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Technically, I'm asking a fundamental question ;)

  • #1
  • First Post: Oct 26, 2007 3:32am Oct 26, 2007 3:32am
Hey folks..

listen. All this constant talk about inflation and fed cuts and stock markets and risk and whatnot has gotten me quite confused and it seems the market, too.

Here I used to think inflation was the worst enemy of any economy and that having high rates and tightening cycles should work towards combatting this. Rampant inflation is always worse than a bit of a normal recession cycle I have been led to believe.

(Btw, I've noticed there's been a really nice page made about the wording and terminology of all this stuff here
http://www.currencytrading.net/2007/...nslation-book/
)

But I still can't help but notice that even though basically every commodity known to man has gone through the roof BIG TIME the last 3-6 months(surprise, the USD devalues and the nominal value of the commod has to be compensated) and everyone from Donald's cousin to Pizza Hut seems to be noticing the effects on price inflation.
Higher rates are used to combat inflation, so we see a smart and prudent Fed go and..cut rates by 50bps. Uhm.

Has Wall Street become more important than risking having the USD go to an index value of 1 against all currencies or is an out of control inflation suddenly nothing big anymore or what important change in paradigms did I miss?

I will readily admit I am absolutely clueless and lacking in macro-economical knowledge and skills, but if everyone I know who DOES have a degree and background says that there's nothing worse than unchecked inflation, why is the guard dog against it suddenly inviting it in for tea and biscuits?

Someone please tell me what I'm missing here, because it appears that now everyone is expecting yet ANOTHER cut, and I just can't see where this is going except down the drain and against every conceivable conventional econo-logic I've been told about.

Maybe I just have it wrong though.


Please help me out!
Trust price. Know yourself.
  • #2
  • Oct 26, 2007 7:31am Oct 26, 2007 7:31am
Got this reply via PM since the guy isn't a 1kT member, yet felt it should be here anyway...I mainly put this thread here so I wouldn't get posts that blame forest fires and bass guitar players for fed cuts/inflation de123

Not to shut people out really...but on the other hand to make sure those with some background on the whole matter could enlighten the poor ole light seeker..

Quoting faure
The thing about the Fed is that their mandate is to ensure the stability of the economy and control inflation. The reason they cut rates was to avoid financial panic (not stock market panic). They felt things were getting to the stage where no-one wanted to lend money because they didn't know how the other side stood financially (sub-prime exposure etc.. Nothern Rock being a prime example) You could call this a definite market failure and a type of information assymetry. In economic theory it gave the Fed every right to act.

Make no mistake rampant inflation is devastating to an economy. But inflation also pushes stock prices higher and I'm not sure the US is experiencing "rampant" inflation just yet. The commodity cycle is another thing that needs to be kept in mind. The Fed can only control a part of the price of oil, corn, wheat etc... It also comes down to international demand. You can slow local demand but I think the commodities cycle is a type of price shock that is a similar situation to the 70's. The only difference being that there was no real estate crisis then.

It all boils down to the question of whether or not keeping inflation under control is more important than preventing a collapse in the financial system. The Fed has a huge housing bubble to deflate and I think they will do their best to do it verrry slowly. The ARM's also have to reset next year and the next - 2009 is where most are looking at for the housing trouble to bottom out. Untill we get there I think the Fed will be more concerned with protecting property holders than high inflation.

BTW I've just finished my bachelors in economics, so as an economist you better know my opinion can change overnight and is probably wrong.
I rather liked that last bit

Thanks faure! Some interesting points indeed.

Anyone else have some thoughts on this?

Also feel free to speculate on what effects on markets, speculators, investors and "end users" = real world people and perhaps even the market we're trading this all might end up having...I really could use some reading material over the weekend
Trust price. Know yourself.
  • #3
  • Oct 26, 2007 7:47am Oct 26, 2007 7:47am
Hi SL,

I'm not good at macro economics too, but in my strive to 'improve' and ehem, 'sound more economically savvy'. *pulls the tie up, (Shifts).

