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Currency Wars and Your Trading

I recently read a book that has had a significant impact on my world view.  Currency Wars is Jim Rickards’ exploration of the last century of international relations through the lens of currency values.  Through his writing, he connected a lot of fairly disparate events in history for me and gave me a new perspective on the current international situation illuminated by the political ends of politicians and central banks. 

Currency War

Rickards defines a currency war as one or more countries attempting to devalue their currency primarily to increase exports and create jobs at the expense of their trading partners. Currency wars consistently end poorly as a result of currency devaluations, capital controls, inflation recession, retaliation, and sometimes violence.  Though the long-term costs tend to outweigh the short-term benefits—benefits that may or may not accrue—central bankers and elected politicians haven’t been deterred.  According to Rickards, in the last one hundred years, there have been three currency wars, which he has labeled simply enough as CWI, CWII, and CWIII. 

CWI occurred from 1921 to 1936 as a result of not just WWI but several identifiable antecedents.  Among those circumstances were the “classical” gold standard for currency valuations, the new US Federal Reserve Bank, and the imbalances created by the armistice with Germany.  A violent war in the form of WWII followed CWI; however, that kind of outcome does not necessarily follow a currency war.  The conclusion of WWI prompted a new international agreement on a system of currency valuation.  The stability brought about by the Bretton Woods conference lasted from 1944 to 1973.

The stability introduced by the Bretton Woods Agreement lasted until CWII, which Rickards says started in 1973.  Instability follows stability and that instability started showing up in the late 1960s as inflation in the US and UK.  The devaluation of the Pound Sterling and the Nixon Shock were notable events in the lead-up to the start of CWII, which lasted until the international community reached the Louvre Accord in 1987.

Rickards cites 2010 as the start of the current currency war and points to three main fronts:

  • The US and Europe.
  • Europe and China.
  • China and the US.

Although Rickards believes we are still early in the struggle, so far, the results for CWIII are at a draw. The pressures on the dollar are evident.  The decline of the absolute value of the dollar can be seen in the dollar denominated price of gold, though the relative value of the dollar against other currencies has not changed nearly as dramatically.  Again, relative currency devaluation is the immediate goal of a currency war and because this is at a draw so far, it could go on for quite a while longer. 

Potential Outcomes for CWIII

Rickards sees four potential outcomes from CWIII:

  1. The world will learn to live with multiple reserve currencies rather than depending on the dollar.  Actually, this has already occurred and diversification away from the dollar is likely to continue.  The dollar amount of global currency reserves has dropped from about 70% in 2000 to more like 60% recently.  Whether or not this trend continues, it does nothing to address a core issue: the gross (pun intended) amount of debt in the world today. 
  2. Special Drawing Rights (SDRs) from the IMF ascending to some more important role in international balance of payments.  Like the multiple reserve currencies outcome, the greater use of SDRs would do nothing to address the debt levels and  could help alleviate some.
  3. Gold could find a new role for currencies.  There is not one solution here and a gold-backed currency does not mean any single method of gold backing.  Rickards believes that gold has some valuable purposes and some likely role in currencies the future. 
  4. The global trade world we know today could devolve into a series of regional trading blocs, or into a much more chaotic situation.  Rickards provides detailed reasons why such a devolution could occur as well as a narrative of a potential path of events. 

For Your Consideration

Naturally, such a well-written, well-researched and comprehensive book generated some thoughts relating to a trader’s business.  Here are a few primary considerations:

  • Should everyone become a currency trader?  Maybe that’s a bit much but should every trader monitor the relative value of his/her equity against other currencies and maybe gold?  I can’t think of a good reason why not.  This would be a meta-equity system or a hard asset valuation system.  As long as the last two currency wars lasted and as massive the imbalances are internationally today, it seems that such an exercise may prove valuable for years to come. 
  •  Rickards recounted the Mexican Peso crisis in the 1990s and said that, while it seemed to be building for months and months, suddenly, in one night it was over.  He relates such financial experiences to a phase shift—a gradual buildup of forces and then sudden release of energy as found in avalanches or earthquakes.  Where else do we have a similarly structured financial event unfolding now? Greece? Elsewhere in the EC?  The Chinese real estate market? 
  • Nixon preempted the most popular TV show at the time in 1971 (Bonanza) to make the “Nixon Shock” announcement.   Which show would it be next time if it were near term?  American Idol? NCIS? Seriously though, such a shock could come from the President of the US or from another country’s leader next time.    How would such a market-led or leader-driven shift affect your market and your preferred trading instruments? 
  • In a market update recently, Van pointed to the possibility that earnings from trading a bull stock market could be at risk of being lost if the dollar weakens.  For anyone who plays it safer though and remains in cash, the weakening of the dollar insidiously erodes the value of that “safe” position.  Our research assistant Frank Eaves likes to say, “You are never flat.”  Being in cash is a large, long position in the dollar.  How do you manage the risk on that open position?  Do you manage that risk?  If so, where is your stop on your dollar position?
  • As for Rickards warning of a dollar meltdown, do you have contingency plans for such an event?  Van stresses the importance of imagining worst-case scenarios and thinking through potential responses to them.  This worst-case contingency planning is so important that he believes traders should have such a plan even if they don’t write up a trading plan.  On the flip side, could you consider ways of profiting from a worst-case dollar scenario?
  • On a personal psychology note, I have noticed that I find richly-detailed bearish predictions very appealing in part because of their rich detail and my currently bearish bias.  In the past, that has affected how I trade.  Are you aware of any such external influences that affect your trading?  Now, I am aware of that tendency and am quick to remind myself that the prediction, however detailed and believable, is still a prediction and nothing more.  Occasionally, I will even construct a richly detailed optimistic prediction to neutralize the effects of the bearish prediction.

