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):

Be careful what you wish for: distressed markets may become a ‘brutal’ bear market

When markets decline heavily as they have, as a trader you try and look at the opportunities that may arise from a depressed equity market. The problem with this so called financial crisis is the volatility is just so widespread and market declines are constant over any rises, why? Market confidence has been shattered and now sinking into a psychological fear of personal wealth decline. So investors are now generally sitting on the sidelines, a good example is Japan with the stock market trading at 27+ year lows, the Japanese government is now considering buying stocks (to bolster retirement funds); a crazy notion, but a good example of how the private sector, investor and person in the street is now in survival mode.

In my opinion for about 4 years (from 2004 to 2007) markets were overvalued and a correction was in store, several declines or corrections occurred prior to the massive sell off in November 2008. The huge 2008 sell off was predictable, but knowing when that sell off was going to occur was hard to factor in; despite lies and illusion based talk from Federal Reserve officials and US politicians (European policy makers were just as bad) . If you followed the markets/and economy carefully, you would have seen massive de-leveraging taking place after a slew of bad news coming through from the banks, this occurred from 2006 right through into 2008 (the credit crisis). So it set the stage for a huge sell off. The Lehman Brothers failure in 2008 of course was the prelude for global stock markets to collapse in November 2008.

There are two potentially diverging theories on the markets at the present, one that markets will bounce back from their November 2008 lows (as they have been so severally sold off), or we see further declines into 2009. What ever the case, I still don’t believe that a substantial rally from the global indices can occur at this point. What we may see is huge amounts of volatility continue as ‘creative destruction’ removes a lot of companies from the face of the earth, and government intervention into the markets is leaving countries very vulnerable to economic and geopolitical shocks. This is all going to weigh on the markets, so further declines may all but be part of a more brutal bear market forming, one that could even surprise the bear commentators. So the market is a disaster zone. In saying that, markets do eventually recover; what this market will recover into is hard to say. But the global economic and general society well being is and going to face huge challenges in the future, from oil, water to environment, geopolitical and health concerns (viral). So a strong recovery may seem very unlikely in the near term.

The markets as they are now, is set up for short term trading. That means shorting indexes, puts and calls on currency derivatives/stocks, trading currency and so on. This is nerve racking trading, but the only form of trading that can be done in a volatile and challenging bear markets. The distressed assets and long term opportunities are hard to find, only because as mentioned earlier, we may see a lot of asset/company destruction in the market before a bottom is found. A good example is the car industry, at some point the US government who essentially has become a drug dealer to a problematic addict. May eventually have to let the addict go, if there is no return or payment on pending restructured assets. Once well known companies could disappear, because the governments of the world have become paranoid trying to support asset prices, any cash addicted zombie company that does die; might open up for a lot corporate failures on a broader front. This will again cause the markets to slide further into the red, as mentioned this could be defined as a brutal bear market, with sproatic bear market rallies and sell off’s into lower territory.

Extreme market volatility: blame it on Bernanke and Paulson – revised ‘bailout’ bill.

Already recognized as one of the most unpopular bills the senate in the US has ever orchestrated. Knocked back once because of voter displease, now revised in an ‘ad hoc’ way which will still cause the congress to vote in an uneasy majority.

The US is going into a prolonged recession, with US unemployment numbers coming in at a seven year high, motor vehicle sales down and literally every indication that the US is in recession or heading towards a nasty one. This revised ‘bailout’ bill will have no effect on the greater economy, this is factual. A government money infusion to any bank that puts it’s hand out, maybe even the possibility of private business (non banks) getting bailed out too, makes no sense. To capitalize business when the market hasn’t even stabilized is crazy talk, in fact the US housing market is still collapsing. So essentially if you were a bank that just got bailed out, you would not reinvest into an unstable market. You would like any investor, or business shrink down your business model, horde cash and sit it out. Which is what the banks will do on this bail out proposal. It could be argued that this so called ‘700 billion’ revised bail out proposal is more token to restore confidence in the stock market. Not the wider markets, it’s actually quiet deceptive. Orchestrated by a ex-banker Henry Paulson, who would know that a ‘crisis of confidence’ or confidence in the market can make money and lose money. So, if you were to agree to this bill, you would from a perspective of a short term gain on banking stocks – as they will rally significantly once this revised bill is passed. It is a quick fix for Wall Street, not main street. It’s gambling with tax payers money. Thus is the nature of clueless politicians and ex-bankers trying cash in before the shit storm really kicks in.

