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):

2009 – Get ready for massive deflation, US dollar destruction and the global economy slump further into recession

A trader from Japan noted in a report that he felt that volatility had diminished, or at least volatility had narrowed within a range. The trader may be correct, volatility has tone down somewhat, but the markets still represent dysfunction. Not to forget the oil price, that decided to move back into the high 40’s on the back of the Israel invasion into Gaza Strip – remember the oil spike is not so much on the Israel blockade and attack on Gaza, the oil spike is on the back of Iran (and a wider middle east conflict) and it’s response.

But the global economy is falling into a sharp downtrend, which is now unstoppable (until it reaches a bottom). Hence massive deflation is on the horizon, no matter how much is spent and how much stimulus is given out, confidence in the global economy has been shattered, therefore a stimulus package is essentially a waste of money and it is a token gesture at best

So it could be assessed that global stock markets could decline in a massive sell off, under the weight of very poor corporate earnings, the bubble bursting in US Treasuries and a substantial sell off of the US dollar (capital flight out of America); and mix in a broader conflict in the middle east. We could be a the edge of a huge price decline on everything, hence a massive wave of deflation beginning at the end of the first quarter of 2009.

Traders and some commentators are now looking at US Treasuries as the next bubble to burst and a bigger slide in the US dollar. As Obama will attempt sell a muted (with tax cuts) stimulus package to congress, regardless it will put pressure on the USD – and I think this time, as opposed to the USD recovery in mid 2008, it will definitely get crunched very hard in 2009.

But in saying that massive deflation is on the horizon also means the rise in the Japanese Yen, Gold and now possibly Oil. With money outflowing out of stocks, Treasures and USD, it will end up with the very few safe havens left.

Global indices generally were flat into 2009, the ‘feel good’ rallies in the first week of 2009 started from Wall Street, although Asia was subdued, now Europe’s main Indies rallied as the US stocks fell. These rallies won’t last, in fact they are barely rallies. There are speculative at best, as new year profit driven trading begins – but the bad news is just settling in. As mentioned, the narrow volatility range now could indicate that the market is waiting for the next shoe to drop which could be a nasty deflation slump, with inflation remaining on food and other essential amenities.

Israels 2nd military blunder in two years, the rise of bandits and fudementalism – blame America’s pointless war on terror

Israel is making another military plunder. The first recent Israeli military plunder was the 2007 Israel/Lebanese conflict, which was a good example of poor Israeli military decision making, that not only effects the vast majority of civilians on the ‘other side’ but again puts a huge dent in Israels international standing in the world. We can thank American military examples that have created precedences for it’s ally countries (and not so much ‘ally’ countries like Russia – refer to 2008 Georgian conflict), usually a massive disproportional attack, lead by air strikes, a lot of civilian deaths and in the end no resolve. In fact resolve in the sense the ‘enemy’ retrenches it’s self back into previous positions, note Afghanistan and Iraq. But a closer conflict to Israel was the failed Lebanese invasion in 2007. With Hezbollah still in power in the South of Lebanon, the conflict killed a lot of Lebanese civilians and did not change the power structure in the South of Lebanon.

Hamas are bandits, fueled by a Islamic fundamentalism. The more the US and Israel perpetuate the terrorism cycle, by creating an enemy. The more these conflict will occur and give more significance to rag tag Islamic armies. It is an un-winnable war with an enemy entrenched in a highly dense populated area (Gaza Strip), so the invertible outcome will be a ratio of civilian deaths the far succeed any justification to declare an ‘all out war’ on Hamas.

Still Israel will need to launch a full scale ground assault, air strikes have never essentially worked in a gorilla, or quagmire type conflicts. Will Israel commit to a ground assault? They will have to, in the sense the rocket attacks into Israel will continue well after the areal bombardments. Of course, even though Hamas are bandit type militia, a ground war stirs emotion. So Hamas will not be short of a lot of fighters in a ground conflict, with weapons smuggled in from Iran and/or are being stockpiled, I imagine that Israel will suffer a lot of causalities on the ground. Unless they flatten the whole Gaza Strip and kill as many civilian’s as possible. The point is as mentioned in Israel attacks the Gaza Strip 280+ dead in 2 days Iran could be the wild card, a conflict between Israel and Iran has been on the boil for a long time. Will the US help if Iran comes into the play, maybe not. Iran can tighten the oil supply, no problems, also as mentioned in my previous post; China will be the country to watch as they depend on the oil from Iran, from Bloomberg December 29th 2008: Prices also advanced as China, the world’s second-biggest energy consumer, said it will supplement its emergency oil stockpiles while prices are low, while Libya and the United Arab Emirates announced compliance with OPEC output cuts agreed on this month. “China’s plans to stockpile crude may take up some slack from the demand destruction from the economic slowdown,” said Rob Laughlin, a senior broker with MF Global Ltd. in London.

