8/13/2019 FX Concepts Market Insight - Nov. 21, 2013

1/2

MARKET INSIGHT REPORT

Loving Them Too MuchNovember 21, 2013By Jo hn R. Tay lor

Chief Investm ent Off icer

Societies are defined by the people living in them and their children who pass the mores and

nature of that society into the future. It might not be clear that German pre-schoolers would

be behaviorally different than Danish children born at the same time several hundred

kilometers away, but some rather famous studies have shown that to be the case. Social

differences are spatialnorth vs south, Serbia vs Croatiaand time differences children

born in 1947 vs those born 50 years later. These ideas can lead in racial and nationalisticdirections, often dangerous, but I must try as the ideas hidden here are too important to

ignore. I hope on this one page I can set you to thinking. Rather than get into trouble

comparing nationalities, I would like to look at the more recent crop of young Americans,

comparing them with those of Tom Brokaws book, The Greatest Generation, those that

fought in WWII, and then project into the future, applying these thoughts to economic growth

and financial markets, targeting the value of the dollar and the relative performance of the US

going forward.

Tom Brokaw argued that the men and woman of that time defended their country and those

of others because they felt it was the right thing to do. They put themselves at risk and

worked hard for little or no personal gain, accepting the good with the bad, knowing that if

they pushed ahead through the tough times, eventually they would succeed. As its teenage

years were spent in the Depression, this generation had seen plenty of difficulties despite the

feeling many expressed at the time that these youngsters had been coddled by their moms,

trying to protect them from the ugly realities of that decade. Coming out of World War II at 25

to 30 years of age, these men and women had seen a lot of suffering and pain. More

important, they had responsibilities and risk thrust upon them (think of John F. Kennedy and

George H.W. Bush, commanding men and very valuable equipment before they were 25

years old). Then financial leaders set up Bretton Woods, Congress built the interstate road

system, and the US struggled to define the role of labor, dishing out responsibilities.

Countries, companies and people were all expected to perform. Success followed, allowingthe US to grow for many years. Now three generations later, the situation is reversed as the

society takes care of the individuals. No one is building ittaking responsibility. Its a what

can you do for me,and a you owe me a livingworld. Most are more insular, more

narcissistic than their grandparents. Some say it is computers and some say this is the way it

should benot the uncontrolled, risky pastbut it is more defensive, less caring of others,

and more conservative. Responsibility is taken from individuals not given to them. Entitlement

programs thrive in this atmosphere. Why shouldnt they? The Fed does this too

recessions, not allowed!Will this last forever? No. Will the really young ones be the same?

As Mom and Dad are self-centered, dependent not independent, the children get short shrift

especially as they become older. They are shut out and wont get what they need. Already

they cant get jobs. They are living in a new depression. The government wants to help, butthey cant just like the 1930s. QE will come out badly, and the young will be the ones who

payresponsibility for the future will be thrust upon them. They will kill entitlementshurting

us old guys. The US and its dollar will be strong.

To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com Page 1

8/13/2019 FX Concepts Market Insight - Nov. 21, 2013

2/2

November 21, 2013

CURRENCY Europe Long-Term View

Deflation is good for Eurozone Bonds

By Jo nathan Clark

When analyzing currencies against the

dollar there is a checklist of positive and

negative quantitative and technical factors

we use to determine if the current

environment is positive or negative.

However, it isnt simple to value the euro

due to the 17 countries in the Eurozone andthe handful of other countries that use the

single currency. There are a myriad of

reasons to buy or sell it that defy easy

classification. The Eurozone has a central

bank that recently cut its main refinancing

rate in half to % due to fears of deflation and concerns about the feebleness of the

economic recovery. Eurozone inflation fell to 0.7% in October, well under its the ECB target

of just under 2%. The central bank is contemplating other ways to ease monetary policy that

appear to conflict with the ECB being modeled after the German Bundesbank. This includes

quantitative easing by making asset purchases similar to the Federal Reserve, Bank of Japan

and other central banks.Also under consideration is cutting the interest rate on bankdeposits at the ECB from zero into negative territory. If we were just dealing with Germany

with its 10-year government Bunds only yielding 1.71%%, well below the 2.78% in the US,

then the ECB would have a freer hand to move and we would view the euro negatively. With

the ECBs easing bias and the Fed contemplating the end of its easing cycle, we would

probably be short the single currency. But, no. One of the most popular trades in the

financial markets this year is owning the government bonds of the peripheral

European countries where 10-year yield pick-up over Bunds is 6.65% for Greece,

4.21% for Portugal and 2.37% for Spain. The threat of deflation in the Eurozone means it

is likely that higher interest rate regional bonds will rise in value and this further increases their

attractiveness. There are two key factors to watch regarding owning euros and peripheral

debt. The first is the lag between the ECB contemplating QE and if it actually can act, whichwould take months and much debate. If they act the euro will fall, but will they?. The second

is the actions of the Fed. When it finally appears likely to taper asset purchases the yield on

nearly all global bonds will rise, leading to liquidation of the high-yielding European Bonds.

We are getting a number of reliable cycles calling for a significant peak in EUR/USD

next month, with the week of December 2 the most likely time, but the strength could

persist up to several weeks longer. Our target for this upmove is the 1.3800 area. If the

upmove becomes stretched and lasts into the FOMC meeting during the week of December

16 it could reach 1.4025 before peaking, but this appears far less likely to us. Following the

peak expected in December the cycles call for weakness lasting a minimum of severalmonths. Only a close below 1.3350 immediately turns the outlook negative into February.

To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com Page 2