“Act II” of the financial crisis says Soros

Posted by Jack Crooks - Black Swan Capital

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“The market usually leads because there are people who know more than you do.” – Bruce Kovner

FX Trading – $50 billion here, $50 billion there…Short euro?  Be careful here with euro…

The phrase I think originally went something like this: A million here and a million there; pretty soon you are talking real money.   We can only dream our government used numbers with so few digits.  News on the wire is that President Obama’s economic team will push congress for another $50 billion in funds; supposedly targeted to teachers, police, and fireman jobs that are disappearing thanks to the giant hole in state, as well as federal, budgets.  For those handicapping a double-dip recession, this news carries some weight. 

This news follows on the much worse than expected US non-farm payroll report for May.  Jobs represent the raw material to drive real recovery.  So far, we can call it Keynesian stimulus that has provided much of the juice to keep hope alive, but running out of bullets we and many other western nations are.  This is most likely why George Soros says we are entering “Act II” of the financial crisis.  Mr. Soros said last year that he expected a double- dip global recession in either late 2010 or early 2011.  

A double-dip was also one of our calls, when you make those types of guesses in typical New Year’s forecasts.  But our call so far has been all wet, as we predicated a double-dip on the back of a slowdown in China.  In fact, China has been the shining star as we know.  But
here is the potential takeaway, trying to get it back to FX:

1) The fact that additional US stimulus is needed to keep hope alive in the job market, changes the expectations on the Fed’s next hike; now delayed at least and QE back on a possibility.

2) This explains why the US Treasury has decided to mostly pass on China as a currency manipulator; the last thing the global economy needs now is a fight between the US and China.

3) Maybe it also suggests the US will be happy to see a little weakness in the buck, as it helps China’s exports, supporting the primary engine of global growth at the moment.  A fall in the US dollar is a corresponding fall in the Chinese yuan.

…all this (maybe guesswork on our part) comes at a time of MAX bearishness on euro, even though the latest vehicle established seems to be providing some calm to Eurozone markets.  

Recently we guessed a dollar correction might be afoot, in Currency Currents.  

Given the economic backdrop, seemingly slight changes in expectations, and technical condition of the euro, it could mean the “correction” could have some legs.  

So, if you are max short euro here, you may want to be careful.  

Jack Crooks
Black Swan Capital


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