A US dollar currency crisis just a stone throw away

There is doubt we are in a perfect storm of global financial problems; the credit crisis, the bank liquidity crisis, rapid depreciating value in housing markets (globally), inflation, high oil costs, high food costs, growing trade account deficits in most western countries. This storm could just be the precursor to widespread damage of the global financial system, in other words in the wake of this storm, there is going to be a lot of rubble.

The Central Banks of the world have all in some ways taken their cue from the US central bank; when the Federal Reserve made a move, the other banks followed. There hasn’t really been a decoupling from US reserve bank policy. Most of the central banks have copied a similar patten of the US Fed, others have quickly increased interests rates to contain hyperinflation, the countries that come to mind are the commodity export powerhouses Brazil and Australia. But both the Reserve Bank of Australia (rate set at 7.25%) and Brazilian Central Bank (rate at 12.25%) have had absolute no choice but to increase rates, even though slowing domestic growth and consumer sentiment is down. More so in Australia as consumer confidence is at a 16 year low. Both economies may be slowing rapidly, namely Australia.

So with a minority of countries having larger spreads on interest rates compared with the majority with low rates. It is an interest rate conundrum that the central banks face with global inflation and a rapid slow down within the global economy. The central banks of the world are either stuck with low interest rates or high ones. Like the US Federal Reserve, most central banks will hold rates indefinitely and hope that inflation is brought down by slowing economies or a global recession. Of course this is a false dichotomy, as oil, like certain food stocks namely wheat, rice and soy are now scarce commodities.

But current runaway inflation is also blamed on the extremely low US dollar which now sits on the dollar index of 0.72 (refer to *graph, click for larger image).

*

The de-pegging on the USD is very close now, if the European Central Bank does increase interest rates, which they will do; on the escalating inflation in both the European Union and Asia. As I mentioned in my blog post ‘Inflation and the EUR, the USD will further decline – ‘buy’ signal on the EUR’ - Europe has been put in a precarious position with interest rates and inflation, the ECB may have no choice but to increase rates on the back of the declining USD.

There is a very probable chance the USD will be de-pegged from the Saudi Riyal. The ECB will just grin and bear a weak USD, as Europe will tip in to a severe recession – which was unavoidable.

The depegging of the USD from the Saudi Riyal will inevitably cause the USD to collapse further in the short term, this could essentially depress US treasuries and we may see a massive sell off off the USD, namely from China – so long term collapse may be invertible, unless the Fed in an emergency meeting increase interest rates. In my opinion, if the US enters a stagflation depression (severe recession with rising costs), The Fed may cut further from their 2% (Ben Bernanke has indicated through speeches and thesis on the 1920′ 30′ Great Depression that a lack of liquidity was the reason the depression was as severe as it was) . This could essentially send the US dollar into a currency crisis as the world will shift the peg from the USD to the EUR, or a basket of currencies.

This would leave the US economy in a very serious situation, a depressed economy and a currency with no purchasing power or trade power.

Brent Crude Oil hits $140 a barrel

As I mentioned in a post on June 17th 2008 under World Crisis scenarios for the 21st Century – Peak Oil (update 13): Looming Oil option price at $140.00 a barrel (Brent crude).

After reaching peaks of 139 a barrel, it was analyzed that oil will break into 140. I prematurely called 19th June 2008 as the date that oil would hit 140.

The trade would have been bought when it hit 131 (June 18th), as I mentioned in the June 17th post oil was slightly over bought. The choice was to either close the trade prior to the 19th June 2008 when oil was trading at 136, or continue to go long for the 140 mark.

The trading range from the June 17th post was set at the lower trend line of 125, this should be moved up to the 128, and hold the upper range at 140. The market appears to be trading in that range even though resistance has been broken at 135. Take profit should be effected for this trade now at 140.

Please click on graph for larger image

Inflation and the EUR, the USD will further decline – ‘buy’ signal on the EUR.

