Friday, August 26, 2011

Long Term View: Update August 26, 2011

If this analysis provides any true insight, it would go against my current thesis (Unless my current thesis is only relevant in the short term). I have been quite bullish on risk positive correlated trades. The current huge drop in the US equities (de-leveraging of expectations), normalization of prices in WTI crude, and continued dollar weakness has led me to believe there are big buying opportunities out there to be bullish on risk. 

However, if the above analysis seems to go against risk positive trades in the longer term. Seen in the bottom chart of the EUR/USD and USDX shows that since the last corrective cross we have yet to see another cross happen. The 2008 crisis only was leading into a corrective cross but monetary policy quickly extended the trend from the last cross. 

Historically it would make sense for a need of a stronger equity crash to correct overly bullish expectations, and the dollar would have to strengthen again for US domestic consumption to pick up with increased inflation expectations and rising rates in order for a risk positive scenario. However since the early 2000's the world balance has changed further, especially through the 2008 crisis with the rise of emerging and developing Asia. 

1. The new norm may be weak dollar and strong equities around the world. As the US may grow slower than the rest of the world (assuming the Eurozone sovereign debt crisis finds a bottom).

2. Or we will see a very strong return to US growth and inflation much faster than the rest of the world inline with historical relationships. 

Scenario 1. is inline with my original thesis. Scenario 2. is inline with with what the graphs above explore. Scenario 2. would imply more corrections in financial markets are needed to happen before re-balancing can occurred followed by strong world economic growth.

Analyze Capital LLC

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