The day before

Tomorrow everything will become clear, or at least sort of clear. At 8:30 AM the U.S. Bureau of Economic Analysis will announce by how much the economy grew the last quoter. The consensus number is 3.1%, the fastest growth since the beginning of the financial crisis two years ago. And there are reasons to be optimistic. All the government stimulus measures should have had their effect by now. However, the problem with stimulus packages is that they are like antibiotics---you need to take them punctually, hope that your bacteria is not drug resistant, and be careful not to damage your kidneys when they circulate out of your system. To translate this, the government needs to continue spending, hope that the signs of recovery are not just a temporary reprieve, and hope that all this spending does not cause hyperinflation in the long run.

In other words, the tomorrow's data may actually perpetuate the uncertainty instead of dispersing it. A simple what if game:
What if the GDP turns short of the expectations?
This will mean that the unemployment has turned from a symptom of the recession into a deceases itself. Really bad scenario, which is not quite impossible--it happened in Britain. There the expected growth was .5%, but it turned out negative, -.4%. Oddly enough, I think that under this scenario the dollar may rise. The invert correlation between bad economic news and the value of the dollar has been one of the particulars of this crisis.

What if the GDP turns much bigger than expected, e.g. 5%? Then the dollar will also rise since this will signify a V-shape recovery, and the market will start prizing an interest rate hike in the near future.

I think that exactly because of this hypothetical developments the dollar is gaining presently. The uncertainty of how the GDP report will shape the market is causing a lot of profit taking. After tomorrow, however, given no surprise, the dollar can promptly go back to the 1.50 level. Lets wait and see.

Roubini agrees with Baronov

In case, you don't remember, in my entry from Sep. 17, I wrote that whatever carry-trade is going with the dollar, there will be a point in the future, when course is reversed and the dollar wins back due to the influx of repayments. Here is what Roubini said:
First,

Now we are in the mother of all carry trades,

and then added

[T]he dollar cannot keep falling forever, and there could be "a market crash all over the world" when the currency's course is reversed.

Does this guy read my blog?

1 1 1

This is just a small observation. As the dollar is loosing value three different currency pairs are gradually moving to parity---the AUDUSD, USDCAD, and USDCHF.

The closest one is the Frank. It closed at 1.008 this week, just shy from the parity mark.

Then there are the commodity currencies, that have been riding the recovery wave as a couple of easy going surfer dudes. The Aussie and the loonie are trading respectively at 1/0.922 and and 1.052 to the greenback, nearing this point where all the dollars in the world will come together as equal and throw a big party to celebrate their colonial heritage.

It seems that these three 1s will be reached at the same time, so when this happens, close your eyes and make a wish. What happens next, however, is anybody's guess. All this talk of how the cheap dollar is hurting the economies of all other countries but the US whispers of a big massive coordinated intervention. It will be a game of chicken, and is there a bigger chicken then the ECB?

And to avoid making my case for ECB intervention, I am just posting a link to an FT article that does it for me.

Gambling and currencies--Las Vegas edition

Folks, first excuse me for not updating your favorite blog for so long. First, I was writing a really boring article for an engineering journal, and then I was enjoying a crazy four-day Vegas vacation, and in between these two things I left my blog neglected. Now, however, your faithful blogger has acquired such indispensable knowledge, as how long can you survive on four hours of sleep a day, should you split two 8ths, and can you call it an after party if it is before 4 AM. (In case you are wondering, the answer to the first question is--a lot if you have pure oxygen inserted in your air circulation system; also, yes you should split the 8ths; and to the last one--people do it only in Boston.)

In Vegas, I also figured out that the great trick of gambling is the illusion it gives of pattern and balance. It was so funny to stand next to a roulette table and see all the suckers that have notebooks (helpfully provided by the casino) for recording the numbers that are showing up.

It is so natural that the human brain detests randomness. The ability to see the structure, and the interconnectedness of the surrounding world is what can help you hunt your prey in the jungle, or conquer your enemies, in the battle field. In the casino, however, it turns you into an audacious spender fixated on a never coming payout.

How this doomed search for pattern is different from technical analysis? After all, from my perspective as an engineer, the rational behind most of the technical analysis tools is as laughable as the logic of the guys filling their notebooks with numbers at the roulette table. Well, there is one major difference between gambling and trading, and this is that in gambling, the house is always pattern-blind. That is, the house is a player that does not believe in anything but the law of large numbers, a player that always wins. In markets, however, there is no such agent. There is a democracy there, and the more players believe in the "pattern", the more it turns into a pattern. Is this, however, more rational than a guy putting numbers in a notebook...