A Quick Study of Indicators7/12/2007 6:34:05 PM
Technical analysis is infinitely interesting, particularly when you study the Wave Principle and the indicators that you can use with it. Bob Prechter has been doing that for decades, and he has some solid advice about how to handle the myriad indicators that inundate traders. For one, he says, stick with a few tried-and-true indicators rather than getting bogged down by too many. Read the rest of his interesting interview with a financial journalist in this excerpt from the book that collects dozens of his Q&As with journalists, Prechter's Perspective.
* * * * *
Excerpted from Prechter's Perspective, revised 2004
Let's look closer at your method, which is first of all a technical approach. How do you sort out all the indicators that are out there? How do you decide which ones you should listen to and which ones you should ignore?
Bob Prechter: I like to use indicators that help me anticipate. I don't like indicators that make me wait until after the turn has occurred, so I've spent all of my time looking at anticipatory indicators. If I get into the common situation where there are two or sometimes three valid interpretations under the Wave Principle, I use the indicators to help me decide which is more likely. But if an indictor fails me in a big way, I throw it away. An indicator that gives a completely false signal should be discarded.
So which ones have you settled on?
Bob Prechter: I don't like stochastics or other price velocity indicators that have ceilings. Unrestricted momentum indicators – percent rates of change, for instance – are better. Take the current day's price and compute its percentage difference from its price X time units ago, and do that over a broad time spectrum. Moving averages give signals far too late, as far as I'm concerned. Your goal as a trader should be to buy weakness and sell strength. While top and bottom pickers who don't have a method get destroyed, trend followers by design buy strength and sell weakness, which is a big strike against their potential profit and loss. What's more, every computer jock on the planet uses stochastics and a moving average system, so you're often buying and selling with the crowd, at least on a short-term basis. You need to use indicators that allow you to buy or sell ahead of the moving average contingent.
What about volume? Does it give you any clues as to where you are in the wave structure?
Bob Prechter: Other than price, volume is one of the most important things to watch. Generally, increasing volume on a fifth wave means that the wave will extend. Light volume in a supposed third wave means it's not a third wave. Both of these situations present invaluable information. Remember, it's happening at all degrees, so there is a lot of information to assess.
How do you weight various indicators?
Bob Prechter: The winningest formula is:
The Wave Principle, applied thoroughly and with discipline to price and volume activity
Percent rate-of-change indicators of varying lengths, from hours to years, to help confirm the wave status of the market and confirm trend change indications by divergence
A few tried-and-true sentiment indicators
Do your indicators as a whole affect the way you view any given indicator? Or does a certain ratio of bulls to bears or a certain divergence from a moving average always mean the same thing?
Bob Prechter: Many indicators have suffered tremendously because people treat them as absolutes instead of relating them to the rest of the market environment. It is never their levels that matter: it is their relationships to recent behavior. A momentum divergence, for instance, i.e., a lower high in a momentum indicator against a higher high in the market, is more important than the level of the oscillators.
What do you think of other methods of analysis that come out from time to time?
Bob Prechter: I look at them all when they come out. Almost every one is some variation, usually very minor, in a momentum indicator. You only need two or three types, and you only need the simplest construction. Advance-decline oscillators and rates of change in the broad market are all I feel I need.
If you want to use an exponential moving average, that's O.K. If you want to have a fancy combination of volume and advance-decline numbers and 60 other things, that's O.K., too. But when you plot them on a chart, they behave in exactly the same way as the simple ones. They give you signals for the same reason – either divergence or extreme readings.
Do hourly, daily and weekly charts work differently in different markets?
Bob Prechter: No. The market is fractal, so they all behave the same way. Of course, one degree of trend can be sideways while the other is trending. One of the most interesting comments in R.N. Elliott's Market Letters is his comment, "In fast markets, the daily range is essential, and the hourly useful…. On the contrary, when the daily range becomes obscure due to slow speed and long duration of waves, condensation into weekly range clarifies." In other words, keep them all and trade with the clear one.
What are the characteristics of a good technician?
Bob Prechter: One of the best that I know is Arthur Merrill. Arthur's most intriguing characteristic is his combination of open-mindedness and close-mindedness. He is open-minded in being willing to explore any idea that could be construed as reasonable, yet close-minded with regard to the fact that he requires statistical proof before relying on anyone's assumptions about the effectiveness of an indicator. Through the years, he validated numerous indicators while rejecting, for instance, the utility for stock market timing of the occurrence of full moons – a darling of the astro-economists – and also the forecasting value of earnings – a darling of fundamentalists. He also wrote a concise exposition of the Wave Principle as an appendix to his Behavior of Prices on Wall Street book.
What did Robert Farrell, who hired you at Merrill Lynch when you were first starting, teach you?
Bob Prechter: Patience, among other things. It wasn't just market-oriented patience, but professional patience in general. Letting things have time to take their course. And, really, this goes back to the philosophy of the Wave Principle itself: You've got to let trends develop to their fullest extent in their own time. What you can do is recognize the pace and adapt to it, and that brings a lot of peace of mind.