It is no surprise that the Federal Reserve under Chairman Ben Bernanke decided to leave rates on hold as of their recent meeting), after drastic cuts have left the US cash rate at 2.00%. The main criticism of Ben Bernanke is he is a money printer; with global inflation edging up in the last two years. It all but seems realistic to make the assumption the Fed, under the auspiciousnesses of Ben Bernanke, have helped caused an inflation disaster by degrading the US dollar and do not seem the least bit interested in tightening monetary policy.

I posted in morbius glass in 2007 about the potential for the USD to be de-pegged from certain currencies, namely the Saudi Arabian Riyal (SAR). So I think we are going to see the US dollar peg disappear very soon, opting for the stronger EUR. We may see a huge decline on the USD in the next quarter; with the Fed clearly losing control of inflation in the US.

It’s essentially an economic disaster in the making.

So it is clear that American crumbling economic landscape is most certainly going to effect the global economies, as it already has with the credit crunch that was brought on by the subprime mortgage market collapsing. Now inflation is going to rapidly effect global economic conditions. Europe with a cash rate that remains at 4.00% is in a bind, already there are dissenting aspects with in the EU union, France, Italy and other economies that feel marginalized by the stronger European countries . Although, with inflation very much destroying consumer confidence right across Europe, most economies within the greater EU are now on par with economic pain and dire forecasts for growth and productivity.

Of course the US decision not to lift rates, in such a stagflation environment, sends out a subtle signal for other central banks to follow suit. The question is, will the European Central Bank leave rates on hold as they have done since their last meeting on March 8th 2008? Or will they increase rates to combat inflation?

But as mentioned the looming US currency disaster, mixed with inflation or stagflation, high oil, high food, bank failures and declining asset values (namely property) – is the beginning of a huge economic crunch in America. Europe may try and attempt to escape this, or at least try and tackle inflation; accept their downturn – and hope that it may not be as painful as the downturn in the US is going to be.

The ECB must be shitting bricks with the US Fed decision, it ultimately puts pressure on the ECB governor Jean Claude Trichet to make a move; and it appears the move will be up for rates. Possibly despite France and Italy, Spain making a fuss, thus putting extra strain on a already shacky EU Union. Still with the Federal Reserve in the US in a world (narrow) of their own, driving blind with such blatant denial of the US economy; the EU like I said, will have no choice but to break away from the trend of low interest rates and holding rates, in which that ‘trend’ has contributed to inflation (scarce commodities) and has we are all aware – is outta control.

The EUR has been a star performer against the US dollar throughout 2008 (refer to graph 1983 to 2008). you can see the incline started from 2003 upward against the USD.

Please click on graph for larger image

The EUR will be in greater demand when the ECB increase rates, on a one day grap of the EUR/USD we can see the resistance at 1.5820 and support set at 1.5284 – the EUR is now just climbing above the 50 day average. It is settling in a trading range between 1.55 and 1.60. A break out of the resistance of 1.58 is possible within the next 3 days after this post (option for June 30th for 160). So the EUR is buy.

Please click on graph for larger image

*please note morbius glass does not give investment advice. The following information is for reference only. Trade at your own risk.

A commodity bubble forming, mining shares vulnerable

With a volatile and at times confusing market and global economy, it is sometimes hard to focus on the determining issue within the global economic turmoil. But then again, if one was to assess the global market and economy, you could essentially lump it all into an interacting basket of problems. All reacting with each other in a nest of uncertain volatility.

There is now, thanks to a combination of factors, a commodity bubble forming. Disproportional currencies in regard to commodity markets, the artificially low Chinese currency Yuan and the declining value of the USD. Both causing inflationary problems, the USD’s fall against against all commodity markets, combined also with scarcity in rice, cocoa, wheat, oil. China with a raw material boom, that is showing no end; faces a problem with inflationary pressures that will either cause China to raise interest rates and strengthen the currency, or face a hyperinflation scenario that could lead to a harsh hard landing. As long as the market looks for a hedge against inflation, it will always turn to the commodity market

The problem with a Chinese and Indian raw material appetite, especially in regards to commodity export countries is the invertible slowing down in other aspects of their economies, namely housing, financing and general company profits. Two examples come to mind, as far as commodity export countries, is Brazil trying to contain inflation with an interest rate at 12.25% (exporting Iron Ore which is 15% of the Brazilian GDP). The other country is Australia, with a mining boom that is still persistent with forecasts for Iron Ore exports to grow into 2009.

