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“Hubris is one of the great renewable resources.”

P. J. O’Rourke

Commentary & Analysis

What if almost everybody is wrong about the euro?

I have to confess, I have been a long-time doomer and gloomer on the euro. And the last time I was as gloomy as those are in the market now, was just before the currency blasted off for a 25 cent rally against the dollar back in June 2012. Back then I knew it was finally over for the euro. I was extremely confident price action was confirming my brilliant fundamental thematic analysis. My long-held target of parity would soon be realized. Gee, wasn’t I just grand.

Mr. Market shared with me what it means when you are only looking to confirm your own brilliance and not remaining open to data to suggest you may be wrong. The year 2012, my year of maximum confidence in my themes, turned out to be far and away my worst year’s performance in the currency market. at my point of maximum bearishness the euro began its journey on a stunning 20 cent rally. And it turned out to be my worst year ever trading currencies—by far. Hubris kills!

What did I learn? Or should I say, what did I re-learn?

Extreme in speculation = Extreme in price

Of course determining extremes in speculation is easier said than done, I grant you. And this isn’t about picking exact bottoms or tops. But is about being open to sentiment—quantitative and qualitative measures. Or as the great John Percival puts it: Being aware of flashing yellow lights.

If everyone you know is talking about the demise of the euro, especially those who have no business doing so, that is a flashing yellow light to suggest the trend may soon change. It is the way the market works. It is the way the market must work.

When I suggested just recently in a promotion for my service, maybe the euro was putting in a bottom given the one-way extreme levels of speculation as evidenced by open interest levels in the currency futures market, it drew some feedback from readers. These readers shared all the fundamental themes and very solid rationales as to why the euro is done for. They made perfect sense. But the funny thing is, I have heard them all before. It seemed a déjà vu moment all over again.

Today, we are seeing a sharp rally in the euro. It may suggest indeed some type of interim bottom is in place. Or it may be just a bounce. I do not know; though I have my betting suspicions. But given today’s price action in the face of overwhelming euro bearish sentiment, I am sharing two things: 1) a quote from Woody Dorsey explaining why abiding faith in fundamental themes over the technical analysis may be misplaced at times (the full piece from January 2013 can be found here), and 2) a plausible alternative scenario to the consensus theme of Eurozone economic demise.

  1. Fundamental themes are ephemeral too…

    Where can we find all the latest cultural concepts and investment themes? It turns out that if we want to get a glimpse of market culture, we have to go to the Concept Café. At this kind of café, we don’t order the soup du jour, we listened to the stories du jour. To really understand this we may need to play the part of the flaneur. A flaneur is a gentleman of leisure who frequents cafés and observes the spectacles of street life purely for pleasure. His observations and inferential focus is an apt metaphor for the process of determining the Investment Themes, or the Mind concept of Triune Theory. A flaneur may be in the crowd but is not of the crowd. The life of the street, the culture of the city, and the concerns of the citizens are seen as opera or a story to be both observed and savored. Everything the flaneur sees, every vignette is an open investigation. The flaneur detects everything while no one detects him. The Concept Café is where Investment Theme, or the ephemeral and fickle stories circulating in the market, can be seen and heard. Most people believe the fundamentals are real, solid, authentic, reliable, and durable reasons we can count on to explain the market; however, the flaneur, or a behavioral trader, knows differently. In fact, we have to take into account the reality that the marketplace is full of propaganda or what we call spin. Spin has been an aspect of human behavior from the beginning.

    …Descartes had a huge influence on what philosophers call the mind and body question, also known as Dualism. Simply put, the still unresolved problem revolves around the relationship between the body (technical analysis) and the mind (fundamental analysis). Which influences which? What are their natures and how do they interact? We have two natures or live in two different worlds, the world of our minds and the world of our bodies. Descartes came down on the side that the mind is immortal and immutable compared to the body. This presumption is at the heart of the fallacy of “rationalism.” On Wall Street they still think that the Mind, or Investment Themes, rule everything. They’ve always dismiss the body or, the “Technicals,” just because Descartes effectively told them to.

    Woody Dorsey, Behavioral Trading

    Just maybe Germany was right after all. Just maybe those taking the hard medicine are in fact showing signs of recovery. Just maybe the euro will be around a lot longer than most are betting…

  2. Saxo Bank economist Steen Jakobsen discusses why quantitative easing by the ECB could be a huge mistake because the periphery is already showing signs of recovery relative to Germany and he expects Germany to grow strongly next year:

    ECB about to make biggest policy mistake in history (12/4/14)

    Now a look at EUR/USD Daily…