Sunday, July 15, 2007
Monday, July 2, 2007
Why W.D. Gann Says Stocks Will Top Out in 2007 (Video)
I'm sending you a new video that reveals a forecasting method that may be new to you. And if you're familiar with W.D. Gann, you probably have not seen his methods applied this way.
You can access it immediately here: www.GannGlobal.com/v/sp04?img=157&kbid=1471
This 20 minute video "pulls the curtains" on a revealing historical analysis of the S&P 500 using the methods of W.D. Gann.
Many traders and analysts try follow Gann's techniques. But, most of them lack the most important tools to replicate his most successful methods.
W.D. Gann was a student of history. He consulted history on a regular basis during his trading career.
And the study of history is the main part of his work that is most OVERLOOKED by "Gann Experts." In fact, his most highly valued secret, which he revealed in his $30k trading course was the Master Time Factor. This was Gann's observation of cyclical patterns in the markets, especially, 10, 20, 30, 60, and 90 year cycles (obviously a result of deep historical study).
In this new video you will see the historical record as Gann would have, using technology he did not have. You'll see the comparisons of the bull markets of yesterday, with the bull market of today.
This type of analysis requires a database of daily stock market prices back to 1928. In this video, you'll get to see a glimpse into that database, and an important forecast for the Stock Market that could have a profound bearing on the direction of the Stock Market in 2007.
Here's the video link again: www.GannGlobal.com/v/sp04?img=157&kbid=1471
Trade Smart. Not Often.
Brett Fogle
Options University
© Options University
925 South Federal Hwy
Boca Raton, FL 33432
You can access it immediately here: www.GannGlobal.com/v/sp04?img=157&kbid=1471
This 20 minute video "pulls the curtains" on a revealing historical analysis of the S&P 500 using the methods of W.D. Gann.
Many traders and analysts try follow Gann's techniques. But, most of them lack the most important tools to replicate his most successful methods.
W.D. Gann was a student of history. He consulted history on a regular basis during his trading career.
And the study of history is the main part of his work that is most OVERLOOKED by "Gann Experts." In fact, his most highly valued secret, which he revealed in his $30k trading course was the Master Time Factor. This was Gann's observation of cyclical patterns in the markets, especially, 10, 20, 30, 60, and 90 year cycles (obviously a result of deep historical study).
In this new video you will see the historical record as Gann would have, using technology he did not have. You'll see the comparisons of the bull markets of yesterday, with the bull market of today.
This type of analysis requires a database of daily stock market prices back to 1928. In this video, you'll get to see a glimpse into that database, and an important forecast for the Stock Market that could have a profound bearing on the direction of the Stock Market in 2007.
Here's the video link again: www.GannGlobal.com/v/sp04?img=157&kbid=1471
Trade Smart. Not Often.
Brett Fogle
Options University
© Options University
925 South Federal Hwy
Boca Raton, FL 33432
Friday, June 29, 2007
How To Understand Social Mood & Market Behavior
How To Understand Social Mood & Market Behavior6/29/2007 1:55:08 PM
http://www.elliotwave.com
Which came first, the chicken or the egg? Can't answer that classic conundrum? Then, how about this: Which comes first, the news event or the social psychology? In this excerpt from Prechter's Perspective, Bob Prechter answers a reporter's questions to get to the heart of which comes first.
*****
Excerpted from Prechter's Perspective, published 2004
Over the years, you've extended your stock market studies to the economy, popular culture and social trends. On Wall Street, it is common for observers to consider the market's performance to be a by-product of politics in Washington or the latest global crisis, with such phenomena cited as causal explanations for market behavior. According to you, the correct temporal relationship is the other way around. The market precedes social change, because the market is a "coincident register of mass emotion." Is there really a foundation for making such sweeping observations?
Bob Prechter: Yes. Exactly. Almost everyone believes that social actions cause changes in social psychology. If that is true, then events must be so perfectly determined that they create the Elliott wave patterns we see in the markets. For people to claim that the latest idea from the White House or the latest law passed by Congress or the latest statistic on the trade deficit or earnings or war or natural disaster has any effect on the market's pattern, that such things are determinants of stock prices in any way, is suggesting a far more radical view of the harmony of the universe than I am. In other words, to argue that events cause the state of social psychology is to argue that events are patterned, which is determinism. In that case, free will is invalid, in which case no one could make money from the Wave Principle, which we have shown can be done.
On the other hand, if social psychology guides the tenor of social actions, then it is only mass psychology, which is apparently a process governed by the unconscious mind, that need be patterned to produce structure in markets. Its patterns underlie social behavior, and behavior ultimately produces results in the form of social action that are viewed as important events.
So given moods, or wave counts as you call them, always produce the same events or similar junctures in the count?
Bob Prechter: No. Social events are manifestations of a patterned social mood, but the moods may be manifest in countless ways. Social actions are an outlet for the patterns of mass psychology, expressing it in diverse ways that give rise to the myriad events of human history.
