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.

Currency markets revealing the dire problems in global economies

The economic crisis that is gripping the banking sector and inter market credit markets, has polarized governments to establish an intervention problem beyond anything seen in the history of capitalism and global markets. As discussed numerous times on morbius glass this intervention is short sighted and dangerous for the future of market stability. So this economic crisis could have essentially burnt it’s self out albeit harshly, but that is the down side of capitalism; you play markets in boom times expect at some point a bust. That is the reality of markets. Still the belief that government intervention from fiscal stimulus to bank and company bailouts will work, has now developed into a frenetic hysteria of ‘bailouts’. Of course this will lead to the next crisis, or more correctly has exasperated the next crisis which in all retrospect could be worst than the credit markets imploding.

So with global economies and the markets still collapsing, the unsure aspect and volatility will continue to erode confidence. A widespread panic is developing again this could be the final drop in global markets, particularly stocks. But currencies are an excellent bellwether to it’s perspective economies.

The next crisis (and this could be sudden) could be accumulation of two things both leading into each other as a severe blow to a countries economic stability. The first is currency destruction, which is now happening on a broader economic front, as all countries have gone mad with stimulus packages and bailouts. A risky disposition under the false pretense that somehow countries will avoid a nasty bout of inflation down the line. We know this as untrue as inflation may not have entirely disappeared. Declines on discretionary items may have fallen dramatically, but I still hear and see increase in energy bills, food. Although containable at this point, it is not unfeasible to see a spike in food prices (depending on weather and climate change) and even oil (depending on the geopolitical volatility of the middle east and output shrinking/costs increasing).

When the UK recently decided to bail out RBS, claiming to 70% ownership of the company. The Great Britain Pound was immediately sold off, this was also on news the the UK government would insure credit worthy mortgages and guarantee bank debt. Not just for one bank, but for all banks. Hence the market factoring in that the UK government has now taken on huge risks, including the Bank of England’s terrible balance sheets which now rely on money printing to continue the flow into the UK economy. Not only does a falling pound represent the losing value of it’s worth, but the risk now of a country that may find it hard to raise capital; it’s government debt could be downgraded. As was Spain’s recently, also Portugal, Greece, Italy, Ukraine. Germany, France and the UK are close to be downgraded as credit worthy nations, in other words no one will want the debt.

Refer to graph of the GBP against the Japanese Yen (From 1.41 7th January 2009, down to 1.24 on the 20th January 2009. The sell off was primary on news of the bank bailout out and government intervention into the UK banking system):

With Ireland recently threatening to pull out of the EU if it isn’t bailed out by the EU also effected EURO. The crisis is now in a panic phase, that extends not just from the credit/banking crisis; but politically. As politicians attempt to save their own necks, they are inevitably causing more harm to economic stability than good. It’s a ripple effect, that is becoming more an more pronounced. Disproportional and ‘ad hoc’ intervention is creating far more volatility and market panic, if they were to just allow the markets to correct itself naturally.

In saying that, the EURO was sold off dramatically when Standard and Poor down graded Spain’s sovereign debt, this is a warning shot to the FX markets; that European countries all could be downgraded in someway. With Ireland and Spain who are both extremely over leveraged especially in the property markets.

Refer to graph EURO against the Japanese Yen (from 131  18th December 2008 to 115  20th January 2009)

One of the better currencies (not in value) for measuring risk and volatility in the global markets is the Australian dollar. Once a favorite in carry trading, especially with Japanese FX traders. The AUD collapsed timed with the stock market collapse in September 2008 from .85 down to .60 in October 2008. Now bouncing around in a wide volatile range between .60 and .72, this would indicate the extreme volatility in the global markets. Although now the AUD is on the downside again, it could most probably breakthrough the .60 support. Especially if Australia gets a rating downgrade, or the Reserve Bank cuts rates aggressively in the coming months. Also to note is Australian government intervention in the banking sector of local credit markets. Other factors global too watch that will effect the AUD is the commodity markets, when or if a recovery occurs soon. Which may be unlikely in the short term.

refer to graph AUD/USD:

Freddie Mac and Fannie Mae – US goverment takeover.

The amazing aspect of Treasury secretary Hank Paulson’s press conference and the unveiling of a complete take over of Freddie Mac and Fannie Mae by the US government on Sunday the 7th September 2008. Was in light of what occurred with the markets on Friday 5th September 2008 – in which the market was in ‘risk aversion’ refer to Overview of countries effected by credit, liquidity and inflation; recession conditions – Japan (Asia), Spain, Iceland, Australia – (update 10). Is Asia facing a economic meltdown? China’s central bank under strain?, the whole market was dumping high risk currencies, stocks everything connected to debt related risk. It was a significant day, as one could see how a major sell off (particularly currencies), can alter the value of an asset dramatically (causing anyone holding those assets to sell). Then the Freddie Mac and Fannie Mae press conference on Sunday with Treasury secretary Hank Paulson announcing the US government would take over or “conservatorship” the mortgage bank giants. Although the market had factored this in weeks ago, the point is the major indices/currencies were so sold off on the 5th September 2008, that any “good” news; even it was yesterdays news caused a rally and had the market fall back into risk appetite. The amusing part is treasuries tanked (has since recovered) on news that the take over is final and when the US markets opened on Monday 8th September 2008, stocks soared (Dow gained 290.43 points), but both Freddie and Fannie stocks went south.

Dow and Nasdaq compared with Freddie Mac and Fannie Mae stocks

Treasuries 2yr yield (I yr graph)

The Freddie and Fannie ‘take over’ has been discussed on numerous blogs by numerous people, so I won’t go into the moral semantics of the issue. Except to say apart from taxpayers footing the bill (without consultation with the public, but sanctioned by all US leaders – including Barak Obama), the risks of allowing the US government to take over the mortgage giants are far more dangerous economically, than allowing the banks to go bankrupt and redirecting assets elsewhere. The treasury and US government have now added more risk to their balance sheet; the taking over of insolvent entities, will not stop a depreciating US property market, as long as you have weak employment, banks foreclosing, company defaults, the continued tight credit markets and a shaky US dollar and inflation; the Freddie and Fannie market euphoria could be very short lived. So back on the table will be the depreciating US Dollar and inflation in the markets and it has to be noted that a US ‘recession’ will not be mild with high inflation. It will be inflation which will be the killer for the US economy in which the Federal Reserve and Treasury/US government do not seem to be concerned with the inflation issue – by allowing the US government to rake up far too much risk. Will put too much pressure of the USD with any hope that the Fed will increase rates diminishing.

Like the Bear Stearns rescue on the 15th March 2008, the markets got a respite and there was talk of normalization in the credit markets, although this was short lived and the credit markets are still contracting.

So, the risks are numerous with the tax payer footing the bill for this bailout. Bond holders of Fannie and Freddie debt may have some reprieve, but I doubt treasury notes will sustain a higher yield solely from US government guarantees.

Major players holding mortgage debt, say China and and it’s mass of US treasuries must be watching this very closely. The stock rallies are superficial under the massive bailout of GSE (Government sponsored entities – Freddie and Fannie). Still, I think the pricing of assets (Freddie and Fannie) is going to get messy and hard to price. Some asset sell off’s may occur in the future, so I wonder how much will eventually remain in government hands?