A Worthwhile Habit II

BarroMetrics Views: A Worthwhile Habit II

Today I am going to show my thought processes on the SNB decision. The best way to do this is to reproduce some of the Evernote entries:

2014-12-05: Saw Mario’s interview. Seems clear that he is hell bent on a European QE. Question is whether the EC rules and Germany will acquiesce. Keep eye on this.

2014-31: assessment of Europe.

  • Germany seems OK but rest of Europe especially France and Italy are heading South. Given nature of economic thought, QE is on the cards.
  • What will this mean? Euro down. Greece force to toe the line? What about rise of left? Impact on CHF? Will the cap be too expensive? Not enough info but need to keep these questions in mind for 2015.
  • When will the case initiated on Oct 14 against QE be heard? Cannot find date for decision.

2015-01-17: It seems clear that Europe is in the grips of a major recession and that Draghi, politically, will be able to overcome the Germans objections. The only barrier will be the Euro Court decision. If he receives its approval then all systems go. What effect will this have?

Foreseeable – expected event: the EURUSD will fall.

Less foreseeable – unexpected event? If QE starts, this will place an enormous burden on the Swiss cap. I think it unlikely they will keep it in place. I would expect the CHF to rally against the USD and other currencies if the cap is removed.

Action: should I short the USDCHF? Too much of a risk for me. If the Courts rule against Draghi, the EUR will rally and may take the the CHF with it. If it rules in favour, the CHF will rally. Too much of a lottery for me. And since my AUDUSD is signaling the possible end of the R2 move, time to exit.

For new positions, will wait till after ECB’s meeting on Thurs  Jan 22.

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I thought I’d end this blog with the headwinds  I see on the horizon:

  1. ECB’s plans for QE.
  2. China’s growth
  3. FACTA
  4. US Congress vs the President
  5. Islamic Terrorism, in particular Iran’s nuclear program.
  6. European Court of Justice decision on whether to ratify the decision by Pedro Cruz Villalón, a European Court of Justice (ECJ) advocate general. Note that the review is due in April to June 2015. And note that the advocate general provided an avenue for the Court to reverse his decision without appearing to do so. He said in his decision:

“The ECB must give a proper account of the reasons for adopting … the OMT programme, identifying clearly and precisely the extraordinary circumstances that justify the measure”.

The ECJ could merely say that the ECB had failed to discharge this duty and reverse Villalon.

I am not saying it will do this; in fact, the ECJ is expected to rubber stamp. But, in this exercise we are considering what is possible and its effects if it happens.

    6 thoughts on “A Worthwhile Habit II”

    1. hi Ray,
      But, but, the following were not in your Evernote entries!!!
      “Earlier this month, Jordan described the cap as “absolutely central”, while SNB vice-chairman Jean-Pierre Danthine said on Monday it would remain the cornerstone of SNB policy.”
      (http://www.reuters.com/article/2015/01/15/us-swiss-snb-cap-idUSKBN0KO0XK20150115)

      Hindsight:
      (John Mauldin friend Anatole Kaletsky, in a CNBC interview not long after the announcement, quipped (with a completely straight face) that)

      “just as James Bond has a license to kill, central bankers have a license to lie.”

    2. Hi Ray,

      Nice rational thinking! But so much over my head unfortunately. My economic skills are too poor to make a confident analysis. This kind of analysis I better externalize it and get it from a 3rd party.

      Cheers,
      Sorin

    3. Hi Ray

      I have the similar feeling as Sorin has.
      I always feel there are lots of information and don’t know how to filter out which are more useful.

      By the way, any commodity newsletter or commodity research service you know is/are worth of looking at especailly in fundermental analysis aspect?

    4. Hi Wenda, Sorin

      I did say I don’t try to teach this process – mainly because it would need a great deal of time and one-on-one coaching.

      I don’t know of may newsletter that does this sort of analysis. The closest are some comments made in Zero Hedge (http://www.zerohedge.com/) and Ben Hunt’s Epsilon Theory (http://www.salientpartners.com/epsilontheory/)

      If you have not previously used this process, the first step is to decide on the economic theory you want to rely on. Right now you have Keynesian (in all its forms), Austrian and Minsky.

      Then, all you need is to study a primer (the easy part) of that discipline.

      Then, you ‘merely’ need to read the news, start writing down the connections you see, and reviewing to see where you went wrong (the hard part – especially on the ego![G]).

      For what’s its worth, tomorrow I’ll post the entries I did tonight in Evernote for Thursday’s EU QE announcement.

    5. Hi Ray,

      Thank you for the epsilon theory link. Their latest article made it clear for me… Since the CHF implosion I keep having a feeling of unease regarding fx trading compared to other trading vehicles (mainly shares/commodities).

      The author says that the difference between fx and the others is I quote “there is no positive long-term expected return from trading one country’s economic license for another country’s economic license”. And this in terms of comparision with shares and commodities.

      The author doesn’t that currency trading is bad. It’s just that compared with other vehcles black swan events like the CHF one are more probable in fx. That’s how I understood the article.

      The article: http://www.salientpartners.com/epsilontheory/post/2015/01/20/Ghost-in-the-Machine-Part-11

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