You don't consider fundamentals?
Bob Prechter: On the contrary, socionomists, as I call us, are the only ones who do so properly. The patterns of social psychology that occur naturally are the fundamentals of the market. They are what cause what most people think are the fundamentals.
On Wall Street, analysts contemplate the ramifications of events in Washington, Tokyo and all points in between as much as the people who make their livings there. Then they proceed to build a market opinion from an initial observation about a political or social event that they see happening. They say, "The Democrats are going to win, and the president is going to do such-and-such, and that's going to cause stock prices to…."
Bob Prechter: Right. And they have about as much success predicting markets as economists have predicting the economy.
Isn't it possible that there is no pattern – that the five-wave subdivisions in the market since 1932 are an accident?
Bob Prechter: That's the typical response from Wall Street observers: "Another coincidence." When patterns of this tremendous size continue to work out time after time, it becomes a matter of faith to continue to believe that the Wave Principle is not reflective of stock market behavior.
It's an elegant idea, but in the workaday world of Wall Street, the average broker or economist or reporter is going to say, "Ellio-huh? The Fed just raised interest rates."
Bob Prechter: And what do they say when the market goes up despite a rise in rates?
They don't talk about it.
Bob Prechter: Right. They find a different event they perceive as positive and say the market went up today because of that. It's easier than saying it's because a given wave pattern may or may not be in effect. A rise in rates is a matter of fact. That's something a broker can sell, an economist can speculate upon, a reporter can write about and an investor can grasp, all without doing any research.
The logic may be compelling, but the implications that flow from this idea demand an enormous re-ordering of one's mindset.
Bob Prechter: Yes, and accepting it as depicting reality is a bigger step. I am confident that people will take this step, though. I may present a radical theory of social causality, but it is the only one that makes sense.
The Wave Principle presents a profound truth: sometimes the dynamics of social psychology are impelling the mass mood toward optimism, and sometimes toward pessimism, regardless of all news. Events do not shape the market: it's the forces behind the market that shape events. Events are results, and when you know what they result from, that is, social mood trends, you can often predict the general tenor of such behaviors. If one knows the species of a tree, he can predict what kind of fruit it will bear. Events are the fruits of a bull or bear market in social mood.
http://www.elliotwave.com
Which came first, the chicken or the egg? Can't answer that classic conundrum? Then, how about this: Which comes first, the news event or the social psychology? In this excerpt from Prechter's Perspective, Bob Prechter answers a reporter's questions to get to the heart of which comes first.
*****
Excerpted from Prechter's Perspective, published 2004
Over the years, you've extended your stock market studies to the economy, popular culture and social trends. On Wall Street, it is common for observers to consider the market's performance to be a by-product of politics in Washington or the latest global crisis, with such phenomena cited as causal explanations for market behavior. According to you, the correct temporal relationship is the other way around. The market precedes social change, because the market is a "coincident register of mass emotion." Is there really a foundation for making such sweeping observations?
Bob Prechter: Yes. Exactly. Almost everyone believes that social actions cause changes in social psychology. If that is true, then events must be so perfectly determined that they create the Elliott wave patterns we see in the markets. For people to claim that the latest idea from the White House or the latest law passed by Congress or the latest statistic on the trade deficit or earnings or war or natural disaster has any effect on the market's pattern, that such things are determinants of stock prices in any way, is suggesting a far more radical view of the harmony of the universe than I am. In other words, to argue that events cause the state of social psychology is to argue that events are patterned, which is determinism. In that case, free will is invalid, in which case no one could make money from the Wave Principle, which we have shown can be done.
On the other hand, if social psychology guides the tenor of social actions, then it is only mass psychology, which is apparently a process governed by the unconscious mind, that need be patterned to produce structure in markets. Its patterns underlie social behavior, and behavior ultimately produces results in the form of social action that are viewed as important events.
So given moods, or wave counts as you call them, always produce the same events or similar junctures in the count?
Bob Prechter: No. Social events are manifestations of a patterned social mood, but the moods may be manifest in countless ways. Social actions are an outlet for the patterns of mass psychology, expressing it in diverse ways that give rise to the myriad events of human history.
You don't consider fundamentals?
Bob Prechter: On the contrary, socionomists, as I call us, are the only ones who do so properly. The patterns of social psychology that occur naturally are the fundamentals of the market. They are what cause what most people think are the fundamentals.
On Wall Street, analysts contemplate the ramifications of events in Washington, Tokyo and all points in between as much as the people who make their livings there. Then they proceed to build a market opinion from an initial observation about a political or social event that they see happening. They say, "The Democrats are going to win, and the president is going to do such-and-such, and that's going to cause stock prices to…."
Bob Prechter: Right. And they have about as much success predicting markets as economists have predicting the economy.
Isn't it possible that there is no pattern – that the five-wave subdivisions in the market since 1932 are an accident?