So if Iran participates in this conflict in some way, either with oil supply embargo, weapon supply or direct involvement – the oil price will definitely rise back into 60 – 70 a barrel range. Even with Chinese stockpiles and it’s own overall energy demand, Iran could just force China into the play (if Iran cuts oil, which they most likely will do if the conflict continues, which would be a good excuse to kick some life back into the oil price; hence gain more profits on a higher price); this would most likely broaden the problem. But as long a the US sits on it’s hands with this conflict, as it has for decades, the more useless the US policy machine will appear to the global community. But with the US facing a massive economic meltdown, a forever war continuing in Iraq and Afghanistan, a spike in the oil price could draw the US and other countries into a tense situation.

While Israel kills Palestinian civilians daily and the world sits complacent on this one, this conflict could spill over into something larger and more dangerous. So a military plunder by Israel could also be a plunder that effects everyone.

Brace for a global recession (update 2) – Japan in recession, rest of Asia next. Next stock market bull run 5-8 years.

Japan officially slipped into recession a day ago (17th November 2008 to be precise); technically Japan has been in recession for about 9 months into 2008. Japanese car exports (mainly to China), was the only positive contributor to their GDP, when everything else was collapsing, property, shares, machine orders, technology and consumer goods – pretty much everything Japan created was now piling up adding to large inventories. As the US slows down more dramatically going into September 2008, Japan’s GDP was also shrinking dramatically (0.1%). Now with China going into recession, thus ultimately effecting Japan, it therefore officially sent Japan into recession. Again there is a false belief that Japan could emerge somewhat less effected in a global recession. We have to remember Japan feeds US consumption from cars to technology. To assume that Japan could survive (retaining a 2nd place as the worlds largest economy) via it’s mass of savings or a re-feeding Chinese demand, is quite deceptive. In the sense Japan is an export based economy, that is not commodity driven, in fact Japan doesn’t mine anything and is an importer of oil. With global consumption slowing sharply throughout the world, a country that ‘produces’ like Japan is in big trouble. It is also a country that has never really come out of two decades of deflation, when inflation comes back; especially on oil and food. This could evaporate any domestic savings after the current ‘slump’. I honesty cannot see Japan rising as a powerhouse economy after this global downturn is through. As for the rest of Asia? Yes, Hong Kong, Singapore, South Korea, Philippines, Indonesia and quite possible China will all follow suit into recession. Joining the US, Germany, UK and the rest of Europe – into a global slump.

The markets know this, therefore there is continuing selling on all market indices. As discussed in The falling Oil price and Treasuries ‘ bank bailout plan’ falls apart. , we may not see significant rallies into 2009. Partly because the start of the recession is here, from a fear perspective it could be a long and harsh economic slump.

If you look at my portfolio, it is mostly made up of index puts on major commodity producing countries and their stock markets, currency put warrants on the AUD, RIYAL, EURO, PESO. Gold and gold shares (bullion), Gold ‘call’ Warrants. No company stocks at this point and I still think the markets have yet to find a bottom; I also think there will be a slew of creative destruction in the market. A depressed global stock market that could last 5-8 years, with sporadic rallies, but no way close to the highs it reached in the ‘boom’. In saying that, I personally see biotechnology stocks (on the premise that bird flu will migrate to human strain), renewable energy and energy stocks (as the next big crisis and more significant one will be energy) as possible stocks to watch. Geo-political turmoil will also occur, especially in Asia, India and possibly China, middle east (if oil drops lower). So relatively safe countries (western) could see some opportunities in real estate from overseas investors (this is very speculative at this point most since most western countries have huge housing bubbles). All in all, the governments of the world will pump the money and pour millions into infrastructure and stimulus cheques for the consumer. Probably too late, since all countries are contracting at the same time. Depleting sovereign funds and emptying reserves will equate to more countries going bankrupt than surviving a recession somwhat intact.

