Stock Valuation and Currencies

One of the toughest mental habits to break is the notion that you “buy” something or “sell” something. In truth, all one ever does in the market is exchange one thing for another thing. For example, you may buy an SP500 ETF (SPY) but you only do so by simultaneously selling US$ cash. One of the two people surrounding you in the exchange is selling the SPY ETF to you and buying US$ cash (and likely selling that US$ cash to buy something else – or maybe not). The other person in the exchange is buying your US$ cash and selling something else. “The market” is, in truth then, all of those transactions – aggregated across all asset classes – worldwide.

This is an inevitable part of globalization and it obviously gives a monopolistic advantage to those who a)have the biggest fastest computers running the most accurate trading algorithms and who b)have the most proprietary information about the individual transactions that occur and who c)have the cheapest access to the one external input into these markets — which is the central bank’s ability to create money out of thin air so that “cash” can acquired without selling anything else. IOW – the advantage goes to the sharks — not you or I.

Failing to understand this and keep this constantly in your mind when you assess investments means that you are, potentially, chum. Let me illustrate this using the SPY ETF as expressed in different currencies.

First, the SPY chart expressed in US$. Momentum peaks in mid-April, price peaks in late April, followed by two waves down with lower lows and lower highs. Recent 3 days has moved SPY above the 50 day avg and now above the 200 day average.

Second, the SPY chart expressed in pro-fiat anti-dollars (the dollar index). Momentum and price peak in mid-April, followed by one wave down, a rebound, a higher low, and now a higher high. Recent days have punched thru the 50 day but are below the 200 day.

Third, the SPY chart expressed in euros. Momentum peaks in late March, price peaks in mid-May (AFTER the flash crash). Followed by two waves down with lower highs and lower lows – and a third wave with a higher low and, so far, lower high. But SPY has never dropped below the 200 day and is currently tracing up towards the 50 day.

Fourth, the SPY expressed in yen. Momentum peaked in early April, price peaked in late April – followed by two waves down with lower lows and lower highs. The current rally has not even broken through the late May lows and is now just at the 50 day avg and below the 200 day.

Finally, the SPY expressed in gold. Momentum and price peak in late Mar, followed by a pullback in early April, and a lower high in late April – then a two wave plunge with lower lows and lower highs and in the last two days the rally has moved above the June high and is now above the 50 day average but well below the 200 day average.

All very very different charts with different technical interpretations. The story of blindfolded people touching different parts of an elephant comes to mind. The only difference here however is the currency — not different parts of the elephant. Look at only one of these when making buy/sell decisions and you run a real risk of being blindsided by the rest of the world. That is why the big global financial institutions are running serious hedge funds and quantitative HFT and why the currency markets dwarf all other markets in liquidity/volume/transactions/etc. They take full advantage of their information/quantitative/leverage/access advantages.

The reason I chose to look at a single chart expressed in different currencies is because currencies are at the core of every single investors/traders decisions – worldwide – always – across all markets. They are the grease that makes transactions possible – and the unit of account that we all use to determine whether we are successful or not. Get your cash right – in the form of different currencies and an analytical framework for how/when you want to use these different currencies as a source of funds for investments/trading – and you have a chance against the sharks. And indeed, the currencies themselves may provide a non-interest return expressed in your local currency (which is good in a world where cash pays no interest). Fail to do that — and you will be – and probably deserve to be – chum.


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