Bob Prechter: That's the typical response from Wall Street observers: "Another coincidence." When patterns of this tremendous size continue to work out time after time, it becomes a matter of faith to continue to believe that the Wave Principle is not reflective of stock market behavior.
It's an elegant idea, but in the workaday world of Wall Street, the average broker or economist or reporter is going to say, "Ellio-huh? The Fed just raised interest rates."
Bob Prechter: And what do they say when the market goes up despite a rise in rates?
They don't talk about it.
Bob Prechter: Right. They find a different event they perceive as positive and say the market went up today because of that. It's easier than saying it's because a given wave pattern may or may not be in effect. A rise in rates is a matter of fact. That's something a broker can sell, an economist can speculate upon, a reporter can write about and an investor can grasp, all without doing any research.
The logic may be compelling, but the implications that flow from this idea demand an enormous re-ordering of one's mindset.
Bob Prechter: Yes, and accepting it as depicting reality is a bigger step. I am confident that people will take this step, though. I may present a radical theory of social causality, but it is the only one that makes sense.
The Wave Principle presents a profound truth: sometimes the dynamics of social psychology are impelling the mass mood toward optimism, and sometimes toward pessimism, regardless of all news. Events do not shape the market: it's the forces behind the market that shape events. Events are results, and when you know what they result from, that is, social mood trends, you can often predict the general tenor of such behaviors. If one knows the species of a tree, he can predict what kind of fruit it will bear. Events are the fruits of a bull or bear market in social mood.
Friday, June 22, 2007
Inflation Fears: Real or Bogus Market Mover?
Inflation Fears: Real or Bogus Market Mover?6/21/2007 6:56:46 PM
When stocks drop sharply in the course of three trading days – as they did earlier this month on June 6-8 – news commentators try to supply the reason. This time around, "inflation fears" seemed to win the lottery. However, Bob Prechter, debunks that reason in the June 15 issue of his Elliott Wave Theorist, which is excerpted for this Prechter's Market Perspective column.
* * * * *
Stocks Tumble on Global Inflation Fears—June 07, 2007, Fox News
Investors are getting a case of inflation jitters —June 7, 2007, Business Week
Inflation Fears Again Chill the Markets—June 8, 2007, New York Times
Stocks decline…inflation fears citedJune 8, 2007, Atlanta Journal-Constitution
According to economists and news commentators, the stock market fell on June 6 through 8 on “inflation fears.” Charts of the S&P 500, gold, silver, the US dollar and the S&P 500 Homebuilding Index show that the stated reason for investors’ fear is utterly bogus. As stocks fell on those days, gold cracked to its lowest level since January, and silver fell as well. Did investors sell gold and silver because of inflation fears?
At the same time, the US dollar had its second-biggest two-day jump of the year. Did investors buy the dollar because of inflation fears? Real estate prices were falling as well. We can’t blame inflation fears on the fall in bond prices, which can fall either on fears of inflation or fears of default brought on by deflation. Thus there is no basis upon which to argue that fear of inflation is the fundamental reason that investors sold stocks on June 6-8.
To be sure, investors, economists and others did feel fearful on those days, but these charts prove that the reported reason for their fear cannot be the real reason. It may also well be that stock sellers said they feared inflation. But these graphs prove that any such statement on those days could have been the result only of rationalization. Fear indeed motivated investors to sell, but their fear derived from a turn—however brief—toward negative social mood, which caused investors to sell stocks, bonds, gold, silver and real estate all at the same time.
Here are more ironies.
Credit inflation, deriving from an optimistic mood, has been holding the stock market up. Stocks have risen in dollar terms since 2002, and the dollar has been weak for most of that time. So inflation has been bullish for stocks, not bearish.
A slight social mood change toward the negative has also been motivating lenders, borrowers and legislatures to curtail the expansion of credit and debt, thus acting to turn the tide – though not yet decisively – toward deflation, the very opposite of the cited reason for the stock market decline.
When stocks drop sharply in the course of three trading days – as they did earlier this month on June 6-8 – news commentators try to supply the reason. This time around, "inflation fears" seemed to win the lottery. However, Bob Prechter, debunks that reason in the June 15 issue of his Elliott Wave Theorist, which is excerpted for this Prechter's Market Perspective column.
* * * * *
Stocks Tumble on Global Inflation Fears—June 07, 2007, Fox News
Investors are getting a case of inflation jitters —June 7, 2007, Business Week
Inflation Fears Again Chill the Markets—June 8, 2007, New York Times
Stocks decline…inflation fears citedJune 8, 2007, Atlanta Journal-Constitution
According to economists and news commentators, the stock market fell on June 6 through 8 on “inflation fears.” Charts of the S&P 500, gold, silver, the US dollar and the S&P 500 Homebuilding Index show that the stated reason for investors’ fear is utterly bogus. As stocks fell on those days, gold cracked to its lowest level since January, and silver fell as well. Did investors sell gold and silver because of inflation fears?
