FX Update: No Bretton Woods III just yet ...

The IMF/G20 finance minister meeting yielded nothing of import over the weekend – not a tremendous surprise for market participants, as global markets try to decide whether there are more piles of fiat currencies to burn or whether enough is enough for now.

Our favorite quote of the day come from a Bloomberg article about the failure of the G20 finance ministers to come up with a resolution to the currency disputes: “Finance ministers and central bankers pledged cooperation, yet did little to show they would alter their ways beyond agreeing to let the IMF study the matter”. Nothing like agreeing to study something to show commitment! Another part of the article talks about China being accused of undervaluing its currency while the developed countries were accused of flooding the emerging markets with capital. Both sides have a good point. Also, the latter accusation shows how the “decoupling” theme is revealed as a self-fulfilling prophecy because how can EM economies not grow when they are bursting at the seams with new funds and the credit booms they trigger?

This current boon to growth is also a risk, however, a risk that will be made evident if the capital flows stop or even reverse. As we have fretted endlessly over recent weeks, however, we ask again what the catalyst would be for such a change of heart by this market? We’re getting a bit of uncertainty in the charts in key instruments like AUDUSD and Gold, but as long as the status quo is maintained, the pressure mounts and mounts on the USD, with only extremely lopsided market positioning the salient risk. And the more lopsided the market becomes, the more violent the correction potential – so hang on to your seats, everyone, as we’ve already gone far and there is plenty of energy pent up in this market if the current paradigm is disappointed or refuted at some point.

Chart: EURUSD
EURUSD showing a bit of uncertainty even as it recently vaulted beyond the 55-week moving average and the 0.618 Fibo retracement area around 1.3900. This could just be a pause as the market contemplate whether it wants to take the pair above the 1.40 level or signs of larger consolidation. Note that momentum has come off somewhat after the last two days of “long-legged doji” candlesticks – classic markers for uncertainty. Note also that EURUSD rallies and sell-offs often pause close to major big figures (1.50 on the upside last time around and just below 1.20 on the downside.)

Looking ahead
Watch out for the parade of Central Bank officials speaking from Washington this week, though most of the focus will be on tomorrow’s FOMC minutes release, which might round out the market’s knowledge of how heavily the Fed is leaning to move on QE in November and the degree of dissent within the FOMC on whether QE is warranted at all. Remember that the composition of the FOMC changes rather dramatically at the first of the year. (We can’t help but wonder if some of the dissenting voices get loud as the more clever dissenters (are there any?) realize that Bernanke’s policies are doomed and they might smell political opportunity…)

Below we look at a few data highlights this week. Note that this is by no means a complete calendar of upcoming events. In particular we have left out a number of key CB speakers out this week, so watch out for those on a day to day basis:

Tuesday

• UK Sep. RICS House Price Balance – this is the leading survey on UK housing and suggests very rapidly falling prices lately
  Australia NAB Business Confidence/Conditions – was coming off in recent months from very high levels, but the August Confidence number was quite strong at 11.
• UK Sep. CPI/RPI – the BoE really needs a solidly sub-3.0% headline CPI figure and core CPI well below 2.5% (expected are 3.1%/2.6%) to get the numbers headed in the right direction relative to the BoE’s dovish inflation forecast.
• UK Aug. Trade Balance – last month’s deficit was a modern record – how can the GBP escape becoming a poster child for further devaluation in this current environment if risk appetite stays up and we get another bad figure?
• US FOMC Minutes – a bit more insight into the internal FOMC debate – and very critical for the themes this market is currently trading

Wednesday

• Canada Aug. New Housing Price Index – tick-tock on the Canadian version of the housing bubble…this will offer an interesting data point.

Thursday

• New Zealand Sep. REINZ House Price Index/House Sales – there’s a stale bubble in NZ housing as well. Prices have flattened out, but not yet turned down.
• New Zealand Aug. Retail Sales - retail sales have leveled out in recent months
• Canada Aug. International Merchandise Trade – a new record large deficit in July and no prospect for improvement should serve as a brake on any further CAD appreciation
• US Aug. Trade Balance – Jul. finally saw a sharp improvement that may be a result of a slowing of inventory building and weaker domestic demand.
• US Sep. PPI – consensus expectations are for a modest rise and commodity input prices are up sharply of late. The core PPI is well off the lows of the cycle (1.5% YoY is consensus)
• US Weekly Initial Jobless Claims – the trend is definitely going the right way, but we need this well below 400k a week and possibly 350k to really see an improvement in the US job market.

Friday

• Canada Aug. Manufacturing Sales – signs of a decline developing as inventory restocking mini-boom may be behind us.
• US Sep. CPI – CPI releases are critical now that the Fed decided to single out low inflation as a key policy concern with the last monetary policy statement.
• US Sep. Retail Sales - The US consumer hasn’t completely gone on strike yet – sales have been slow, but no clear signs of a decline just yet – though the last time around, clear declines in end consumption were not evident until mid-2008 even though the recession began in late 2007.
• US Oct. Empire Manufacturing - the first of the major regional manufacturing PMI
• US Oct. Preliminary University of Michigan Confidence - confidence has clearly been declining again lately.

Economic Data Highlights

• Norway Sep. CPI out at +0.6% MoM and +1.7% YoY vs. +0.8%/+1.9% expected, respectively and vs. +1.9% in Aug.
• Norway Sep. Underlying CPI out at +0.7% MoM and +0.9% YoY vs. +0.9%/+1.1% expected, respectively and vs. +1.4% YoY in Aug.

