“Absurdity. A statement or belief manifestly inconsistent with one’s own opinion. “
Commentary & Analysis
Two examples why fundamentals are absurd don’t always matter!
People will argue that eventually fundamentals always matter.
It can also be argued that price dictates fundamentals over certain time frames.
In other words, relying on fundamentals alone can get you in trouble. All too often it seems like fundamentals don’t deliver trading profits, no matter how obvious the future seems.
Case #1: The euro.
Why has the euro not completely collapsed already?
You might say because of the US Federal Reserve’s implicit weak dollar policy; in that their liquidity schemes ultimately serve to undermine the value of US dollars.
But after three years of persistent sovereign and bank debt concerns – a slow-moving financial train wreck – plenty of analysts have identified the root cause of the regions problems: the common currency.
We’ve hit on this concept more times than we can count; most recently, Ambrose Evans-Pritchard had this to say about the euro’s impact on the zone:
None of Mrs Merkel’s proposals – whether enshrined in EU treaties or not – offer any meaningful solution to the crisis at hand. They continue to ignore the cancer in the EMU system: the corrosive 30pc currency misalignment between North and South, and the German-Dutch trade surplus.
Interestingly enough, traders/investors have not capitulated to this analysis. As Jack said in response to a subscriber question this weekend: a free fall in the price of the euro is “still a big assumption given how much money still being thrown at this problem” and things “could be prolonged once again …”
We continue to believe no amount of money will solve the fundamental problem of the common currency union. With the euro trading at $1.3450 right now, the fundamentals have yet to really matter.
Case #2: Social Unrest in China
Chinese equities have underperformed relative to their global counterparts over the last year; but why has the entire global risk appetite complex not completely collapse based on the risk of a hard-landing in China?
For almost equally as long as we’ve been harping on the root cause of the Eurozone crisis, we’ve been anticipating an uncontainable streak of social unrest in China that contributes to the country’s hard landing.
Again, while plenty of analysts have presented the threat of social unrest on China’s economy, traders/investors have been hesitant to adopt such a doomsday scenario for the red-hot dragon. Perhaps the lack of concern is understandable; after all, China is carrying the weight of the world on its shoulders, and its influence will only grow stronger over the next century (or so we’re told.) Bring on the renminbi as new world reserve currency!
From the Financial Times, China to prepare for social unrest:
Recent months have seen a rise in unrest – apparently linked to economic grievances, including workers’ fears about the economic dislocation caused by Beijing’s long-term plan to move away from low-value manufacturing to more creative and innovative industries.
Workers in Shanghai clashed last week with police at a Singaporean consumer electronics supplier during a strike over mass job losses due to a company relocation, the US-based group China Labor Watch said.
A recent decline in uncomfortably high inflation plus stop-and-go monetary policy may buy Chinese officials some time, but ultimately they’re going to have a hard time with social tension as they attempt to make a necessary transition from their current growth model.
This chart on Chinese PMI is a big reflection on the health of Chinese manufacturing; currently it is in contraction territory:
As you have probably already gathered, I’m going to tell you that neither of these two cases has really given way to the fundamentals (at least to the extent we and many other expect.)
But we, and you should be too, are less and less surprised by the seeming divergence in price action and fundamentals … even when death is breathing down the neck of the euro or the Chinese are getting pissed that the economy is going to dump on them just as things started to get good.
This is why it is important to develop trading strategies that work for you (e.g. accommodate your personal risk criteria and time frames). We at BLACKSWAN continue to fine-tune these strategies and help our members earn profits (and protect capital) in unpredictable economic times.
We look to many sources for our own guidance. One source at the crux of our technical analysis is Elliott Wave. The EWI guys are good. Period. And they’re making our readers an offer today that I suggest you check out …
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Fundamental research is good and necessary; but it is not always sufficient especially when there are so many variables being used to counteract normal market forces.
Shore up your analysis and bolster your trading account.