29 November 2010

A Rocky Shore: USD, Cable and Growth

An optimization will tend to find a limit, that is one reason why forex does not express growth in the way the Dow most certainly does, and the economy with it. The exception is EUR/USD. One possible reason for this is that forex does contain chaos growth and indeed EUR is a new creation, it needed to grow.

That is one possible argument the other would be the one this blog has outlined that the ECB Fed Funds rate differential calmed the waters of money flow and subdued optimization such that chaos growth became more prominent than usual. However this resulted in a correction with a vengeance in the crash from 2008 and vast revaluation of this instrument.

Put it this way, the search for value could not be held off forever, doing this would have resulted in a failure of forex as a dynamic valuation process (optimization is the efficient engine of this) just as the equity market failed in 2008 not only as a valuation process for companies but also as a focus of money flow. Thus is could be argued that the correction was a restoration of functionality to the forex market.

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I would argue it was a restoration thus of value to equity. There is a causality, forex itself re-setting the Dow. The fact that the Dow became like forex in the crisis, might support this. The re-setting process seems like a melting of the equity market. Thus how does one restore the Dow. One would probably need to remove that ECB Fed Funds differential, which despite supposed zero rates, still stands. That is a more causal elaboration of the position of this blog that interest rates need to be raised.

Everything right now supports the way things were up till the crash, which resulted in the crash. One difference this blog feels is surprisingly QE2. That is because company growth has carried on regardless and at this time money flow may help restart this growth cycle in the Dow again. But I believe that a full restoration needs USD to grow. Behind that will be a fractally growing economy, company growth. That is happening, but it needs to be more central than it is now.

The capacity of the economy to self-regenerate is not in doubt, the US economy has done it before and will do it again, fundamentally it has this enormous reservoir of creativity, expressed in economic action. This is something the UK has actually been trying to emulate (it used to have this). I believe that is may just be possible that it will now. Imagine the UK economy as an economic powerhouse again ?

The kind of painful action the government is taking right now seems to have resulted in enormous benefits with other countries in the past (i.e. Ireland, but the UK has a sounder basis for this). Perhaps this is because it strips away the kind of devices that result in easy come easy grow growth, i.e. action that helps that fractal growth happen. Thus for USD, all the US needs to do is to get that deficit in order and raise interest rates. For Cable the UK government has a lot of work to do to free that dynamo of creative economic action again, but it is possible.

In my tweets (@GuyBarry) I noted that it may be the case that the titanic money flows out of the UK in the World Wars distorted this dynamo. It is the contention of this blog that money flow is an essential element of growth, but its misuse or overuse can be devastating to systemic growth processes in financial systems, as the present state of the world economy perhaps shows, however necessary it may be for non economic reasons. It may be the world economy is now like the UK economy after the Wars, except that the US economy can generate company growth.

For USD all this means that USD should go up, especially relative to EUR, if the US economy genuinely grows. Since all attempts to simulate using money flow have failed so far it seems we are stuck with that real recovery this blog and my tweets have been talking about, but that is a good thing, it is just not the way things have been. That is a manufacturing recovery, but more than this the fulfillment of the potential of the Internet boom and that creative dynamo at the heart of the US economy continues.

If stimulus injected into the system simply generates another move upwards without real growth, accompanied by rises in EUR, then it will simply generate another correction down. The retracement waves of forex are everywhere, in a market which is about money flow. But the elements of real company and economic growth are nonetheless there.

Those fundamental realities this blog discusses did reassert themselves on EUR, but they were really always there, they were simply masked by the flotation of money flow, which ebbed when the crisis happened, revealing a rocky shore. The question is can they be masked again, attempts so far have not succeeded, but they have had an effect. But if real growth happens then stimulus will have been a necessary support for this as this blog argues, it is a matter of timing, it is like making a trade which affects the market, at the right time point, on a vast scale. Thus what the effect of stimulus is, may be apparent in terms of how time affects the reaction.

For Cable it is a matter of what Cable's valuation means. As this blog has discussed it is a historical valuation, we can say perhaps it represents that creative dynamo in action, forex seems to believe it is real. What this means is a genuinely growing UK economy may not result in valuations higher for Cable than were seen in the past. That is an expression of the limiting of an optimization, hard wired into the valuation ranges of Cable.

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