Allow me to take a jab at this.

The wide economy is almost impossible to grasp, but one main factor remains, people often correlate interests rates and money supply in tandem.

When money supply goes up, interest rates fall and vise versa.

The US are proly acting on various reasons.

  1. Downgrading the current interest rate level can stimulate Credit growth. People are driven by the myth about lower interests means cheaper lending. SO by cutting down the rates fast, The Fed are hoping that it could further encourage banks to borrow.
  2. While anti-keynesian beliefs sees it as a bad sign for the economy, its always a known fact that once the interest rates starts falling into an attractive level again, the creditors and the borrowers will start bustling with vibrance again. "Early bird catches the worm"
  3. So this induced cycle created by the Feds who are playing god, tinkering with every little system available to them will forever go on and on. We can call Feds the ultimate King maker, driven by political agendas, like what Bush is doing to Ben right now.
  4. The Feds have been quick in reacting to market delicacies lately and we see it as show of skill by the Fed leaders. BUT what we should be noting is also the deficit growth that is currently a major issue while the Feds keep saving the market from a total collaspe (and we are seeing this happening more frequently in the last 10 years). Everytime the US goes into a corrective mood their deficit increases like a person who rolls their credit card debts, one day this is all gonna reach a tipping point(Malcolm Gladwell-good book).
  5. How are we gonna approach this Deficit Issue?
    - Many economist believes they'll - just write em off. *spits the floor
    - Every American Citizen is likely now living on Credit, even the salaries are probably govt debts, and it is said that 5 (or 3) trillion dollars circulating in US are defit $$$.
    - While we can say that USA will meet its final doom, it has become a powerful political tool for the US people.
    - Their main lenders, China and Japan will be astronomically hurt if the US is led in to a manic recession. How this will correlate? I'm not sure but if i lent a guy 500k and he can't pay me back what will i do? Beat him? Invade him? At the end i'll suffer too....
  6. How will it correlate in currency movements?
    - Well i really don't know, USD to gain strength as all other currencies fall into a recession too? Or USD will be humiliated....i just can't imagine a world economy without the US right now but maybe thats coz we've been so used to it? I'm not sure how all this will play out in the currency markets really.
  7. What i know or guess will likely happen is that China will use all their powers (in the form of their highly leveraged 200B fund) to influence the USD. They proly won't want to buy much more USD but likely use thier currency to increase the value of USD in the near future nad so far i am seeing a good possibilty of this turning out even in the technical chart formations, but i could be very very wrong...

regard
jest

  • #4
  • Oct 26, 2007 1:52pm Oct 26, 2007 1:52pm
Thanks for the input jest.

-----------

I'm gonna go right ahead and help myself along a bit since as always in life there is the "god helps those that help themselves" axiom, and even though I don't believe in the ole guy/gal/thingamajigga I still find it doesn't hurt to actually do some research on your own ;p

There's an article linked via one of my favorite blogs that sort of attacks this topic head on, literally.

It has this really lovely quote(from a Professor of Economics at U.C Berkeley no less) that will make any person understanding what a trend means (Phil you would really love this prof I bet) slap their foreheads ;p

Quote
However, when increases in inflation are confined to (i) energy and (ii) food prices, odds are that the increase is transitory and will be self-limiting.
From: http://delong.typepad.com/sdj/2007/0...ritholtz-.html


I have to say I definitely side with Barry on this who phrases what the Fed means when it says "Readings on core inflation have improved modestly this year, [..] some inflation risks remain." like this:

Quoting Barry Ritzholz
"that's Fedspeak for: inflation is under control, unless you look at the costs of things that are going up."
I rather like this guy for that ;p

Really do read both that delong post and Barry's original at http://bigpicture.typepad.com/commen...-no-infla.html
as well as his last few blog posts if you like.

I am in no way affiliated with any of those guys, I am merely pointing out interesting reading material considering it's the weekend coming.

