Just when you start to feel too good about your story—blam!!!
We were feeling good about our dollar story yesterday—especially when euro tanked and others followed on the ECB news. But this morning, it ain't looking so hot.
Now don't get me wrong, the type of move we've seen this morning can easily be completely reversed by day's end in this wild and crazy market; but we have to admit to getting a bit cocky lately in these pages about our story. Not a good thing indeed when trading in short-term time frames. Not a good thing in any time frame really, but at least the longer term allows one's bias to play out.
Have we changed our story—no! But we do know that all stories must have two sides. We just haven't talked about that other side much—cockiness does that to a story teller.
This morning's US bond move we think highlights the other side. Bond's are off over 2 points at this writing, and yesterday's action is showing up as a very dubious doji candle!
The uptrend is in full force with a strong 1st day. All confidence built up by the bulls from the 1st day is destroyed when the 2nd day's gap up closes near its open. Profit takers will quickly appear if the next day opens lower.
If risk about US over-stimulus flows into US assets, seen first in the bonds, then it likely isn't a good thing for the underlying paper in which those assets are priced—Mr. Greenie! This is part and parcel to the bond-bubble story.
Just how much new paper can one throw onto the market in order to spend one's way to prosperity? Answer: No clue on just how much more paper can continue to be created, but we do know that spending on top of a market already saturated with bad assets and zombie institutions isn't exactly an efficient market clearing process and has been known to prolong said problems regardless of how well intentioned, or politically expedient. (We are leaning toward the politically expedient choice there.)
What bothers us about the bond bubble story, which makes a ton of sense given the weight of all the paper, is the deflation. We think it trumps supply at the moment.
And what bothers us about the run out of US asset story is where else do big pools of capital hide? I think we've learned over the past couple of weeks the fiscal and growth backdrop is falling faster than expected in both Europe and Asia. Does this make them in worse shape than the US? Maybe not now, but these areas seem to be accelerating downward even faster than the US. That increases their riskiness as a viable hiding place.
Well, maybe the hiding place will be gold just as the gold bugs say. The heavy metal is up 20 bucks as I scribble. Just maybe this is the ultimate default place to hide in a world where all governments continue do denigrate their legal tender. As much as we disagree with the bugs at times, we believe this is a VERY valid point.
Is there a moral to this missive? If so, it would be this: Stay open and cautions and question your story in each and every timeframe in which you trade. We keep learning that lessen over and over again. We know it's a heck of a lot easier to say than do, as most of those cute little adages of trading tend to be, but well worth the effort.
Have a great weekend!
Black Swan Capital LLC