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Confused markets, deflation/stagflation threats and our old friend gold.

Posted by Adrian on November 25, 2008

The recent rallies in global stock markets occurred from one market report, which was that Citigroup had been bailed out. The ‘too big to fail’ argument was the main driver of the bail out package, which then drove oversold markets from Germany to the UK and of course Wall Street to rally. It is the same market rhetoric from institutional players, ‘restore confidence’, ‘restore psychology of the markets’ and so on. We have to remember as the deal to save Citigroup was revealed to the media, also reported was the US property markets continue to fall (3.1%) and across to Europe where German business confidence is down from 90.20% to 85.80%. I still think continued stock market rallies into 2009 maybe unlikely; and if we talk about stabilization, especially in the market and fiscal stimulus and bank bail outs; the epicenter of the economic collapse in the US stems almost solely from a depressed housing market linked to the credit markets. The equation just doesn’t calculate. So the whole financial system can be bailed out, a trillion plus pumped into the global markets. Yet, if they calculate a fiscal stimulus to just rally the equity markets, fill banks up with cash; then it is assumption, and most probably a misguided one (as they all have been), that a flow on effect will occur to reinflate a depressed housing market. This has not happened, the housing market is still declining.

FTSE, US markets, German DAX all rallied on Citigroup bail out. Markets still 30% and 40% over sold.

In saying that the closest correct calculation (on the premise that throwing money into the financial system is going to work). Would be that the governments of the world should buy every mortgage on the planet and shift them onto their balance sheets – and guarantee defaults (on every mortgage) to keep the markets stable. Otherwise ‘bailouts’ especially for financial institutions is an unbalanced and flawed market assumption. The deluded idea that inflated equity markets will instill ‘confidence’ in the broad market is dangerous, hence the market volatility. But in reality throwing money at the problem is a pointless and wasteful exercise.

I don’t believe in a fiscal stimulus or bail outs, of course ‘the too big to fail’ policy is inevitable part of policy in capital markets. But AIG is a mess and I suspect Citigroup will prove to be problematic too.

The market is still too cautious to believe that a fiscal stimulus and ‘bank bail outs’ is going to work, rallies are somewhat subdued and contained. With oversold markets yes sporadic rallies have occurred, but not significant prolonged rallies going into the end of the year.

Can the deflation in the global market be stopped? I guess this is the global financial experiment that is occurring, with President elect Barack Obama pledging to throw 1 Trillion + into the US economy, the UK with a 40 billion stimulus and every other country doing the same. We shall see.

But of course governments tapping surpluses (commodity producing nations) that they may have had, or sovereign/future funds. They will eventually drain them too nothing, increase taxes and cut public services and health care. So the taxpayer will foot the bill for everything and still get shafted.

As discussed in Watch Global Currency markets. Country bankruptcy ‘endgames’., we are either going to see stagflation come back quicker, maybe at some point in 2009; or there will be a slew of countries going bankrupt; and become deflated, poor economic wastelands. From the middle east through to Europe and quite possible at some point the United States. Either way, destroying their capital reserves and falling into deficit is a recipe for a greater economic disaster.

From an investors point of view I am still bearish on the Euro, GBP and the AUD and all South American currencies. I still think the US dollar has life in it, especially against the EURO and the AUD, PESO (Argentine). But the Yen could be the only currency with sustained buying power on the back of risk aversion into 2009. I only say that the YEN has a buy on it because Japan can’t really go any lower as an economy. Until Europe, the US and major parts of Asia join Japan in a deflated slump; the YEN still holds value against most currencies. One should watch the USD into 2009, still viable against the GBP, AUD, NZD; we could see major sell offs of the AUD and NZD, also the GBP and EURO. If the Federal reserve cuts rates to 0%, then most of the global central banks will cut very aggressively emulating Fed policies (as they all have been timing ‘joint’ rate cuts). The commodity producing currencies will get destroyed against the Greenback.

Stock markets are still volatile, so I am in nothing in stocks. I mentioned Biotech in Brace for a global recession (update 2) – Japan in recession, rest of Asia next. Next stock market bull run 5-8 years., The biotech industry will shrink significantly from lack of finance as will junior miners and the mining industry in general. But with the economic ‘crisis’ still front page material; we are forgetting potential virus related crisis’s. Bird flu could still reappear refer to World Crisis scenarios for the 21st century – Bird Flu (H5N1) and other pandemic Virus concerns, or other pan epidemic virus. I wouldn’t completely live in an arrogant bubble assuming that the economic crisis is ‘the’ crisis. We have a few lining up, and the bio viral threat is one of them.

But our old friend gold has held it’s own, static in the 730 – 744 range now rallying (with the stock markets) to highs of $829. Gold in someways has been solid, not moving much with volatility, nor suffering major sell offs, apart from it decline from the high 900’s in July 2008 down to it’s current trading ranges. Still, when risk aversion is turned on and I suspect it will be right into 2009. Gold may hold it’s upper range, or move further into the 900’s. In light of supply demands of raw materials and gold (miners closing up shop), the scarcity and flight to safety will come into play.

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

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3 Responses to “Confused markets, deflation/stagflation threats and our old friend gold.”

  1. […] original post here:  Confused markets, delaflation/stagflation threats and our old … Tagged in: economic, Economy, europe, Finance, financial, gold, japan, politics, president, […]

  2. […] mentioned in Confused markets, deflation/stagflation threats and our old friend gold. that there will be no exten…. At this point I still stand by that, can US market stage a day 5 rally? Possibly. But at the same […]

  3. […] by Adrian on February 3, 2009 I wrote a blog post in November 2008 titled Confused markets, deflation/stagflation threats and our old friend gold. The post detailed that I personally did not see extended or significant rallies in global stock […]

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