07 December 2010

Forex Pointers to Growth: Reality Beckons

Can we regard the bounds on USD/JPY as an optimization limit ? As one looks at higher time frames on a currency chart one sees a certain order, the unpredictable retracements which can devastate a position and which force one essentially to gamble with a stop loss as your point to exit are turned into huge waves.

This blog has warned of the dangers of using this appearance of direction to hold positions over the long term. The problem is directionality. With a stock direction is already taken care of by chaos growth.

If a stock does not go up (which is what chaos growth is represented on in a chart) well it depends on where it is on its growth. If it has entered the stage where is is moved about by money flow (growth has been stopped by that overuse of money flow this blog has talked about on larger economic scales) it can go down steeply as money flow which one can say has destroyed all structure, flows out and one rides the deflation with shorting.

That was the equity market during the crisis. Usually one tries to enter near the beginning of a growth cycle, that really is the basis of investing as I and other see it. In that case it cannot go down much further and that is a kind of inherent investing stop loss.

So what does a forex chart represent - well this blog believes it is something like an optimization process. That does not have a direction. Directionality does not exists at all in forex. This blog believes that chaos growth only provides a seed to re-start optimization. Optimization essentially needs a start point, else it loses any sense of momentum.

Perhaps this is what we see in the random consolidations common in forex, though even here there is order of some kind. Thus chaos re-starts this process itself of optimization.

But that point is not represented on charts, but it can be pointed to by indicators. A useful analogy is pointers in the C programming language, they point to something very real yet that reality is completely abstracted from the programmer.

In this case it is necessary to abstract it, and it could be argued that it is necessary to abstract it in forex, because the complexity of this system is beyond the capacity of the mind or logical representations to represent. As the blog suggests it is not at all beyond the capacity of the mind to feel in an intuitive way.

So what are those bounds on long term currency charts pointing to. This blog has discussed them in the past and it could be suggested that they are pointers to the capacity of the currency to grow, and thence of the economy behind them to grow. This is a complex point, because the US economy has great capacity to grow but it has tended to obscure this with a vast budget deficit.

This blog has felt that the valuation of USD/JPY points towards a crossroads, either the US economy fulfilling the great promise of Obama or continuing on the road of asset inflation. This blog has also pointed out that the market is rejecting that road. This blog believes at the heart of a capacity to grow is that creative dynamo, that the US most certainly has.

Tax cuts are not necessarily against this, they can certainly be helpful for growth from the bottom up and indeed the nature of the US economy may make this a positive route. That creative dynamo is not absent from Europe, it seems to exists in the UK and Germany.

It is not that it does not exist in other countries, but they seem to lack the infrastructure to express it in company growth. That should perhaps be a direction for the EU, rather than looking to make money off asset inflation. When the US economy revalued itself, the EU did not revalue itself, rather it sunk with it. This suggests that it itself is asset inflated.

This is the difference between a company coming off of money flow highs and a company like a tech company valued on future revenue projections crashing after the tech boom. It is the difference between change in a system and damage in a system (part of my research in AI).

That suggest the US economy is fundamentally in a growth cycle, maybe finding a point to optimize itself (suggesting an economy is more like forex than an equity market in certain respects).

For the EU, I would suggest looking at true economic integration, for example infusing the best of the UK and German company business model throughout the EU. One could assess 'best' based on profitability here as well as factors important to the EU (and me) like workers safety and rights.

The EU is a rich infusion of templated success, for example the way the Irish turned a non-economy into a great economy and the successes of the Italian and French economies. The issue is adapting and infusing them.

The effect of this on EUR would be most interesting because it would start to make the EU like the US in terms of that creative dynamo on a large scale. One could even argue that the Dow mirror growth of EUR/USD up to the crisis was like a pointer to future things, in the way the Dow tech growth seemed to have accurately reflected a future growth cycle.

So EUR/USD would become in this rosy world a battle between growth (since it is a pair it might not do much in this scenario).

Chaos growth subdues that complexity in forex but this blog has argued that it may have been imposed by those interest rate differentials. But obviously I believe it may have been more a case of structuring it with the help of natural growth processes inherent in the birth of EUR. In all events in the case of EU and US economic re-structuring happening or continuing in a coherent and positive way, it would be real.

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