Key News

• For all the concern over the $1.6 trillion U.S. budget deficit and record debt load, the dollar is as valuable now as 35 years ago. (Bloomberg)
• Japanese bank lending logged its biggest annual fall in more than four years in January as companies faced with overcapacity and a murky economic outlook steered clear of borrowing for capital investment purposes. (Reuters)

Quotable

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

                             George Soros

FX Trading – Where are we? Our best guess!
Long-time readers know we are big fans of the boom-bust theory of price action, as first I saw articulated by George Soros back in 1987 in his book, Alchemy of Finance. (It is by the way the same time I learned of Karl Popper and the black swan; and name our firm accordingly, back in 2003.)

We use the boom-bust construct to help us understand better, but never with anything approaching perfect knowledge (if one can ever approach such a thing), where we might be in the current cycle regarding the dollar.

A visual of the boom-bust looks like this:

A written summary, defining the stages:

1. The unrecognized trend; the beginning of a self-reinforcing process
2. The successful test
3. The growing conviction, resulting in a widening divergence between reality and expectations
4. The flaw in perceptions
5. The climax
6. A self-reinforcing process in the opposite direction

As you can see, this boom-bust cycle in a way mirrors the Elliott Wave cycle. Both are grounded solidly in human action, or the way human’s drive price action based on waves of sentiment (fear and greed), I think.

With anything in the financial world, one only never really knows until the gift of hindsight is revealed. Unfortunately we often listen to people who think they know— that is usually a big mistake. Everyone, and their mother, in this dollar cycle, seems to think they know exactly where the dollar is going. Of course as you well know by now, the buck is heading to zero!

We have seen it differently for a while. But only the gift of hindsight will determine if our guess (forecasts are simply guesses wrapped in a better package) is correct.

That said, we think we have witnessed the successful test phase of the boom-bust cycle and are at the very early stages of the growing conviction stage (in the Elliott Wave world that is often referred to as Wave three, usually the longest wave of the trend).

Dollar Index Weekly:

During the beginning of the Growing Conviction Stage you start to see signs of what John Percival (editor of Currency Bulletin) calls “conversion flow.” We are starting to see it in the form of positioning numbers and commentators coming around to the idea the dollar is “really” rising and finding some rationales to dispute the still lopsided, but cautious, dollar bearishness.

Today we saw a perfect example of that type of thing in the Bloomberg story listed first above. “The dollar is a valuable now as it was 35 years ago.” Cough, guffaw, hack…say what…you might be saying to yourself, if you are one who actually listened to the dollar doom and gloom crowd that do their best to scare the be-jesses out of you. Often these seers that always seem to have a handle on absolute truth are not currency analysts, but love to use the dollar to hawk much of their other wares. (That was a bonus just in case you hadn’t noticed.)

How can it be? Well, it just is. Conversion flow is sentiment changing. It can swing on a dime. Conversion from bear to bull is what creates the buying that powers the Growing Conviction Stage.

So our guess is we are early into stage 3, or wave 3, of this dollar multi-year bull market.

The key word in that sentence was “guess.” In about two- or three-months Mr. Hindsight will likely share the truth.