The Third Choir

By: Erik Swarts | Tue, Dec 17, 2013
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The Choir
Despite what the academics and semantics present, we remain firmly in the tapering is tightening camp. Furthermore, while it's not an apples-to-apples structural comparison (because of ZIRP and QE) to previous Fed cycles, we would argue that the esoteric nature of our current monetary policies introduces a greater behavioral catalyst for the markets to react and interpret; thus, a longer lag-time between what the Fed says and eventually does. Are they still exceptionally accommodative? You bet, but they have been trying to prepare the markets throughout the year that they are approaching a major pivot. In terms of where the rubber meets the road in the market, the bond market voted unanimously this spring that even a mention and discussion by the Fed of the taper was equivalent to tightening these days.

With the Chairman's last meeting on deck tomorrow, we feel it's a toss-up between a ceremonial introduction of a taper or a more definitive timetable to when the Fed will begin curtailing QE. From our perspective, it's mostly a moot point - because we feel the bond market has already accomplished the lion's share of heavy lifting with higher rates this spring and summer.

With respect to the US dollar, we continue to expect that the USDX will make another push towards the bottom of its long-term range. At the end of the Fed's previous accommodative cycles (1977, 1994 and 2004) - the dollar has initially come under pressure and tested the bottom of the range. Our comparative profiles of the USDX have been pointing that way since June.

USDX 10 Yr Yields Fed Funds Rate 1973-Today (Monthly)
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The one constant you can depend on is that participants will overreact when the US dollar weakens. Point being, they egregiously misread the tea-leaves to indicate hyperinflation on the two previous occasions (08' & 11') when the dollar tested the lower limits of its long-term range. With the quantitative reservoir now almost full and reaching the Fed's flood gates - we expect to hear a very loud and boisterous third choir as the dollar doubles back.

Last year at this time we had looked at the 1980 top in gold as a prospective guide for both the current market and the US dollar. Gold did loosely follow those historic break-lines well into the spring, but a notable negative divergence was recognized in the dollar which led us to temper our downside expectations with precious metals in June and pivot bearish on the US dollar. While gold has made a round trip back towards its June lows, we feel it's only a matter of time before the market is inspired to its feet by members of the third choir and hymns from 1977.


USDX vs Gold vs  Fed Funds Rate 1973-Today (Monthly)
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Euro vs US Dollar Index (Monthly)
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USDX 1994 vs USDX 2013 (Weekly)
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USDX 1994 vs USDX 2013 (Daily)
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Erik Swarts

Author: Erik Swarts

Erik Swarts
Market Anthropology

Although I am an active trader, I have always taken a broad perspective when approaching the markets. I respect the Big Picture and attempt to place each piece of information within its appropriate context and timeframe. I have found that without this approach, there is very little understanding of ones expectations in the market and an endless potential for risk.

I am not a stock picker - but trade the broader market itself in varying timeframes. I want to know which way the prevailing wind is blowing, where the doldrums can be expected and where the shoals will likely rise. I will not claim to know which vessel is the fastest or most comfortable for passage - but I can read the charts and know the risks.

I am not a salesperson for the market and its many wares. I observe it, contextualize its moving parts - both visible and discrete - and interpret.

I practice Market Anthropology - Welcome to my notes.

Erik Swarts is not a registered investment advisor. Under no circumstances should any content be used or interpreted as a recommendation for any investment, trade or approach to the markets. Trading and investing can be hazardous to your wealth. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This is strictly for educational and informational purposes only. All opinions expressed by Mr. Swarts are subject to change without notice, and the reader should always obtain current information and perform their own due diligence before making any investment or trading decision.

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