I highly recommend Rickards’ book to anyone interested in understanding the pivotal role relative values of currencies has played in the history of the last century and a context for understanding what we are experiencing now. 

About the Author: RJ Hixson is a devoted husband and active father. At the Van Tharp Institute, he researches and develops new products and services that will help traders trade better. After a number of adventures in Wi-Fi connectivity, he submitted this article en route to Sydney Australia where he’s eagerly preparing to teach two workshops with Van.  He can be contacted at “rj” at “”.

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Unusual Market Characteristics

Three years ago, the Barton family got a new addition—a Havanese dog named Rocky. Rocky is 10 pounds of fury, or more accurately, 10 pounds of fur (see picture below). Rocky is awesome! He’s smart, loving and playful; he is truly one of the family.


Domesticated dogs are still very much pack animals. As such, their actions and motivations are pretty predictable. So when Rocky acts in a way that is different from his usual pattern, I take notice and try to figure out what caused the behavior.

Havanese are lap dogs; when we’re watching a movie or spending any amount of time in a seated position, Rocky usually finds a lap to park on. Recently, he was in my lap, but instead of his usual calm self, he was a bit agitated. He wouldn’t lie still, always sticking his nose in a new place and constantly changing his position. And then I found the reason why—a piece of popcorn was lodged between the couch cushions. And with his sensitive dog nose, he knew it was there. Once the food was retrieved (and given to Rocky as a treat, of course), order was restored.

In a similar way, when the markets do something unusual, I take notice.

From mid-December to late February, the equities markets have been grinding higher and higher with no significant pullbacks. In fact, if we look in the chart below that has a fairly quick acting 20-day moving average (MA), we see that the S&P 500 price has not touched that MA for 40 trading days!

dr chart

One researcher noted that in the last 44 years (since 1968) there have only been 21 times when the S&P has spent 30 days above the 20-day MA without touching it during that time. All 21 times led to a higher market 2 to 4 weeks later (in other words, a higher high was made in the next 10 to 20 trading days.) The implication is that an extended run up that has no significant pullback has traditionally been followed in the intermediate term by continued strength, rather than an immediate pullback.

With Europe’s central bank loaning out cheap money to buy bonds in needed countries, the monetary liquidity-fest continues on. The Long Term Refinancing Operation (LTRO) promises to keep the injections coming. So bets against the equities markets are tough when new capital is floating around. However, when this newest version of the “sugar high” wears off, look out below!

As always, I’d love to hear your comments and feedback. Send them to drbarton “at”

Great Trading,
D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at "drbarton" at "".


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From Dr. Tharp

When You Create the Results You Are In Charge of the Process

An Excerpt from the book Super Trader, by Van Tharp

When you look at your trading results and say, “I created those results,” you are in charge of the process. If you don’t like the result, you can start to look for the mistakes you made. When you find the key mistakes that actually produced your results, you can make changes and get better results. That is why personal responsibility is so important and why I look for it in all of my Super Traders.

Do you like the results you produced as a trader in the last 12 months? If not, what mistakes did you make and how can you correct them? Ask yourself the following:

  • Do I have a business plan to guide my trading?
  • Do I have a worst-case contingency plan?
  • Do I have several positive expectancy systems that are well tested for this market climate that I can trade?
  • Do I have something else that will work if the market type changes?
  • Do I even pay attention to the type of market we are having?
  • Do I regularly work on myself as the core of my trading results?

If you answered no to any of those questions, you have some real clues about why your results in the past have been undesirable. These, by the way, are only a few of the questions you could ask yourself.

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February 22, 2012 - Issue 565

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A Must Read for All Traders

Super Trader



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