At the same time, the US dollar had its second-biggest two-day jump of the year. Did investors buy the dollar because of inflation fears? Real estate prices were falling as well. We can’t blame inflation fears on the fall in bond prices, which can fall either on fears of inflation or fears of default brought on by deflation. Thus there is no basis upon which to argue that fear of inflation is the fundamental reason that investors sold stocks on June 6-8.
To be sure, investors, economists and others did feel fearful on those days, but these charts prove that the reported reason for their fear cannot be the real reason. It may also well be that stock sellers said they feared inflation. But these graphs prove that any such statement on those days could have been the result only of rationalization. Fear indeed motivated investors to sell, but their fear derived from a turn—however brief—toward negative social mood, which caused investors to sell stocks, bonds, gold, silver and real estate all at the same time.
Here are more ironies.
Credit inflation, deriving from an optimistic mood, has been holding the stock market up. Stocks have risen in dollar terms since 2002, and the dollar has been weak for most of that time. So inflation has been bullish for stocks, not bearish.
A slight social mood change toward the negative has also been motivating lenders, borrowers and legislatures to curtail the expansion of credit and debt, thus acting to turn the tide – though not yet decisively – toward deflation, the very opposite of the cited reason for the stock market decline.
Monday, June 18, 2007
Futures: Double Zigzag, Single Opportunity6/15/2007 10:08:43 AM
By Nico Isaac
When you hear the word “zigzag,” what images come to mind?
A bolt of lightning
A sewing stitch
The path Paris Hilton’s party wagon takes down Sunset Boulevard
Well, in the world of Elliott Wave analysis, a zigzag is an important corrective pattern, primarily for its ability to earmark the end of an overly extended trend AND onset of a move in a new direction.
As for an official definition of the shape in question, Elliott Wave Principle – Key To Market Behavior delivers the goods in full:
“A zigzag is a simple three-wave pattern labeled A-B-C, in which the top of wave B is noticeably lower than the start of wave A. Occasionally, zigzags will occur twice or at most three times in succession, particularly when the first zigzag falls short of a normal target. In these cases, each zigzag is separated by an intervening “three” or “x”, producing what is called a double (or triple) zigzag.”
Also to bear in mind are these Zigzag Rules to live by:
Wave B NEVER moves beyond the start of wave A
Wave C is often the same length as wave A
Wave C almost always terminates beyond the end of wave A.
Now for the best part: In the June 12 Daily Futures Junctures, editor Jeffrey Kennedy presented this labeled close-up of a major MEATS market that shows a double zigzag at work in real time.
As you can see, the resolution of the zigzag pattern initiated a u-turn to the upside. And, according to Jeffrey Kennedy’s chart, this is just the start of the advance in prices.
So, what are waiting for? Check out the complete Daily Futures Junctures publication today via a risk-free subscription.
Subscribe to Futures Junctures Service nowand instantly download the Trader's Classroom Collection eBooks FREE!
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Gain complete access to EWI's advanced online tutorial, the 90-minute online Basics of The Wave Principle video, the subscribers message board monitored by our top analysts, and much more.
Tuesday, June 12, 2007
The coming collapse of the US dollar
The coming collapse of the US dollar
M R Venkatesh
The skew in the global financial system -- commonly called 'global imbalance' -- seems to be fast spiralling out of control.
For some time now economists have been engaged in the mother of all debates: whether the US dollar would collapse by as much as 40% when compared to other currencies (some are even betting on the US dollar going belly-up) or whether there would be an orderly devaluation -- that is, a gradual revaluation of other currencies vis-�-vis the US dollar.
In effect, the question that is confronting us is not 'whether' but 'when' and by 'how much.'
This global imbalance can be understood in economic terms by simply examining the massive size of America's twin deficits -- trade and budgetary. Put modestly, Americans have been living way beyond their means, consuming much more than what they could possibly afford and, in the process, borrowing far beyond their capacity for too long.
This was facilitated by a policy of maintaining weak currencies across the world, notably in Asia. This policy of maintaining a competitive exchange rate for their currency to boost exports has resulted in a race to the bottom amongst various countries.
Nevertheless, this arrangement suited countries, both Asian (with a huge unemployed population) and American, (as it provided cheap imports for its huge consumption binge).
While the going was good, everyone profited and expected the arrangement to continue indefinitely. Unfortunately, linearity as a concept has limited appeal in real life, much less is global macroeconomics.
No wonder, of late, countries are discovering that this arrangement has its limitations. The current account deficit of the United States translates into current account surplus of exporting countries. To cover this deficit, US borrows: this corresponds to the forex reserves of exporting countries. The crux of the issue is that no other country, barring the US, has such a huge consumption pattern and an ability to absorb this huge export surplus.
In substance, countries are producing their goods, exporting it mostly to the US, and parking the resulting export surpluses with the US to facilitate US to finance its imports!
Clearly, the global imbalance is a by-product of this mindless competition by various countries to devalue their own currencies and the reckless consumption in US. Naturally, it is indeed tempting to blame US consumption for this crisis. However, one must hasten to add that the emerging economies -- notably Asian countries, especially after the1998 currency crisis -- with their fixation for weak currencies, are equally to be blamed.
