Every day as I am studying the market and the economy, an idea or topic pops into my head about what to write for my next day’s column. This can be troublesome as the topics are many and interesting. So, some days what I decide to do is touch upon more than one and less than four. Today is one of those days …
First off, I want to give you a summary of that great article in Futures about setting up currency trades. The basic idea is that a trader can determine whether the U.S. dollar is undervalued or overvalued compared to another currency based on the price of a “universal” product within that particular country. The term for this is “purchasing power parity.” The product used for quite some time has been McDonald’s Big Mac, thus, the “Big Mac” Index.
Simply, “if all currencies were fairly valued, then the cost of the Big Mac would be the same all around the world.” In today’s high-tech world, a ground beef patty on a bun with special sauce no longer is the standard universal product. The iPod and the iPad have jumped into the game. Both have indexes associated with their price in other countries. When you combine the study of these indexes with the technical analysis tools of Bollinger Bands and stochastics, you have a specific tool to identify potential Forex trades. If you trade currencies, check this article out.
Yesterday, I came across and interesting fact – the yield curve is as steep as it has ever been in our economic history. Of course, some are arguing that this is a bad omen for the economic recovery. Yet others, such as me, believe it is exactly what we need right now to stimulate more growth. As the yield curve steepens, the spread between the long end of the curve and the short end of the curve widens, which means banks can borrow money at the short end and then lend it out at the long end to make solid profits. I don’t know, but isn’t lending more money exactly what we need banks to do? Isn’t the argument small business lending is key to reducing unemployment? Isn’t a healthy financial sector an imperative for economic recovery? Well, if the answers to the above are “yes,” then a steep yield curve is a good thing.
As a follow up to my discussion of my belief that Ben Bernanke is much, much smarter than I am when it comes to the economy …
I watched a portion of his Congressional testimony this morning. Not only did it reinforce my belief about how smart he is, but it gave me deeper insight into his thinking (and mine as well) about our current economic environment and how we will get through this slow rebuilding of our economy. Listening to him (and watching him), I am more encouraged than ever that the Fed will engineer a soft exit from its current monetary policies, and that in the end, our economy will be stronger for its actions. Man-oh-man, that guy is really smart, but more than that, he is confident and self assured that the path he and his fellow policy makers are following is the right path for where we were, where we are, and where we need to go.
Trade in the day – Invest in your life
