Global currencies devaluing – protectionism end games

Ok, my post here was essentially a caffeine (yes caffeine) induced conversation with a friend who trades in the market. Basically we were amazed (as was everybody) as US taxpayers paid AIG executives bonuses, although not entirely surprised. We tried to imagine the possibility of the US government reversing it’s ‘bailout everybody’ policies; to protect it’s own wealth (taxpayers monies). So it is a fantasy. Nothing more. The reality is that the US (with other countries already beginning the process) is now on a mission to destroy it’s currency. This quantitative easing (printing money) and buying up mortgage back securities and any other securities tied to the credit markets, is essentially a massive attempt at flooding the USA and world with cash. Courtesy of the Federal Reserve under a self confessed money printer Ben Bernanke.

This is of course will lead to inflation even in deflationary environments, but the other factor is the protectionist aspect as all global currencies are been devalued at the same time. So it could be wise to assume that a huge debasement in global currencies and their value is the first shot in a protectionist agenda.

As the US attempts to self capitalize, outflows of investment from USD and USD related assets will occur. Today I listened to an economist at a certain big bank explaining the benefits of the massive money printing exercises by the Federal Reserve, but again he missed the point that inflation will trump any internal inflows of cash into the US economy (hey like Zimbabwe!). But as discussed with all the global Central Banks attempting to do the same as the Federal Reserve like the Bank of Japan and Bank of England; by collapsing their currencies they will of course force import prices up. So it’s a terrible situation for the global economy. But expected.

So, from a trading perspective it’s time to look at inflation protective buys. Obliviously gold, oil and the few currencies that still show a degree of value, at this point the Japanese Yen although I would say short term. Stocks, such as bigger oil refinery and produces, some bigger mining companies. Pharmaceuticals, although debased currencies will kill the import market on drugs (hence effecting company profits) although depending if there is crisis such as a severe flu out break. Or watch for tariffs removed for flu drugs. Some ETF’s, say long term purchases on Japaneses stocks. Still if you trading short term, ETF’s on silver, index put warrants on all major indices. Short US banks.

The USD/YEN – notice the USD about to punch through 93 Yen support, then it will reside in the trading range of 83-92:

Oil:

Gold against the USD (self explanatory):

Bear Markets, new year rallies, US treasuries and the China Syndrome.

Global stock markets have rallied, mirroring the rallies in November 2008 that latter petered out into 2009. Oversold markets showed some life after banks Citgroup and Bank of American speculatively informed the market they may return to profit in the next quarter

refer to graph:

Still in fragile economies and negative market sentiment, the bad news just keeps coming. Can US markets maintain rallies out of a brutal bear market, or get sucked back down into new lows? Whether oversold or not, one thing remains is the terrible state of the global/US economy. I was discussing the rallies with a friend of my on the weekend, we both agreed that market would rally but agreed that the rallies showed investor caution, especially when the rallies were speculatively driven.

Yet our discussion kept going back into general human psychology and the mentality fear. We were trying to pinpoint the basis of fear and fear reaction, not so much regarding markets per se but generally. The idea of survival of the fittest kept coming up, not entirely biologically driven, but also not dismissing the idea of survival of the fittest in human instincts and survival. But also adding cultural/economic power structure of survival of the fittest. As I discussed in The wrongs of Government intervention in the free markets, biology and survival of the fittest – Governments may become totalitarianism based., the theory that was reached, which could be a shock in someways. Is with governments of the world trying to maintain asset prices from collapsing could actually allow them to collapse. This conclusion came out of the recent remakes from China’s Premier Wen, when he came out recently and said he was concerned about US Treasuries, since China holds 1 Trillion of US debt.

To me it still comes back to gain over pleasing the electorate, for example governments eventually protecting their wealth rather than intervening in markets to please the taxpayer. Even though market invention has been a complete fiasco (at the expense of the taxpayer), note AIG massive bonus payouts, and counterparties (overseas and local US investments backs) getting taxpayer dollars connected to the AIG bailout! It just gets worst and worst for the Obama administration. But the real fear is China’s concern of their US investment of US debt. If markets rally due to money printing and asset support and Treasures tank, with an added bonus of an absolutely deteriorating US economy. China may edge closer to selling or threatening to sell US Treasuries. This may cause the Obama administration to reverse it’s obsessive bailout programs and sink the stock indices to add weight back into Treasures. Thus keeping it’s (US) major investor (China) happy. Could Governments turn from asset support policies to deflation liquidating policies and hammer the private equity markets back down? All this to protect the inflows of investment into Government debt?

With a bottom in bear markets months away, concerns that tax payers are getting shafted and China thinking (not in a good way) about their investments in the US. A complete reverse in US government economic policy could occur. Only because the fear of a China sell on Treasures and the banks and private sector abusing taxpayer money; at some point the US taxpayer will want to see some free market failure.

The US government could allow the free markets to punish somebody (corporate). To keep faith both from the taxpayer and it’s main investor.

So we both felt, albeit speculatively that the US government may have no choice but to stop supporting asset prices and try and drive Treasures up. In other words allow for a massive deflation to occur, or simply put fall into a depression and hope it’s a sharp one.