I find this controversy rather interesting and intriguing that nobody seems to be able to agree on what's really REALLY a good or bad thing to do to an economy, Berkley professors and macro picture/fundy traders included ;p
Trust price. Know yourself.
  • #5
  • Oct 26, 2007 4:15pm Oct 26, 2007 4:15pm
Personally I think the Fed is - given the circumstances - on the right track, and that worrying too much about food and fuel misses to much of the fact that inflation in these really is self limiting, particularly given the North American penchant for over-consumption. Saw in an article just today, for example, that fuel economy still ranks way down at #8 in terms of American considerations when buying a car, while it's only in the last little while we are seeing a decline in the purchase of oversized homes (and their attendent energy bills). Very few people think twice about living miles from their place of work, and actually prefer suburbs that are poorly serviced by public transportation.

W/r to food, North Americans, IIRC, consume 1/3 of their meals as prepared outside the home; and even the caloric content of what they eat at home is well above healthy standards. Wander into any supermarket, it's stuffed with food imported from all over the world - which I quite enjoy, but if I was a bit pinched for funds I could easily forego the fresh asparagus in January or the frozen microwave Tikka Masala or even the prime cuts of steak...

So maybe it's time people focused on making smarter choices for themselves (particularly economists like Brad DeLong, who is still one of my own fav. bloggers) , rather than expecting the Fed to bail 'em out. Meanwhile, I'm off to dinner. I think it's Chinese tonight
  • #6
  • Oct 26, 2007 10:12pm Oct 26, 2007 10:12pm
when i'm still in school, (about 15 years ago ) my teacher said that america is importing goods from all around the world and mostly pay 'em with $$$....
the reason is trying to pay it cheap ( print it and the seller are forced to accept ) with this policy america keep importing while keeping their natural resouce intact.........
the other thing is IMF alike lend on $$$ too and of course they want it back in $$$ so after they give some, the money forced to circulate and by this way, it gain value (+political reason maybe).

in indonesia retail, some money with specific serial number (only 2 first digit seen ,eg: AK876096....) are considered fake and thus unaccepted by money exchanger and bank.... old printed one are hard to exchanged too... since they just can't keep up tracking it. (alas we have to spend it abroad on retail shopping place )

maybe there is another way to stabilize USD .

i think with population growth all over the world , the value of the land will keep rising, and so if one can hang on, mortgage problem will always subside (war and disaster not included).

asia crisis back to '97 may not an exact example, when investor bailed out following the down trend, local start to panic and follow it in rush (rupiah dropped from about 2500/$ to 16000/$ (maybe more) today price only can recover to 9100/$ (50% fibb retracement???)
historically, i guess investor do play a great role ... just can't ignore 'em
  • #7
  • Oct 27, 2007 10:47am Oct 27, 2007 10:47am
You're absolutely right in that unchecked inflation is very dangerous, but there really hasn't been this type of inflation since the late 70's and early 80's period.

If you're a central bank policy member in the current economic enviorment, it comes down to a question of where the biggest risk to the economy is coming from: inflation or growth. At this time it's apparent that the bigger risks to the economy are for growth to be negatively affected by the housing and credit situation and the fed has indeed lowered rates and shifted to a growth bias.

In the longer term, reducing interest rates is inflationary. I'm sure that the FOMC would have much preferred to have not had to lower rates, because it ultimatey does keep the economy in the interest rate driven boom-bust cycle. In the future, economists will be looking to assign blame for what happened and the argument will center around rates that were kept too low for too long and the financial "innovation" (mortgage securitization) that allowed housing and credit to bubble.

