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Key Reports Due (WSJ):

7:45a.m. ICSC/Goldman Sachs Chain Index For Oct 25: Previous: -1.6%.
8:55a.m. Redbook Retail Sales Index For Oct 25: Previous: -1.1%.
9:00a.m. Aug S&P/Case Shiller Home Price Index: Previous: -17.9%.
10:00a.m. Oct Conference Board Consumer Confidence: Expected: 52. Previous: 59.8.
10:00a.m. Oct Richmond Fed Mfg Survey: Previous: -18.
5:00p.m. ABC/Wash Post Consumer Conf For Oct 26 Previous: 50.
Two-day FOMC meeting begins.


"A good conspiracy is unprovable. I mean, if you can prove it, it means they screwed up somewhere along the line.”
                                  Jerry Fletcher (played by Mel Gibson), Conspiracy Theory

FX Trading –Kookburger Time! A rant it is!
Editors Note: Warning to gold lovers, conspiracy nuts, and US haters.  This rant you may want to avoid. 
The conspiracy crowd is working overtime these days.

Many “deep thinkers” among the gold crowd still spout conspiracy stuff on a regular basis to help explain why their beloved metal is not now sitting at least $2,000 an ounce.  Could it really be that each morning Fed Chairman Bernanke, Treasury Secretary Paulson and, of course, V.P. Dick Cheney wake from their slumber and huddle in the safe room to discuss how they can manipulate the gold market.  We tend to think they have bigger fish to fry. 

What’s odd about the gold conspiracy theory crowd is that gold’s price action, and minor role in the system, is very rationally explainable (granted the explanation may be wrong) on standard economic terms.  But gold guys all seem to have the secret handshake and “know” it’s manipulated.  Odd indeed!  Does it make one feel better to say you lost money because of some nebulous “manipulation” you can’t really define?  Guess so. 

And isn’t it disconcerting when the “manipulators” push gold up for no particular reason and a believer makes money?  We don’t get it. But then again, Philistines we are. 

But it’s getting better than that out there.  Over the past couple of days we’ve been made privy to some whoppers in the making.  If you don’t already know, let us clue you in on a couple: The Amero is on the way.  This conspiracy uncovered says the US will soon toss away its world reserve currency status in order to distribute new currency that has Mexican and Canadian politicians’ pictures on the front.  Aren’t American politicians on our money enough already?  It’s a loony idea indeed. 

And a new conspiracy uncovered, and emailed to us, stars on You-Tube.  A gentleman there has revealed a well heeled crowd in the Middle East will use its vast wealth to take over Russia of all places; after it crushes the US economy in its spare time.  Hmmm…wouldn’t Spain be a lot nicer given those nasty winters in St. Petersburg?  We’ve heard real estate prices are looking good in Barcelona.    

Do powerful people do all they can to advance their interest and power in the world?  Absolutely!  Are markets “manipulated” by pools of capital at times?  No doubt.  But, this doesn’t automatically equal conspiracy.  At least we don’t think so.

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen,” wrote Frederic Bastiat.

We don’t think Bastiat was talking conspiracy theory here.  We do think he was talking about all the stuff underneath the surface of an advanced and complex, yet fragile, system of decisions by millions of players with all types of varying interests that make up what we call an economy. 

Just because we can’t discern what’s going on below the surface, it doesn’t mean it isn’t at least as important, or more important, than the stuff we see going on above.  And because we can’t always apply our Newtonian cause and effect to what we see above, it doesn’t mean we should create conspiracy theories as explanation. 

I’ve recently talked about the doom and gloom crowd getting it exactly right with their broken clocks, but most got it exactly wrong too as they believed US dollar doom was the upshot of the story.  What we found interesting as we followed the dollar doom and gloomers along this long path was the degree to which price action seemly proved them right, hiking their egos along the way, yet the reality bite now shows maybe they were simply fooled by randomness, and shouldn’t have chalked up their rightness to their rather pedestrian intelligence.

Nassim Taleb said it well in Fooled by Randomness

“By some viciousness of the structure of randomness, a profitable person like John [trader of rather pedestrian intelligence], someone who is a pure loser in the long run and correspondingly unfit for survival, presents a high degree of eligibility in the short run and has the propensity to multiply his genes.  Recall the

hormonal effect on posture and its signaling effect to other potential mates.  His success (or pseudo-success owing to its fragility) will show in his features as a beacon.  An innocent potential mate will be fooled not thinking (unconditionally) that he has superior genetic makeup, until the following rare event.  Solon seems to have gotten the point; but try to explain the problem to a naïve business Dawarinist—or your rich neighbor across the street.”

Let me put this yet another way.  Many so-called “currency experts” got it right for many years because of the trend and carved out guru-like status along the way.  The root of their argument was the US was, and still is, all bad.  The US fundamentals were terrible.  The US is the root of all global financial evil.  Thus, despite this “bounce” of 23%+ in the US dollar, to hell in hand basket it will still go.  This crowd has no clue as to what is and has gone on below the surface for the most part, yet glib they still are. 

I’m sure the US haters will wine and complain about our defense of the US financial system—so be it.  But what if all of you who bashed the US for its “dependency” for money flow to support its deficits got it completely wrong?  It would explain why many of you find it so confusing the dollar could dare to rally.

What if the US was the lynch-pin for the global financial system and therefore charged with finding a proper home for all those forex reserves built up by dictatorial countries who were very happy not to reinvest in their own people lest they create wealth that could come back to challenge their rule?  What if they just kept dumping all this stuff into the bad old US where their assets were most efficiently processed and protected by the rule of law, which isn’t quite available at home?  What if the US current account is what we have always said it was, a representation of US dollar credit greasing the wheels of all global asset markets for the betterment of the this thing called globalization (which helps explain why the last two times we got what the economists and whiners wanted, an improvement in the current account, which coincided with stock market crash in 1987 and 2000)?  What will happen to all those resources re-funneled by the US financial system to strengthen export sectors the world over when said export demand by the bad old US falls?  

In short, blame the US financial system if you wish.  But be careful about your diagnoses on the dollar.  If all this efficient recycling of resources which sparked a massive run-up in global growth by creating massive dollar-based credits for others around the globe to grow is now heading home and said export models built on credit come crashing down, this little dollar bounce could easily morph into a multi-year bull market; which is what we expect after applying our pedestrian-like intelligence to the stuff we can and can’t see.    

And of course you can just imagine the plethora of conspiracy theories hatched when the world realizes the good old greenback’s world reserve currency status is poised to soar in a way it never has before.  This will make the Plunge Protection Team look like child’s play.  Stay tuned. 

Is the dollar finally correcting?  We’ve been playing for it near-term and getting steamrolled by it.  But this morning, it’s getting whacked a bit as stocks are actually bidding higher pre-open and did well in Europe. Hopes of a US rate cut tomorrow from

the Fed seem to be lifting spirits, and some calmness in the interbank market suggesting the credit may be normalizing a bit. 

The high yielders, which have been whacked so hard recently, are flying today…

AUDUSD 90-min: Just above near-term resistance.

Given the dollar index chart is looking parabolic, any correction that does materialize could be very powerful.

…and by the shape of the open interest and mix of overwhelming bears to bulls in the euro currency futures, maybe Mr. Market is due to shake off some dollar bulls…