipient global Depression into nothing more than a severe recession.

But government-directed growth on this scale produces a mountain of misallocated capital which eventually comes back to haunt its owner. Lately, Chinese manufacturing has begun to contract:

China Output Contracts at Quickest Pace in 18 Months

The HSBC Flash China Manufacturing PMI shows Output Contracts at Quickest Pace in 18 Months. The overall PMI index, new orders, and production were all lower.

Key points

• Flash China Manufacturing PMI™ at 48.1 in March (48.5 in February). Eight-month low.
• Flash China Manufacturing Output Index at 47.3 in March (48.8 in February). Eighteen-month low.

Commenting on the Flash China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co – Head of Asian Economic Research at HSBC said: “The HSBC Flash China Manufacturing PMI reading for March suggests that China’s growth momentum continued to slow down. Weakness is broadly-based with domestic demand softening further.

And mass defaults are looming:

….continue reading HERE

“Successful traders are not gamblers, they are probability players.”

                                                                                      -Mark Weinstein

Technical analysis on these two particular charts suggest the intersecting actions in China could cause problems

It has been a bad idea to be a bear on China over the last few years (though not necessarily their stock market) based on the expectation the credit crunch would lead to a financial crisis there.
 
I say that because I was very much aboard the China cum-financial-crisis bandwagon. 
 
But no matter how you slice it, Chinese authorities have done a brilliant job of keeping all the balls in the air. As we know, there is often some type of transmission lag after a major global macro event. And the credit crunch bubble that popped may have been the mother of all bubbles.

Are we now about to see, or are already seeing, its lagging impact finally bubbling to the surface in China?
 
For every action there is a reaction.China’s actions to avert the credit crunch impact now seem to be intersecting. Here are two actions, for example:

CLICK THE LINK HERE TO READ MORE ...

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