Harry and I see the world in much the same way: there’s a fundamental, natural rhythm to it. Environmental systems… economies… markets… all flip-flop between periods of expansion and contraction.
The S-Curve that Harry showed above proves this point. Just take a look at the “innovation” stage. It seems that very little progress is being made (which is obviously misleading, but that’s another topic for another day). And during the “growth” phase extraordinary progress is made at a very rapid pace.
This is the nature of booms, busts and everything in between!
The same phenomenon explains the spiraling collapse of the Japanese yen in recent months…
For 28 straight months the USD/JPY went basically nowhere but sideways, as you can see in this chart.
This pattern of sideways movement is similar to the “innovation” phase of the S-curve. It seems like nothing is happening, but in fact a large amount of potential energy is building.
I think of it as a motorbike on a kickstand…
Imagine sitting on a motorbike with the kickstand down, raising the back wheel off the ground. In this position, you can gas the engine to make the back wheel spin, but you don’t go anywhere.
You can shift gears… 1st gear… 2nd gear… 3rd gear… until the cows come home, but all that will happen is the wheel will spin faster and faster. You’re still not going anywhere.
Then suddenly you kick the kickstand down, the wheel grabs the road… and because you’re already in high gear the motorbike takes off like a shot.
Well, that’s exactly what happened to the yen…
Traders have been building short positions against the yen (buying USD/JPY) for over two years now. It wasn’t enough buying to turn the tide immediately, but yen bears were steadily clicking through the gears… 1st gear… 2nd gear…
The election of Shinzo Abe merely kicked the kickstand… and rubber, meet road.
The yen story will continue to dominate currency markets this year. But as I wrote two days ago, today is NOT the best time to establish new positions.
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