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):

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:

Car company bailouts, Goverments will print money into 2009, oil will go lower.

Even though 2008 will close off as a terrible year for the global economy, 2009 will turn out to be horrendous. As liquidity will literally dry up right across the board, the only money being pumped into the economy will come directly from the Central Banks. Not only will growth completely slump in 2009, there will be three aspects (bailing out banks, printing money, increased taxes/cuts to public spending – health and community) to economies which have a devastating effect on a society. With governments throwing billions into the financial system, that on the whole will end up creating zombie companies and propping up zombie banks. As mentioned in ‘Keynesian’ fiscal policy out of control – Australian government bond downgrades, the worst policy plunders a government can make is cushioning the banking system, that has operated in a incompetent and risky way. In other words, the banks or at least the banking model should be punished for it’s lack of care and bad management. This hasn’t happened, instead they have propped up the bad business models. There are going to be lasting effects of tax payer money going straight into buying distressed debt, toxic waste, MBS’s and every bad assets banks own; and don’t believe these ‘effects’ will be a positive for the global economy. Shifting ledgers and accounts by using government money and guarantees, has given banks the ability to recapitalizes their balance sheets, whilst shifting their depreciating assets into other ledgers. So not only has tax payer money being used to recapitalizes banks balance sheets ( but don’t expect to receive personal big credit/loan account offers ), governments have foolishly rushed into guaranteeing bank deposits, with guarantee caps going up to a million plus, the banks can now also re capitalize by selling secured debt or bonds that are now AAA rated. But governments who are now sending all their accounts into deficit, will find it hard to raise capital because government debt will naturally be downgraded, 1. from all the risk on their balance sheets, 2. bank debt is now more attractive to investors, compared to government debt.

Still, the final insult to injury will be governments finding it hard to raise capital; which will be left with the taxpayer again (us), in the raising of taxes and the cutting of public spending – especially health and social services. Nice deal hey?

Then the money printing, which will ensure that inflation will creep back, especially in the US as the US dollar declines rapidly into 2009.

Another example of poor judgment and mindless money printing and spending by government has been the car industry bailouts. Most probably some of the worst business models known to humanity are now all knocking on government doors. You can thank the worst government policy machine in the world which is American policy makers, who have no idea whats going on and their incumbent central bank (The Federal Reserve) which is literally out of control. So it’s a double whammy of economic stupidly.

The car industry will still shrink, despite bailouts and loans, but as mentioned the US have created a precedence; now Canada, Russia, the UK and even France are all considering doing the same. At some point jobs losses in the car industry will be inevitable, but with governments only pumping money into the ailing car industry for their own self interest, ie votes. The joke will be back on the poor car workers as profits will still tumble and the fact is jobs cuts (company restructuring) have already been planned by upper management.

With emotion aside, one has to be sensible at the ramifications of printing money into a severally hemorrhaging car industry. It is senseless, sure the governments can print money, but this will lead to currency destruction and inflation, with the other detriment being raised taxes and public funding cuts. The pain, should be felt now, deal with it . The upper management should be relinquished, company then goes bankrupt and taken over by a rival; say a Japanese based car company (that made better smaller cars).

Also on a analytically perspective. The oil price has crashed from highs of 147 to 38 a barrel, it could go lower. Over leveraged and hugely indebted car giants took massive gambles, with car production. Designing fuel guzzlers and uneconomical junk (refer to the Chrysler 300c). I wouldn’t invest a dollar into that industry, with the oil price totally unstable in lower ranges, indicates that the world economy is slowing down to crunch time. Industries are using less fuel, oil and any petroleum based products. These industries have also expanded on loose credit conditions, are all going to find it hard to raise capital. As a trader, you just need to bring up the oil graph and see the massive deflation in the oil price; with potential to go much lower. But with oil trading in a range at 40 and 43 a barrel indicates that demand has fallen off, therefore any oil related products or products that use oil (cars) have also fallen off. In other worlds, there is NO MONEY to be made in collapsing industries, like the car industry. Yet, the governments have decided to create yet another living dead industry.

Refer to WTI graph. Oil looks stabilized to a point: trading range 40, 43. This could be on the back of OPEC cuts. From a bull to bear perspective on the oil price, which has been a shock in the sense of much it has fallen. Points to the direction of the global economy, which is sharply down. At this point the oil price does not look like it’s in a recovery buy at any point at all. Some more selling into 2009 on economic factors could see the oil price bounce down to 35 a barrel