Economics is called he dismal science because every economic question has at least two sides-and many have muliple sides. For example,a weak dollar does help net exports, but it also brings the threat of imported inflation. You also can say that imported inflation might be mitigated by competition amongst exportors which would help to keep prices low.
  • #8
  • Nov 19, 2007 11:41am Nov 19, 2007 11:41am
This one fits in really nice with the topic
http://blog.foreignpolicy.com/node/7029

and I believe it's also interesting to note that the Fed seems to be "fed up" with cutting to no end...appears that for now they want to say "we've done our part, now see how you get through 2008 and no more presents before or after X-Mas, sorry" and not lean out of the window too far

Quote
Fed's Kroszner Indicates Rate-Cut Chances Are Slim: Federal Reserve Governor Randall Kroszner on Friday sent perhaps the clearest signal yet that the Fed is not inclined to cut rates further even if the economy hits a "rough patch," as he expects. "The current stance of monetary policy should help the economy get through the rough patch during the next year, with growth then likely to return to its longer-run sustainable rate," Mr. Kroszner said in prepared remarks to the Institute of International Finance in New York.


Source is as usual http://bigpicture.typepad.com/commen...anksgiv-1.html
Trust price. Know yourself.
  • #9
  • Nov 23, 2007 6:12am Nov 23, 2007 6:12am
Seems the English are just as torn as me in this regard:

http://forexfactory.com/news.php?do=news&id=57402

Quote
Today, Lomax identified some key uncertainties facing the UK. Firstly, whether the tightening in liquidity conditions will lead to a full scale credit crunch. Secondly, how consumers will respond and thirdly just how long any impact of the first two uncertainties will last.

While consumers appear to be in a relatively string position, tightening credit conditions 'should act as a brake on consumer spending and investment,' she said.

[..]
She also noted that the current problems in the credit market may have wider, long term implications.

'My guess is that over the next 3-5 years, we will see a sustained -- though not necessarily complete -- reversal in these trends, as banks re-appraise the risks around certain business models and complex financial instruments,' she said.

On the other hand, higher energy prices are driving inflation higher, she said, citing crude oil prices which are nearing the 100 usd level. She also made one key observation -- that she and other rate setters were reluctant to lower rates in 2005 even as the economy was slowing because oil prices were also surging then.

And, highlighting the dilemma facing rate setters, Lomax said: 'There are always risks in signalling that policy will be eased, at a time of rising energy prices. This is all the more after a year when inflation has been above target and on some measures remains uncomfortably high.'

Seems it's not all easy peasy stuff, this rate game
Trust price. Know yourself.
  • #10
  • Nov 29, 2007 7:12am Nov 29, 2007 7:12am
Another fun article / post on this.

http://bigpicture.typepad.com/commen...d-to.html#more

Seems everyone in the world is suffering from inflation except those who actually feel the full brunt. Funny how that works.
Trust price. Know yourself.
  • #11
  • Dec 6, 2007 12:54pm Dec 6, 2007 12:54pm
A comprehensive knowledge of the fundamental aspect of this market sector is definately an advantage and will enhance your ability to identify more trading opportunities than if you disregard it.

The more thorough your understanding of this market, the better trader you will become. Your best trading tool in this market is understanding the market and know what drives it and how sentiment changes. However, the skill lies in your own unuque interpretation of the information that flows through the marketplace at any time.

I read through a plethora of fundamental perspectives on a daily basis. I allow the bank to pay for analysts reports and i read them, understanding that the analyst is just doing a job and not forcasting with my money at risk. I listen to "expert and credible PHD economist's" offer their opinion, keeping in mind that they can profit from their outlook, as can I, but in two completely different ways. I use the information to gain a feel for market sentiment and i draw on my own conclusions and merge them with what is happening technically. I don't form an "OPINION" based on what "smart people" are telling me, because that interferes with ones ability to think objectively and logically and make discerning decisions.

I look at the charts and trade what i see, not what i think or hear.