The net result? Well, consider these facts:
By mid-May 2007, the US National Debt stood at approximately at mind-boggling $8.85 trillion -- i.e. approximately $28,000 for every American.
The basic structure of the American economy is that the deficit of the US government is 4% of the GDP and the household sector 6%, which are offset by a domestic savings of 3%, largely from corporates, leaving a substantial national deficit of 7% to be covered by the capital flows from the rest of the world.
The current account deficit of the United States for 2006 is estimated to be in excess of $850 billion. This approximates to 7% of its GDP. Surely, even for the US, this is unsustainable.
In order to ensure that this money is routed into America and to sustain its gargantuan borrowing programme, the US has repeatedly raised its interest rate to its current levels of 5.5%. While the very size of the US debt makes any further increase in interest rates virtually impossible (as it would make borrowings uneconomical), any cut in interest rates to stimulate its economy and make it competitive would mean that the US may not get the money it requires to sustain itself.
On March 28, 2006, the Asian Development Bank [Get Quote] is reported to have issued a memo, advising members to be ready for a collapse of the US dollar.
Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money (that is the aggregate of US dollars circulating in the entire world -- technically called 'M3') in the US economy. This is the worst possible signal that the US Federal Reserve could have sent to the world.
Suspended sense of disbelief
Obviously, what aids and sustains the US dollar is a 'suspended sense of disbelief' amongst countries about the value of US dollar. Yet, common sense tells us that the excess supply will obviously result in a fall in the value of any product. The US dollar is no exception.
Late Iraqi leader Saddam Hussein was fully aware of this paradigm. Seeking to exploit the inherent weakness of the US dollar, Saddam wanted to trade his crude in Euros, which would have lead to a lower demand for the US Dollar and thereby triggered a dollar collapse. And those were his 'weapons of mass destruction -- WMD.'
And if some analysts are to be believed, Venezuela and Iran too possess the very same WMD. Naturally, it requires some specious arguments and military intervention to protect the US dollar. Never in the history of mankind has a national army protected the national currency so vigorously as the US Army has done is the past decade or so.
What is bizarre to note here is that despite the fact that crude is produced mainly in the Middle East; officially it can be purchased in dollar terms from one of the two oil exchanges situated in New York and London. Obviously, should Iran carry out the threat to commence oil trade in Euros or better still an oil exchange, the US dollar would come under tremendous pressure.
The US dollar is akin to the promissory note of a defunct finance company. It is common knowledge that a currency, when not backed by anything precious is just a piece of paper. When US abandoned the Gold Standard in early 70s, countries habituated by then to the US dollar under the Bretton Woods arrangement continued to accept the US dollar as an international currency without demur as the world was not prepared for any other alternative. Else, the global economy would have collapsed by 1971.
But the diplomatic silence did not solve the problem. It merely postponed it and it has come back to haunt us.
Post gold standard, by a tacit approval of the Organisation of Petroleum Exporting Countries (OPEC) and strategic manoeuvring, the US had ensured that its currency is implicitly backed by crude, instead of gold. This explains the American 'geo-political and strategic interests' in the Middle East.
But over time even this was found to be insufficient and consequently the oil standard of the 70s gave way to an implicit multiple commodity standard of today. Naturally, commodity prices -- including crude prices -- have soared in the past few years. Unfortunately, this arrangement too is failing the US. No wonder, the US dollar increasingly resembles a promisory note of a defunct finance company.
It is no coincidence that global trade in most commodities, including oil, is denominated in US dollars as the respective international exchanges are located in the US. To what extent are the prices of these commodities manipulated to protect the US dollar is anybody's guess.
However, it may not be out of place to mention that a barrel of oil which cost less than $10 to produce is sold approximately at $70 in the international market.
But as commodity prices go up it has lead to inflation across the globe. No wonder, countries are forced to increase their interest rates to fight inflation.
This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.
Doomed if it does, damned if it doesn't
Meanwhile, countries are increasingly realizing that the value of the US dollar that they are holding is fast eroding, whatever be the 'officially managed exchange rate.' And if fewer people want the US dollar -- as for instance when oil is traded in Euro the demand for the US dollar will fall -- it would trigger an avalanche.
No wonder, the US Fed is unwilling to make public the M3 figures, as it does not want the holding position of the US dollar to be publicised.
Interestingly, in such a doomsday scenario, some economists are still betting on central banks of other countries to defend the US dollar. It would seem that the US has 'outsourced' even this sovereign function to the central banks of other countries. After all, should the US dollar collapse, the biggest losers will not be the US but those who have US dollar-denominated forex reserves.
Naturally, countries holding US dollar reserves are caught on the horns of a serious dilemma -- should they seek to correct the global imbalance, it could result in the imminent collapse of the US dollar, and should they continue to defend the US dollar, they would be a long-term loser as the current arrangement has seeds of self-destruction.
