A Lot of Money to be Made

Posted by Jack Crooks & Michael Campbell

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“I think we are getting close to what could be a major turning point in these markets and some major trend changes”

Michael: Jack Crooks is with Black Swan Capital one of the premier services talking about the movement of currencies and many other things that come from that.

The Canadian dollars at 103.70 and the Yen at center stage, the Euro at 142. I’m sort of long term bearish on the Euro and looking for an entry point to play that on the way down. There is so much money to be made because of the violence of the currency moves.

Jack: You’re exactly right and I think we are getting close to what could be a major turning point in these markets and some major trend changes. You know you pointed the Japanese Yen. I think that move’s already started. You may be seeing it starting in the Swiss Franc. And these could be major long term moves and there’s a lot of money to be made if you can hang on to a long term trend in this market, that’s for sure.

Michael: It’s also become so much easier to trade currencies. Jack, you’re a 24/7 guy with your people at Black Swan Capital looking at these markets, but with the advent of exchange traded funds it’s brought the currency movements right down to people who understand how to buy a stock. There are exchange traded funds for every major currency in the world and you can play them either up or down. Currencies affects our everyday life and Canadians are buying up the United States because the Canadian dollar is above par. It’s just made it so possible for anyone to all play these currency markets.

Jack: Absolutely, the fact that these exchange traded funds have developed means it in and of itself currencies becomes another asset class to play. When your macro analysis lines up you can sit in these things and ride these long trends, because currencies really more so than any other asset class get moving in a direction, and they get in these what’s called self reinforcing price trends. So you can hang on an ETF and really benefit.

Michael: Everything is  compared to the US dollar, the Yen or the Euro. Those seem to be the three biggest games in town and where the money is to be made. You can make a lot of money in the Canadian dollar also but you’re playing it against those other currency trends it would seem to me. Those seems to be the dominant themes. What about you know right now?

Jack: You mentioned the majors but there’s so much going on in the exotic and developing world currencies and we are seeing more and more of that available in the exchange traded funds. They started a new Asia block currency fund available now in the exchange traded fund format which is pretty exciting because overall  the Asian block is extremely under valued on a long term fundamental basis. And I think that’s the type of long-term play that the average investor really makes sense for them.

No doubt about it, if you get the major themes right that’s what’s nice about trading currencies. You don’t have to get into the nitty gritty and analyze bank balance sheets and that type of thing. I think if you keep it on the global macro level and get the big picture right you’ll make money in currencies assuming you’re not going to try and trade intra day with high amounts of leverage. You don’t need to do that, in fact if you are going to use them as an asset class you shouldn’t do that. You should low leverage and just use them as any other type of investment class. 

Michael: What’s on your radar screen right now? What should we be looking for?

Jack: Ee are still watching the Euro and we are looking for an entry point to play it on the short side. We think that sooner or later the European Union has to pay the price here, they’ve been band-aiding and band-aiding and doing a lot of press releases, but they haven’t solved the problem. The problem is they are just not creating wealth in the periphery countries, and they are not going to be able to pay back their debt. The other problem is the four major core countries in Europe that are supposedly in good shape Germany, France, Belgium and Netherlands, their exposure to banks represents 125% of those four countries’ GDP.

The real problems go right to the core European banking system in a very, very big way. Sooner or later that will come to roost. But we don’t want to enter here because the fact is there’s extreme negative sentiment against the US dollar and there’s been some optimism over interest rate hikes in the European central bank. Regardless once we get through the  ECB central bank hikes we think the Euro is going to play to the downside. The other we love is the Japanese Yen.  Now we’ve been wrong on the Yen but I think we’re right now. Our story has been that sooner or later this fallacy that they can fund this 200% plus and growing debt to GDP ratio in Japan internally will go away. Japanese savers are approaching zero and the earthquake has made it worse.  Japanese are going to draw down more on their savings. The Japanese are going to have to turn to the external markets to fund this massive and growing debt problem, and we think finally that risk is going to flow into the Japanese Yen. We think it started with the intervention, that’s the trigger. So those are the two that we really love long term.

Michael: Longer term as you say Japan was already basket case thanks to demographics and a variety of other things. This is not going to do very much to help them move forward adding on 300, 400 billion more in debt.  

Jack: No not at all, it’s not going to do well at all. You know it’s a situation where I think it’s finally going to trigger this idea that instead of the when the world gets risky the Japanese Yen becomes a risk averse currency, meaning it does well, I think we are going to see that start to swing around here just because of the whole decline in savings. I think the end of this theme of their ability to really fund their debt internally, and now we’ll see rising interest rates on their 10 and 20 year government bonds. When those rates start to move up in a significant way, then we know that it’s a change of tune in a very big way in Japan’s system.

Michael: So that’s really interesting, you’re looking for rising interest rates in Japan that will tell you that the Yen will get very vulnerable at that point. Jack let’s come back the US dollar. What about all the problems governments are having whether it’s California, Illinois, New Jersey or the federal  financial crisis?

Jack: I think all those things are a priced a little bit into the dollar though they are real problems, no doubt about it. But I think the big background theme on a relative basis is the dollar needs some type of yield support. I’m not talking about a big hike in rates but we are talking about an end to this QE2. Our view is if we finally get an end to this QE2, and we’ve started to hear rumors of this recently,  yet the Fed has come out and said no way.  Regardless if we start to see that change based on some improvement in the US economy, and we are starting to see improvement,if we get any type of yield differential move in US rates I think that just changes the dynamics. We can see the US start to improve as the risk levels start to get worse in Europe, and I think the US will outgrow both Europe and Japan and  for sure outgrow the UK. Those are the core countries that the US can do well against and we already know the Yen is weakening against the US dollar. So there are some plays there that suggest that the US dollar could be very strong even though it has warts because it is all relative. So we are just watching that yield support for the US dollar plus we watch the open interest numbers. 

Michael: Jack, you got us to load up on the Canadian dollar, and look at the size of that move. What do you think about the Canadian dollar right now?

Jack: Number one if you look at the sentiment on the Canadian Dollar its about a 94% bullish. When you get this type of sentiment extremes in currency markets that’s where you’ve seen turning points.

Michael: We just lost Jack on the line and we can’t reconnect with him. RECORDING STOPPED

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