Nevertheless, the commodity markets could still be in for a large correction. But in the meantime, prices will still rise (in the case of steel makers, passing on higher iron ore costs) and global growth will slow, or in some cases decline rapidly (consumer and business consumption). To what economic benefits booming commodity markets will have for emerging economies and developing economies will be disputable. Apart from leading to inflation, thus contributing to stagflation. The mining sector could be overvalued (stocks) and it would be worth noting that a correction in mining stocks could be imminent in the near future.

Martin Wolf article – Finacial Times online

Just finished reading an article written by financial times columnist Martin Wolf.

The article it’s self is a good summary on the stagflation reality that world is now facing. Which is declining economic growth with escalating high prices (oil, food etc).

He is correct that the ‘hysteria’ and blame game towards speculators (futures market/commodities) is utter nonsense and the governments of the world are dragging their feet when it comes to investment into renewable and other energy sources. There is a huge untapped renewable energy market out there, but it lacks private and government investment.

Article here

MEDICAL MAVERICKS documentary BBC

You gotta check this documentary out, from the UK station BBC. It’s all about that the breakthrough medical discoveries of our age (anesthesia, pain relief, viruses, poisoning) came from medical practitioners of yesteryear, testing their discoveries out on their own bodies.

Well done re-enactments, even the presenter Dr Micheal Mosley doing some of the routine tests (like the discovery of nitrous oxide and pain relief). Some really interesting stories of old school operations and techniques whilst discovering a better way to help the patient endure the pain.

Animal rights activists win a point here for their argument that animal testing is not reliable. Because with this doco, it is clear the major breakthroughs in human medical advancement has been those brave (maybe crazy) doctors and professors doing the self experiment thing – which had proven reliable outcomes (even when they nearly kill themselves in the process)

Check it out

Tame the speculators?

These government official eggheads are wasting time, mental and yes money; or pointless, misinformed ‘voter’ approval verbal vomit . In regards to commodity markets and speculators pushing up prices.

Suffice to say the legislation to curb funds from investing in the commodity market will not happen – the backlash and possible legal injunctions from free market advocates will be numerous .

The speculation blame game (for pushing up commodity prices is a ridicules notion), in fact if politicians really gave a f###### damn about energy demand they would be pouring billions into proper alternatives and research. They haven’t and don’t really care at all about the oil shortage. They are shortsighted and brain dead when they blame the markets for high prices, when in fact ‘they’ allowed oil to be the ONLY reliant energy source. With no alternative in sight.

Also, the US Fed has literally slaughtered the US Dollar, remember the USD is pegged against all commodities. So with inflation zapping literally every asset vaule you have, the commodity markets at this point is the only hedge.

Where was this lame ass congressman (Lieberman) when Ben Bernanke went bonkers and chopped the US cash rate down to 2.00%? Which has added to global INFLATION and contributed to high commodity prices.

Article here Marketwatch

World Crisis scenarios for the 21st Century – Peak Oil (update 13): Looming Oil option price at $140.00 a barrel (Brent crude)

World Crisis scenarios for the 21st Century – Peak Oil (update 13): Looming Oil option price at $140.00 a barrel (Brent crude)

With oil reaching a new high of 139.92 (Brent crude close of trading 16th June 2008), it has slid back to 134 – 135. Yes, it looks over bought now under the resistance set at 135, trailing way above the the 50 day average at 123 and the 100 day average at 112. It is however trading with in the trading range of 125 and 140. The 22 CCI is showing steady at 67.27.

I believe we will see oil reach 140 by the 19th June 2008, then drop back into the trading range again. Refer to chart ( please click on graph for larger and clearer quality):

*please note morbius glass does not give investment advice. The following information is for reference only. Trade at your own risk.

Brief explanation on current market volatility

You don’t have to overly analyze the global stock market indexes too see volatility with it’s sharp rises and sharp drops. The US stock market index, particularly the Dow has weathered quite well against other markets on the premise of Federal Reserve rhetoric and recession denial.

