Lest you think the current market rally is simply the by-product of enough liquidity to float the titanic a million times over, 2010 is forecasted to be strong year for global economic growth. And while that doesn’t mean the employment situation will be making any drastic improvements, we as traders could be faced with the opportunity of a lifetime.
As both a very short term spot trader and investor for longer time periods, we could be in for a time of serious personal balance sheet improvement.
In other words, we’re in the middle of a Major Fundamental Event (MFE). Probably the biggest one in history in my opinion.
Being a spot trader of foreign exchange, you’re going to be able to the same trade over and over so frequently there’s a risk of getting bored with it-that is unless you find the idea of making consistent profits a tiring affair.
As a longer term investor you can employ a strategy that’s totally in disfavor at this time, the old buy and hold, set it and forget it method.
Here are my suggestions for how to do both.
In spot forex the bet is basically against the dollar as assets which are priced in them, namely stocks and commodities, continue to appreciate and the greenback’s use as the funding currency for the carry trade grows. My personal favorites, in order, are the A$, euro and Canadian dollar with the pound coming in fourth.
In spot I look primarily at the daily charts and what I plan to do is to buy those currencies when they dip. Of course, we can never know exactly when to get in without first having to endure a loss. But what I do know is that when I want to buy something, I feel a lot better about doing so after it goes on “sale.” That’s what buying on the dips represents to me-a chance to buy what I want at a better price.
Think of the A$ (or the other currencies I mentioned) the same way you think about that nice big flat screen TV you’ve had your eye on for a while. Is it less appealing to you when you see an ad in the paper announcing a price reduction? Of course not. So why should you feel that way when the aussie falls a hundred (or more) pips? A couple of down days are your best friend here, if you’re a smart trader.
The play on the A$ is basically a play on continued Asian demand, especially from China, for its exports as developing countries out-perform the advanced economies. According to Michael Mussa, who was the chief economist of the International Monetary Fund for over a decade and whose current position is senior fellow at the Peterson Institute for International Economics, the IMF and many private forecasters are underestimating the strength of the recovery, which he believes began in the middle of this year.
In 2010, he estimates, global growth will be 4.2%. The U.S. will grow 4.0%, Japan 2.5%, the Euro area 2.3%, Germany 2.2%, China 9.0%, and India 7.5%. Regionally, Asia will lead the way with a 7.8% gain.
In the U.S., he expects unemployment to peak at slightly below 10% this year and fall below 9% by the end of 2010.
The 9% growth prediction for China is warranted because of China’s sustained stimulus spending and also because China is starting to rely more on domestic growth. Spending on social services is growing rapidly, he says, reducing the need for Chinese to save as much as they do, and household consumption is picking up.
Chinese consumers aren’t burdened by debt loads remotely similar to Americans. Indeed, he expects Chinese households to start borrowing more and spending more, buoyed by cheap credit. He calls it “releveraging,” as compared to the depressing “deleveraging” facing American households who are saving more to pay off debt in an uncertain times.
Here’s part of my long term buy and hold portfolio, all with Exchange Traded Funds (ETF’s):
- Direxionshares Daily Emerging Markets Bull 3X Shares (ticker EDC). This is a triple leveraged ETF.
- iShares MSCI Taiwan Index Fund (ticker EWT). It’s a bet that friendlier relations will lead to increased trade.
- iShares MSCI Brazil Index Fund (ticker EWZ). Brazil is a major exporter of commodities.
- ELEMENTS Linked to the Rogers International Commodity Index – Total Return (ticker RJI)
- iShares Barclays TIPS Bond Fund (ticker TIP), a smallish bet on inflation.
- Direxion Daily 10-Year Treasury Bear 3X (ticker TYO). This is a bet that Treasury prices will fall as yields eventually rise.