While every central banker is conscious of this fact and thereby seeks to postpone the inevitable while nervously looking for his counterpart in any other country to break ranks and thereby trigger the collapse.
Surely, the emperor is without any clothes. There are only two possibilities from here on: Either we are witness a global meltdown of the US dollar, or allow controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.
The author is a Chennai-based Chartered Accountant. He can be contacted at mrv1000@rediffmail.com
M R Venkatesh
The skew in the global financial system -- commonly called 'global imbalance' -- seems to be fast spiralling out of control.
For some time now economists have been engaged in the mother of all debates: whether the US dollar would collapse by as much as 40% when compared to other currencies (some are even betting on the US dollar going belly-up) or whether there would be an orderly devaluation -- that is, a gradual revaluation of other currencies vis-�-vis the US dollar.
In effect, the question that is confronting us is not 'whether' but 'when' and by 'how much.'
This global imbalance can be understood in economic terms by simply examining the massive size of America's twin deficits -- trade and budgetary. Put modestly, Americans have been living way beyond their means, consuming much more than what they could possibly afford and, in the process, borrowing far beyond their capacity for too long.
This was facilitated by a policy of maintaining weak currencies across the world, notably in Asia. This policy of maintaining a competitive exchange rate for their currency to boost exports has resulted in a race to the bottom amongst various countries.
Nevertheless, this arrangement suited countries, both Asian (with a huge unemployed population) and American, (as it provided cheap imports for its huge consumption binge).
While the going was good, everyone profited and expected the arrangement to continue indefinitely. Unfortunately, linearity as a concept has limited appeal in real life, much less is global macroeconomics.
No wonder, of late, countries are discovering that this arrangement has its limitations. The current account deficit of the United States translates into current account surplus of exporting countries. To cover this deficit, US borrows: this corresponds to the forex reserves of exporting countries. The crux of the issue is that no other country, barring the US, has such a huge consumption pattern and an ability to absorb this huge export surplus.
In substance, countries are producing their goods, exporting it mostly to the US, and parking the resulting export surpluses with the US to facilitate US to finance its imports!
Clearly, the global imbalance is a by-product of this mindless competition by various countries to devalue their own currencies and the reckless consumption in US. Naturally, it is indeed tempting to blame US consumption for this crisis. However, one must hasten to add that the emerging economies -- notably Asian countries, especially after the1998 currency crisis -- with their fixation for weak currencies, are equally to be blamed.
The net result? Well, consider these facts:
By mid-May 2007, the US National Debt stood at approximately at mind-boggling $8.85 trillion -- i.e. approximately $28,000 for every American.
The basic structure of the American economy is that the deficit of the US government is 4% of the GDP and the household sector 6%, which are offset by a domestic savings of 3%, largely from corporates, leaving a substantial national deficit of 7% to be covered by the capital flows from the rest of the world.
The current account deficit of the United States for 2006 is estimated to be in excess of $850 billion. This approximates to 7% of its GDP. Surely, even for the US, this is unsustainable.
In order to ensure that this money is routed into America and to sustain its gargantuan borrowing programme, the US has repeatedly raised its interest rate to its current levels of 5.5%. While the very size of the US debt makes any further increase in interest rates virtually impossible (as it would make borrowings uneconomical), any cut in interest rates to stimulate its economy and make it competitive would mean that the US may not get the money it requires to sustain itself.
On March 28, 2006, the Asian Development Bank [Get Quote] is reported to have issued a memo, advising members to be ready for a collapse of the US dollar.
Since end March 2006, the US Federal Reserve has stopped publishing the quantum of broad money (that is the aggregate of US dollars circulating in the entire world -- technically called 'M3') in the US economy. This is the worst possible signal that the US Federal Reserve could have sent to the world.
Suspended sense of disbelief
Obviously, what aids and sustains the US dollar is a 'suspended sense of disbelief' amongst countries about the value of US dollar. Yet, common sense tells us that the excess supply will obviously result in a fall in the value of any product. The US dollar is no exception.
Late Iraqi leader Saddam Hussein was fully aware of this paradigm. Seeking to exploit the inherent weakness of the US dollar, Saddam wanted to trade his crude in Euros, which would have lead to a lower demand for the US Dollar and thereby triggered a dollar collapse. And those were his 'weapons of mass destruction -- WMD.'
And if some analysts are to be believed, Venezuela and Iran too possess the very same WMD. Naturally, it requires some specious arguments and military intervention to protect the US dollar. Never in the history of mankind has a national army protected the national currency so vigorously as the US Army has done is the past decade or so.
What is bizarre to note here is that despite the fact that crude is produced mainly in the Middle East; officially it can be purchased in dollar terms from one of the two oil exchanges situated in New York and London. Obviously, should Iran carry out the threat to commence oil trade in Euros or better still an oil exchange, the US dollar would come under tremendous pressure.