Upcoming Economic Calendar Highlights

• EuroZone ECB’s Trichet to Speak (1600)
• US Fed’s Yellen to Speak (1845)
• UK Sep. BRC Retail Sales Monitor (2301)
• UK Sep. RICS House Price Balance (2301)
• Australia Sep. NAB Business Conditions/Confidence (0030)
• Japan Sep. Consumer Confidence (0500)

How to Survive and Thrive in the Age of Turmoil

Gary’s Note: International man Simon Black explains that we’ve entered the Age of Turmoil. The old system of prosperity based on debt is emphatically over and those who cling to the old ways will not do well to say the least. Those who embrace the new rules will find abundant opportunities and not only survive, but thrive. In order to thrive, read on...

Whiskey & Gunpowder
By Simon Black 

Dallas, Texas, U.S.A.

How to Survive and Thrive in the Age of Turmoil

I was in Paris recently, in a park near the Louvre museum enjoying a lazy summer day. I wasn’t the only one with such a great idea, there were probably a few hundred others enjoying the sunshine — children playing football, kissing lovers entwined on the grass, businessmen on a lunch break…

You can imagine my surprise when I looked up and saw a squad of French infantry troops on patrol through the park, brandishing assault rifles at the ‘ready’ (essentially holding the weapon in a fire position with index finger over the trigger).

The only thing missing to complete the picture would have been Taliban forces and the Afghan countryside.

I was shocked at the display, wondering what possible threat could necessitate sending infantry troops through one of the world’s most peaceful city parks. Even more, though, I was shocked that no one else seemed to be shocked.

This sort of security charade has become commonplace. Ridiculous and unnecessary shows of force are simply accepted in today’s world; our governments blame faceless, conceptual enemies like ‘terrorism’ and have convinced everyone that such measures are for the common good.

Think about it — when taking public transportation or patronizing public buildings, how many times do you see signs or hear announcements that start with, “Ladies and gentlemen, for the safety and security of all passengers…”

This wasn’t the case 10-years ago. If French troops went marching through Paris in 2000, the whole city would have gone nuts. In fact, consider many of the other ways that the world has changed so drastically over the past 10-years:

1. The endless War on Terror and the rise of police states around the world
   
2. Elimination of any semblance of financial privacy
   
3. The bursting of four major bubbles — stocks, credit, derivatives, property
   
4. Developing nations’ increasing economic dominance
   
5. The end of America’s economic and diplomatic primacy
   
6. The greatest global economic decline since the Industrial Revolution
   
7. Rising world population coupled with food and water shortages
   
8. Loss of confidence in major institutions: government, banks, corporations
   
9. The growing, addict-like social dependency on technology
   
10. Central planning in the world’s most “free” economies

Lying there on the grass in Paris hoping to not get clipped by a negligent discharge, I started thinking about the boiling frog.

The allegory illustrates that when you throw a frog in a pot of boiling water, he immediately senses danger and jumps out. When you put him in cool water and slowly bring it to boil, the frog won’t sense danger until it’s too late.

The changes over any decade are remarkable, but what’s happening now is vastly different. In the next ten years through this period of dramatic change, your country, your business, your neighborhood will look nothing like they do today.

In the past, the world ran on a system of endless debt and consumption; everyone played a part. Students would rack up huge debt at university and in turn enslave themselves immediately to corporate jobs in order to service the debt.

Social reinforcement was a powerful mechanism, encouraging people to indebt themselves further through mortgages, car loans, and credit cards. Conspicuous consumption became a social tradition, and corporate profits surged as people filled their McMansion garages with useless imported trinkets.

For those who got in early and played by the rules, the system was very generous. In exchange for unwavering trust in the system and continued indebtedness, people were rewarded with large salaries, excellent standards of living, soaring investment returns, home price appreciation, health benefits, and generous retirement plans.

In fact, the baby boomer generation, which rode the bulk of this tide, is the most prosperous generation to have ever existed in the history of the world.

Little by little, though, this system has been changing. We have spent decades living in a period of unsustainable fiscal irresponsibility. The crisis is accelerating and the consequences are now being realized.

These economic consequences will drive future political decisions, geopolitical tensions, social stability, demographics, crime rates, resource availability, immigration policy, police activity.

They will even affect the reliability of our infrastructure, utility grids, and food transportation networks, leading to a significant reduction in standard of living for hundreds of millions of people.

Undoubtedly, we have entered what I consider to be the Age of Turmoil — a time that is marked by exceptionally rapid change and fluctuating crises.

Many people will resist the change and instead cling desperately to the old system — the cycle of debt and consumption that provided jobs, stability, and prosperity. These people will have their lives turned upside down because that system is gone forever.

The game as we know it is being reset, and the new rules have not yet been written. For those who are well prepared, this is a time not of fear, but of once in a century opportunity. During this rough period, the die shall be cast for generations. Fortunately, we can see what’s coming and there is still a bit of time to act.

You can survive and thrive in the Age of Turmoil and over the next several days I intend to lay out a set of core principles which, when adopted, can shelter you from most of the pain, and position you and your loved ones to reap great rewards.

I sincerely believe this series of dispatches are the most important I’ve ever written so please stay tuned and, even if you’ve never commented before, I’d love to have your feedback on each of these important letters. Starting with this question:

Do you agree that we’re in the initial phases of the Age of Turmoil?

Regards,
Simon Black
for Whiskey & Gunpowder
(originally published September 7, 2010)