CHAPTER ONE - Background
Those who know do not talk
Those who talk do not know
LAO TZU
And those who can, do; those who can’t, write? Well writing is some thing I do; and trading is also something I do. And I’m still learning how much I don’t know about both.
Here’s another confession. I see the currencies as the biggest, most fascinating, most profitable and most dangerous casino in existence. No, it’s not really a casino. In casinos you cannot win by skill. In currency markets you can. But it is a casino, in practice, for most of the people involved: only they don’t put on their own bets. For most participants, the currency gamble they find themselves involved in is an occupational hazard. The European investor who buys Japanese stocks or US bonds; the contractor who bids for a contract in the Middle East; the multinational corporation which borrows in dollars; exporters, importers, shippers, travel agents, economists, Chancellors of the Exchequer, bankers, oil companies, fund managers – all of the above find themselves involved with an international exchange which reportedly tots up a volume of over $600,000,000,000 a day. It isn’t their business; they can’t assess the risks and rewards, and yet the risk from currency movements may be the biggest risk they run.
The question is:can currency movements be forecast? As it happens, here in the 1990s, the currency markets can, I think, be forecast more reliably than any other major financial market. This is odd, if only because of the sheer size of the market. A big free market like that ought to be what academics call “efficient”. By this they mean that it works so well, that everything that can be foreseen is efficiently discounted in current prices: so no-one can forecast future prices except by luck. But what I am saying is that youcan forecast the dollar, systematically, if you follow certain simple rules.
These rules follow from the character of the participants in currency markets. The way the great majority of them think and act dictates the rules. So it does in the other financial markets – stocks, bonds and money markets. But there is a crucial difference between the currency markets and other financial markets. The difference comes about partly because the currency markets, in their present “floating” form, are so young, dating back only to 1971. The difference is that compared with other major financial markets,the participants in currency markets are naive.
What do we mean by “naive”? The securities markets in the major financial centres have an immense wealth of wisdom behind them. Literally thousands of books have been written about the securities markets. Billions of man hours have been used up by seekers after the secret of what makes securities prices move and how to “beat the market”. This is hardly surprising since the securities markets are a major part of the store of wealth of developed nations, and it’s all quoted, so anyone who had a way of predicting price fluctuations could make a fortune. You can’t quite do this in real estate, which is the other major store of wealth. But you can invest your savings in shares or bonds or real property .You can accumulate wealth through capital growth and income, and the accumulation can, at least in theory, be greatly compounded by timely shifts between shares or property and bonds. And this is the way most investors think and act.
For every thousand stock traders
there is maybe only one currency trader
Traditionally, people have never looked at currencies as a major area for investment. Why should they? In the old days, the major currencies tended to be fixed in relation to gold. Even today, after two decades in which currency rates have been fluctuating freely in the same way as securities prices, most people – businessmen and investors alike tend to see currency fluctuations as something external and outside their control. In the securities markets there are millions of people involved whose sole aim is to make money out of price movements. In the currency markets, you have an army of dealers and brokers, whose business is to execute transactions and close their books at the end of the day; you have another army of commercials, including corporate treasurers, whose business is to protect revenues / assets from financial risk; a host of fund managers, security analysts, and economists whose business is stocks and bonds; a relatively small band of speculators – few of whom have currencies as their main interest; and – wait for it – ”about a dozen foreign exchange managers [whole handle straight foreign exchange accounts using specialised approaches." The quotation is from a brochure advertising a seminar in New York in July 1991, entitled “Foreign Currency – The New Asset Class”.
So, one way and another, the resources and time that have been devoted to the study of securities over the years have never been allocated to currencies. That’s why the accumulated wisdom isn’t to be found in currencies. This, of course, is terrific news. Obviously, the fluctuations in currencies offer inexhaustible opportunity for the accumulation of wealth: the good news for you and me is that there is so little competition. Naturally the currency markets offer equal opportunity for losing wealth; but not if we follo