The US dollar is akin to the promissory note of a defunct finance company. It is common knowledge that a currency, when not backed by anything precious is just a piece of paper. When US abandoned the Gold Standard in early 70s, countries habituated by then to the US dollar under the Bretton Woods arrangement continued to accept the US dollar as an international currency without demur as the world was not prepared for any other alternative. Else, the global economy would have collapsed by 1971.
But the diplomatic silence did not solve the problem. It merely postponed it and it has come back to haunt us.
Post gold standard, by a tacit approval of the Organisation of Petroleum Exporting Countries (OPEC) and strategic manoeuvring, the US had ensured that its currency is implicitly backed by crude, instead of gold. This explains the American 'geo-political and strategic interests' in the Middle East.
But over time even this was found to be insufficient and consequently the oil standard of the 70s gave way to an implicit multiple commodity standard of today. Naturally, commodity prices -- including crude prices -- have soared in the past few years. Unfortunately, this arrangement too is failing the US. No wonder, the US dollar increasingly resembles a promisory note of a defunct finance company.
It is no coincidence that global trade in most commodities, including oil, is denominated in US dollars as the respective international exchanges are located in the US. To what extent are the prices of these commodities manipulated to protect the US dollar is anybody's guess.
However, it may not be out of place to mention that a barrel of oil which cost less than $10 to produce is sold approximately at $70 in the international market.
But as commodity prices go up it has lead to inflation across the globe. No wonder, countries are forced to increase their interest rates to fight inflation.
This has triggered an interest rate hike across continents and the US is finding it extremely difficult to sustain its current borrowing programme: it hardly has any elbow room to manoeuvre.
Doomed if it does, damned if it doesn't
Meanwhile, countries are increasingly realizing that the value of the US dollar that they are holding is fast eroding, whatever be the 'officially managed exchange rate.' And if fewer people want the US dollar -- as for instance when oil is traded in Euro the demand for the US dollar will fall -- it would trigger an avalanche.
No wonder, the US Fed is unwilling to make public the M3 figures, as it does not want the holding position of the US dollar to be publicised.
Interestingly, in such a doomsday scenario, some economists are still betting on central banks of other countries to defend the US dollar. It would seem that the US has 'outsourced' even this sovereign function to the central banks of other countries. After all, should the US dollar collapse, the biggest losers will not be the US but those who have US dollar-denominated forex reserves.
Naturally, countries holding US dollar reserves are caught on the horns of a serious dilemma -- should they seek to correct the global imbalance, it could result in the imminent collapse of the US dollar, and should they continue to defend the US dollar, they would be a long-term loser as the current arrangement has seeds of self-destruction.
While every central banker is conscious of this fact and thereby seeks to postpone the inevitable while nervously looking for his counterpart in any other country to break ranks and thereby trigger the collapse.
Surely, the emperor is without any clothes. There are only two possibilities from here on: Either we are witness a global meltdown of the US dollar, or allow controlled US dollar devaluation (read, revaluation of other currencies). If it is a global meltdown the global economy is doomed, if is an orderly devaluation, it is damned.
The author is a Chennai-based Chartered Accountant. He can be contacted at mrv1000@rediffmail.com
Thursday, May 24, 2007
Five Fatal Flaws of Trading- III and IV
"Fatal Flaw No. 3 – Unrealistic Expectations
"Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.
"Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.
"Fatal Flaw No. 4 – Lack of Patience
"The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
"That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
"All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
"How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.
"I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."
(Editor's note: You can read the rest of Jeffrey Kennedy's Trader’s Classroom lesson on the Five Fatal Flaws of Trading right now – and see 10 pages of chart-filled commodity analysis – in the just-published, May issue of Monthly Futures Junctures.
Look below for details on an exclusive, limited-time offer for A.M. Trader readers, which includes the 2-Volume Trader’s Classroom Collection eBook free.)
"Between you and me, nothing makes me angrier than those commercials that say something like, "...$5,000 properly positioned in Natural Gas can give you returns of over $40,000..." Advertisements like this are a disservice to the financial industry as a whole and end up costing uneducated investors a lot more than $5,000. In addition, they help to create the third fatal flaw: Unrealistic Expectations.
"Yes, it is possible to experience above-average returns trading your own account. However, it’s difficult to do it without taking on above-average risk. So what is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%? Whoa, let’s rein in those unrealistic expectations. In my opinion, the goal for every trader their first year out should be not to lose money. In other words, shoot for a 0% return your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the Hand.
"Fatal Flaw No. 4 – Lack of Patience
"The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
"That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
"All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
"How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month ... I promise.
"I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: 'Aim small, miss small.' I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small."
(Editor's note: You can read the rest of Jeffrey Kennedy's Trader’s Classroom lesson on the Five Fatal Flaws of Trading right now – and see 10 pages of chart-filled commodity analysis – in the just-published, May issue of Monthly Futures Junctures.
Look below for details on an exclusive, limited-time offer for A.M. Trader readers, which includes the 2-Volume Trader’s Classroom Collection eBook free.)
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