Systematic Relative Strength

One of the many problems in the world of politics is that politicians are wont to say all kinds of things that aren’t true. Rather than always taking them at their word, you have to read between the lines. It’s usually more important to watch what they do than to listen to what they say. The Economist has an article on a current bone of contention, the Greek debt restructuring:

A FEW weeks ago, my column was on debt denial. There could not be a clearer case of it today than in remarks by Christine Lagarde, the French finance minister, to Le Figaro about a potential Greek restructuring. “We totally exclude it in any form. Nor is there any question of Greece leaving the Eurozone. I want to reassure investors.”

Now, it is certainly possible that Greece will muddle through. On the other hand, it may be important to read between the lines.

Of course, one recognizes that politicians may feel they have to say this sort of thing…as Martin Wolf argues in today’s FT, it has been a year since the Greek bailout and the problem has not been solved; yields are higher than ever, and private sector investors now face a bigger loss since they have been subordinated to official creditors.

Price is what allows investors to read between the lines, and this is why relative strength analysis is so important. Sure the finance minister says a restructuring is out of the question, but lower prices (i.e., higher yields) might suggest otherwise. If Mr. Geithner indicates the US Treasury supports a strong dollar policy, it is wise to look at a price chart of the dollar. If Mr. Bernanke is convinced that inflation is not a problem, perhaps it would be wise to look at price charts that might indicate inflation expectations. Is the housing market recovering? Some pundits argue that it is; others have equally convincing and articulate arguments that it is not. Let the price chart be the final arbiter.