Houdini, CTA
You are what you do, trade with discipline. Chris Lori, CTA
  • #12
  • Dec 16, 2007 11:06pm Dec 16, 2007 11:06pm
Quoting Houdini
I use the information to gain a feel for market sentiment and i draw on my own conclusions and merge them with what is happening technically.
wow, beautiful post houdini. its very apparent that you are in touch with your inner trader LOL. people are always surprised to see how much financial garbage i consume, they say things like "oh those talking heads dont even trade". and yeah i agree. but as you so eloquently pointed out, i am not looking to these guys to tell me what positions to take!
Relax and be happy.
  • #13
  • Dec 17, 2007 12:56am Dec 17, 2007 12:56am
Quoting Houdini
A comprehensive knowledge of the fundamental aspect of this market sector is definately an advantage and will enhance your ability to identify more trading opportunities than if you disregard it.

The more thorough your understanding of this market, the better trader you will become. Your best trading tool in this market is understanding the market and know what drives it and how sentiment changes. However, the skill lies in your own unuque interpretation of the information that flows through the marketplace at any time.

I read through a plethora of fundamental perspectives on a daily basis. I allow the bank to pay for analysts reports and i read them, understanding that the analyst is just doing a job and not forcasting with my money at risk. I listen to "expert and credible PHD economist's" offer their opinion, keeping in mind that they can profit from their outlook, as can I, but in two completely different ways. I use the information to gain a feel for market sentiment and i draw on my own conclusions and merge them with what is happening technically. I don't form an "OPINION" based on what "smart people" are telling me, because that interferes with ones ability to think objectively and logically and make discerning decisions.

I look at the charts and trade what i see, not what i think or hear.

Houdini, CTA
How long do your trades last (what's a short trade and what's a long trade for you)?

I ask because I see no value in fundamental info but perhaps my timeframe is shorter than yours.
  • #14
  • Edited 4:00am Dec 18, 2007 3:46am | Edited 4:00am
Hi Kiwi,
I will assume that your question is referring to spot trading the crosses, as opposed to alternative fx strategies and other means of asset diversification with currencies. My trades may last 30 min to 6 months, but the majority are in the - intraday to one week - timeframe.

Keep in mind, if you have one dollar, you have an fx position and portfolio diversification is important.

I deal in a multitude of currency strategies customized to the unique financial disposition of clients and aim to profit from global economic shifts, which requires an understanding of the fundamentals. I combine both, technicals and fundamentals.

A thorough understanding of the fundamentals will expand trading proficiency and opportunities. It is necessary for me to pick up on fundamental shifts, for example, IR spreads and related data, cuz i employ various positions like loan swaps (carry) on productive debt and other alternative strategies.

Whether your goal is capital growth through positions settled daily or longer term strategies, there are thousands of ways to skin the cat. If someone were to ask my advice on whether or not i think understanding fundamentals is important to an fx trader regardless of your chosen strategy, the answer would have to be "yes."

When I am making a trade consideration, it has to be within the context of overall market conditions. Most intraday trades are technical, while the longer timeframe trades will be based on fundamental viewpoint. I'm comfortable with the balanced approach.
Taking time to understand and follow the fundamtals would be well worthwhile and you would not regret it, even if you are solely a TA.

Regards,

Houdini, CTA
You are what you do, trade with discipline. Chris Lori, CTA
  • #15
  • Dec 18, 2007 3:51am Dec 18, 2007 3:51am
Right Merlin. I believe it is essential to your foundation and maturity as a trader. Understanding fundamentals and having your hand on the market pulse will foremost, take away a lot of blind spots and also build your competence and confidence in this market.

Houdini, CTA
You are what you do, trade with discipline. Chris Lori, CTA
  • #16
  • Last Post: Dec 18, 2007 5:50am Dec 18, 2007 5:50am
Quoting Houdini

When I am making a trade consideration, it has to be within the context of overall market conditions. Most intraday trades are technical, while the longer timeframe trades will be based on fundamental viewpoint. I'm comfortable with the balanced approach.
Taking time to understand and follow the fundamtals would be well worthwhile and you would not regret it, even if you are solely a TA.

Regards,

Houdini, CTA
Very nice summary indeed.
GOD IS NOT SHORT OF CASH
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