Oil lower, volatility market reaction. Oil now showing price instability. Could the mother of all oil shocks be brewing?

It is extremely hard to find correlation in the market and connect them to other market forces. Other times one can make ‘assumptions’ and interconnect markets. One example is the slowing global economy and the lower oil price, which in some ways is to be expected, especially with demand is slowing in the US and oil supplies appear to be replenishing. China’s slowing down after the Olympics is still speculation, but with the global economy contracting rapidly in the last month – China is slowing more rapidly than expected. Even prior to the Olympics. Yet still Chinese oil demand is up 8.3 million barrels per day, from 8 million (June 2008 ).

So is the recent drop in oil price and indicator that the world is heading into recession?

With the market selling oil, thus bringing the price to 113 (13th august 2008 ) from 146 (15th July 2008 ); what has come into play is several situations, the rapidly slowing European economy, the slowing Asia economy more particularly Singapore and Japan and of course the stagnant and recessionary economy of the US. The European EUR has now gone into retreat under the belief the European Central bank will cut rates. The US dollar has rallied against the high yield currencies as they have declined. But oil output is still high, with OPEC pushing levels to 48yr highs; pledges from the oil countries such as Saudi Arabia to increase output have still yet to eventuate in earnest. No new oil fields have been explored and existing oil fields are struggling with out put. Iran is still is a major player, I suspect they can call the West and Israel’s bluff.

120 was the support, but oil dipped rapidly due too little damage to the Georgian oil pipe lines (Russia’s invasion), US slowdown/demand and so on. The US stock market has been in such a flux of volatility and continues to do so. The new support is now 110, but in my opinion the oil price is showing price instability – the sell off has been a running of funds out of the oil market. Can oil prices collapse near term? Possibly. If liquidity is being run out of the oil market through maybe fear of over regulation and other market factors, we could see oil prices jump all over the place – and go lower.

Despite the theory of speculators and liquidity propping up oil prices, it should be noted that a psychological support will be $100 a barrel. Any lower and we may get an oil shock straight back up into the high 100’s (surpassing the oil shocks that occurred in the 1970’s), mix in a conflict and it could go to $200 year end.

Artificially dragging the oil price lower, from either fear of regulation or panic selling could pose more danger than a sustained high oil price. Like I said earlier, the 100 price most probably will force the market to stop selling.

The oil/futures market is a hard market to speculate in, but there does seem to be some price stability now with the falling oil price. Which could be the new support of 110.

please refer to graph(click on for larger image):

World Crisis scenarios for the 21st century – Peak Oil (update 14) Oil heading towards $150.00

World Crisis scenarios for the 21st century – Peak Oil (update 14) Oil heading towards $150.00

Supply issues and geopolitical tensions will inevitably send oil into a high price range. But still the oil market is a volatile market, it has been reported that Oil is now heading into overbought territory. Related commentary is that a correction in the oil price could be seen at some point in 2008 and we may see oil from it’s highs, back down to $100.00; although this would be a short term move.

At this point I cannot see any substantial correction in the oil price, with continuing weak US dollar and a potential global ‘buy up’ of oil (countries hording oil), the oil price will continue upward.

A dramatic increase in the oil price is on the cards, with Israel poised to strike Iran over Nuclear and missile developments ( Iranian medium range missiles tested recently). Personally I see a military strike on Iran as imminent, it could not be ruled out that strike could occur as early as late July 2008 or early August 2008. The markets have factored this in, with oil going from lows of 135 and then back to 141.

On a one day chart Oil is currently trading above the resistance (broken out) of 140.37, it is trading comfortable in the trading range of 146 and 135. Current oil price 141/142.

Note that oil is trading above the 50 Moving Average of 130, the 100 M.A of 119 and the 200 M.A of 105.

Take profit options at 146 and 150 – oil moving straight into the 150 range if there is a strike on Iran by Israel

refer to graph, please click on image for larger version.

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

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.