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ForEx is Foretold

A year ago, the realities of the economy were just beginning to sink in.  The situation that we know now as a Recession, Depression, bailout, or whatever you want to think about didn’t happen overnight, but realization of it came to most people very quickly, like a nightmare that hit just as the clock was chiming 3AM.  We’ve been awake for a whole year yet, but the clock is only chiming four times and dawn is still hours away. Since we’re awake, why not spend the time thinking it through?

The first thing that always comes to my mind is how so many commentators continue to say that no one saw this coming.  The truth is that many people knew what was happening, even people well placed in the world of economics.  They seem to have one thing in common between all of them, namely a significant amount of international and/or foreign exchange (ForEx) experience.  If you think about it, this explains not only why they saw it coming, but why they are so easily ignored.

The names Nouriel Roubini, Bill Gross, and John Mauldin may be a bit more famous now than they were a year ago, but they are still hardly household names.  Each of them predicted as long as 2 years in advance just what would happen, each was ignored, and each has fared reasonably well through the downturn.  I like to add Graciela Chilinisky in this group, since her work on game theory predicted just how risk management would fail – although it was in dense academic papers that didn’t exactly make the evening nooze.  The only thing they have in common is their experience in international exchange.

I’ve been talking this out for a while, trying to figure out why ForEx was so critical to understanding just what was going down in advance.  There are three key reasons that my friends and I have been able to come up with.

First of all, ForEx people are seen as specialists, but they are really generalists. A bet on a currency is a bet on a whole economy, so you have to understand a big picture right off the bat.  You can’t focus on a narrow market segment and understand what’s going on in an entire nation.

The second thing that comes to mind is that ForEx managers have a lot of international experience.  They have learned to look past different customs and procedures and learn what’s important.  They have, to a person, great BS detectors, too.

The last thing is the downside of ForEx, which deals mainly with sovereign debt.  That’s a fancy way of saying that a nation can just decide that they aren’t gonna pay it back, or that they’ll just print a lot of money, and there’s not much you can do with it.  ForEx traders are masters at managing risk, one way or the other, because their ultimate risk is about as severe as it gets.

If these people are so sharp, why didn’t anyone listen to them?  That’s where it gets interesting to me.  To have a reliable bubble economy, people really have to start buying their own BS on a consistent basis.  It’s especially easy to marginalize the people who don’t want to come to the party if they look like geeks and nerds.  As long as ForEx is seen as nothing more than another strange technical specialty, there’s no reason to have them spoiling the fun.

But that’s where the downside gets even more interesting. We’re already looking at $1.50 to the Euro, which is a good 25% off the target that was set just 10 years ago when the single currency was launched.  The US Dollar is only expected to get weaker.  ForEx is starting to look like a hot prospect for the simple reason that the ties to the world economy that were once something like US edicts are now going to start moving the other direction.  Its going to be hard to get other people to make stuff for us for the paltry price of whatever green stuff we can print.

Not only were the ForEx people right, they were right in part because we thought we could ignore not just them but everything they did. Their analysis is certainly valuable, but their outlook is going to be even more important.  Are we paying the right attention to them a year on?  Not yet.  But we will.

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29 thoughts on “ForEx is Foretold

  1. People never want to hear bad news. But they do want to win, or at least not lose. I think if we learned anything over the last year its that we have to want to win more than we have to want to party. You were right on and now I see who you were following to get the straight story. Looking back that was way better than the party ever was.

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  5. The USD is definitely taking on a lot more risk than it ever had before. I’ve long been in favor of devaluation, since it is probably the only thing that will halt our 50 year long slide in manufacturing. But the problem is that it’s likely to pop quickly and with a lot of mess. That’s not just bad for us, it’s bad for the whole world.

  6. You should tell us more about what the declinging dollar means to things like manufacturing. Start from the begining and spare no details. If you think this is what is in the future we need to know, and the MSM isn’t telling us.

  7. Jan, I may do just that. I think we’re getting to the point where very big changes are starting to happen very quickly, which is why I wanted to talk about ForEx ahead of what’s coming (start from the general, move to the specific, you know the drill by now!).

  8. I think that we make a point of not listening to smart people anymore. Smart people scare us. We want to be entertained.

  9. Bob, that’s a luxury that might be partially true, but it’s going to seem a lot more expensive as time goes on. It may be a hard habit to break, but I’ll bet we find we have to.

  10. I think it will be a while till the US comes back… The company I work for is finely feeling the depression thats going on, so I know thats going to affect others as well…

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