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“Oft expectation fails, and most oft where most it promises; and oft it hits where hope is coldest; and despair most sits”.
                                          William Shakespeare

Commentary & Analysis
Foiled again euro bears by the observer-expectancy effect! Ouch!

Ugh…just when it looked safe to short the euro for all its worth, Mr. Market draws a line in the sand at 1.40, and optimism over another bailout reigns down on the bears. Ouch! We ignore Willy at our peril.

Many of you already know this; it seems when everyone expects something to happen, it becomes less probable it will happen. Or put another way, when everyone falls in love with the same story, there is likely already too many positioned accordingly. Thus it only takes a slight change to the story at the margin to nullify its expected impact and lead to a self-reinforcing move, however large, in the opposite direction. I say however large because the bigger the change in price, the more it can change expectations on the fundamentals. Fundamentals and price are a continuous feedback loop. It is much more than cause and effect in the social sciences when the participants’ expectations can impact the outcome. Confused? Join the club.

Or put another way:

I think this drug will help. So I take the drug and it does help. But I don’t know it is a placebo. I expect this rationale to drive price. Prices are indeed going my way. But I don’t know that my rationale is all wet.

Or put another way: the market represents a continuous “dynamic disequilibrium” machine, as Soros said many years ago. This “dynamic disequilibrium” seems to play out in fractals i.e. across all time frames. Thus the larger story, the less it becomes a straight one way movement in price action. Expectations or those solid rationales need to be crushed by the market one by one, over time. And during that time, what we call “backing and filling” in price, represents those fractals of hope that the story is still intact; this is the process of conversion flow.

Unfortunately, playing in leveraged markets mean these minor adjustments represented by “backing and filling” shake us out of what in retrospect are good positions. It is Mr. Market’s way of making it perfectly clear that this game may look easy, but it ain’t!

I think the euro is backing and filling…the new rationale is, incredible to me but I don’t matter, only participants action reflected in price does, that Germany will be okay with yet another rescue package for Greece. In short, they are Band-Aiding yet again. Is this game played by the Troika (ECB, EU, IMF) any different than taking cash from taxpayers (from everywhere in the world now that IMF is so ensconced) using a three-card Monte?

So, what is my fractal guess now, as opposed to Friday, on this “backing and filling” in the EURUSD pair: 1.4455 or 1.4570 or somewhere in between:

As to other observable events that aren’t quite being confirmed by price action:

  • US bonds will crater; the US can never get its house back in order!
  • Inflation is guaranteed; it’s an inflationary world!

Where have you gone bond vigilantes? Apologies to Simon and Garfunkel…

Sitting on a sofa on a Sunday afternoon
Going to the candidates’ debate
Laugh about it, shout about it
When you’ve got to choose
Ev’ry way you look at it you lose
Where have you gone, Bond Vigilante?
A nation turns its lonely eyes to you
(Woo woo woo)
What’s that you say, Mr. Gross
“New Normal” has left and gone away?
(Hey hey hey – hey hey hey)

I share with you the bond chart, and the consensus expectations, to juxtapose against this summary that I read from Citron Zoakos, a truly brilliant man; I am paraphrasing here:

When comparing the eurozone situation to the US, the US debt situation is sustainable, the eurozone’s is not. US voters want spending cuts, while eurozone voters want spending increases.

I think that is right. And if it is, this move in the euro, which hammered my overleveraged positioning, likely represents only backing and filling and the larger rationale is still in play.