In the chart below is the Dow, UK FTSE and the German DAX; the German economy has all but been a powerhouse within the declining (general) European markets. But like the US and UK, Germany has suffered huge bank writedowns and loss of profit in the banking sector (dragging the index down) – from Jan 2nd 2008 at the start of the credit crunch, the DAX fell from a high of 7,949.11 to 6,182.30 (March 2 2008).

(please note the 6mth graph above is running real time daily statistics)

The FTSE is not much different it trails in a similar patten to the Dow (even though the UK economy is in worst shape than the German economy); the UK has a major worry with an ailing banking sector that has been propped up by the Bank of England, not to forget the UK mortgage market is close to collapse.

Could it be that the UK markets rely intensely on US confidence in the markets? Hence the similar patten of the FTSE and the Dow?

The Dow , DAX and the FTSE that represent some of the biggest capitalized companies in the world; and all indexes have declined over a six month period. The US market, in my opinion, is the most vulnerable for a bigger decline or market crash. This would also put the UK stock market at a major risk too.

The daily rallies and sporadic sell offs are a good indicator of volatility, recent inflation figures are most likey being ‘fudged’ with oil and food taken out of the equation mixed with a slowing economy (cutting back on consumer consumption on retail). But contradiction is abound especially when Treasury secretary Paulson joined Europe finance minsters recently (G8 ) and confirmed that ’stagflation’ is a major concern for the world and world markets

The question needs to asked at what point will the Federal Reserve increase interest rates? If ever?

Has the US underplayed inflation?

How deep will the US recession be?

The falling market since the onset of the credit crisis has been the loss of confidence and collapse of banking stocks. I suspect this will only get worst and drag index’s lower in the next months.

Market conditions return to extreme volatility

The credit crisis, or ‘crunch’ that occurred at it’s peak, during the early part of 2008 has returned. Lehman Brothers and the whole of the Wall Street investment bank sector will be under strain again, as the decaying secularization market starts to erode profits. On top of this, of course there is inflation and the high oil price. As pointed out in World crisis scenarios for the 21st century – Peak Oil (update 12), the higher oil price most definitely will effect the global transport, courier services such as UPS and Fed Ex (UPS losing close to 3 percent on their share price, and Fed Ex losing 4 percent on their closing price 10 June 2008). The point being is, transport and global courier service stocks are going to get a hammering from the high oil price. So without concentrating too much on the banking sector, that in most countries has collapsed (stocks) and lost a lot of value. The one to watch is the mining and emerging economies markets, too see what will happen with share prices in the light of liquidity tightening and the high oil price.

Below is a graph of the Brazilian ^BSVP index, the Argentinian ^MERV index and the Dow and the S&P 500; the commodity or mining countries such as Brazil and Argentina have both been effected by not only extreme inflation problems but also a declining stock market. This could be indicative of the weight of the Merval and Bovespa index’s that are commodity orientated. In could be said, with a global slowdown commodity ‘boom’ economies such as South America and Australia are facing a huge correction in their mining sectors. The worry would be the profit erosion of mining stocks from the high oil price and china slowing down more dramatically than perceived.

(please note the 3mth graph above is running real time daily statistics)

Emerging economies particularly are vulnerable to energy concerns, China will continue to horde and stockpile oil putting a strain on global output and demand. The low US dollar and it’s effect on global commodity markets created a situation where the central banks (Europe, Asia and a lesser degree the US) may begin to tightened or hold rates; it would be curious to see how the central banks will handle the situation of global inflation and the effects it will have on the commodity/foreign exchange markets. Will the USD be de-pegged from other currencies? If Europe raises rates, which they might do; this will send the USD lower putting further pressure on the USD as base currency.

Could Ben Bernanke continue to cut rates? A real possibility, with commodity markets in the last week falling from historic highs on the premise that The Fed may have stopped their rate cutting policy to strengthen the the dollar. But there are ambiguous signals from the Fed and inflation, that do not tell us anything solid that they are actually concerned about inflation and a low USD.

So the slight bull run that markets have had is over. Generally most overvalued stock markets may be faced with a massive correction in the next month or so, especially the US market.