But gamblers who are desperate make rushed and poor decisions, the market volatility is a good bell weather to the bill proposal. The market doesn’t really accept that the bill it’s self will save the US economy, in fact the market knows that this bill will do very little except a short term rally on the Dow Jones and S&P 500.

(Dow and S&P 500 graph is in real time)

Inflation hasn’t entirety disappeared, despite the slowing US economy, and Europe’s dramatic slowdown. So most traders and investors are aware the pressure on the US dollar, of late there has been currency swaps by central banks. Buying the USD. The USD will suffer on this bill, if it is successfully passed this time. The Federal Reserve with other central banks, may cut rates simultaneously. The credit market will still be frozen despite the bill passing in congress. As banks unload worthless toxic assets onto the US taxpayer (billions of dollars worth of junk), the market will then see which banks are essentially dead, to be revived as zombies by the US government. One has to wonder how the hell these business will return to profit, if at all. The con job would be exasperated further as banks (mentioned earlier) start to horde.

VIX heading towards 50

(VIX graph is in real time)

So, with an extremely unstable consumer market, that is in recession. It is a pipe dream to believe that liquidity being pumped into the credit markets will revive them.

The whole process (bail out and rate cuts) looks unstable and unreliable, hence I can’t see banks beginning to loosen up liquidity and lending to each other.

Gold doesn’t go bankrupt.

Gold has risen from lows of 736 (11th September 2008) to highs of 893 (18th September 2008 – gain of 157). Although the current price spike (17th and 18th September 2008) is the historic aspect, to rise as quickly as it has in a short period of time is impressive. Although note as discussed in The world is most likely in Recession, gold was showing signs of instability in the lower price ranges; so a large rally was on the cards. Of course in light of the now recognized meltdown of Wall Street and the world’s finance sector, the spike in the gold price was exasperated even further; as liquidity comes rushing bank into the commodity markets.

After bouncing off support of 744, gold has now passed over supports of 772 and 837. Now moving into the trading range of 857 and 931. Gold could hit a peak of 900 (short to medium term), with some selling (trigger selling) to occur.

But as long as the USD get’s crushed and bank failures continue in the US and Europe, the credit crisis migrates to a broader liquidity crisis. Gold will continue to be a reliant hedge against a falling market.

Although watch take profit signals.

click on graph for larger image

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

Brent Crude Oil hits $140 a barrel

As I mentioned in a post on June 17th 2008 under World Crisis scenarios for the 21st Century – Peak Oil (update 13): Looming Oil option price at $140.00 a barrel (Brent crude).

After reaching peaks of 139 a barrel, it was analyzed that oil will break into 140. I prematurely called 19th June 2008 as the date that oil would hit 140.

The trade would have been bought when it hit 131 (June 18th), as I mentioned in the June 17th post oil was slightly over bought. The choice was to either close the trade prior to the 19th June 2008 when oil was trading at 136, or continue to go long for the 140 mark.

The trading range from the June 17th post was set at the lower trend line of 125, this should be moved up to the 128, and hold the upper range at 140. The market appears to be trading in that range even though resistance has been broken at 135. Take profit should be effected for this trade now at 140.

Please click on graph for larger image

World Crisis scenarios for the 21st Century – Peak Oil (update 13): Looming Oil option price at $140.00 a barrel (Brent crude)

World Crisis scenarios for the 21st Century – Peak Oil (update 13): Looming Oil option price at $140.00 a barrel (Brent crude)

With oil reaching a new high of 139.92 (Brent crude close of trading 16th June 2008), it has slid back to 134 – 135. Yes, it looks over bought now under the resistance set at 135, trailing way above the the 50 day average at 123 and the 100 day average at 112. It is however trading with in the trading range of 125 and 140. The 22 CCI is showing steady at 67.27.

I believe we will see oil reach 140 by the 19th June 2008, then drop back into the trading range again. Refer to chart ( please click on graph for larger and clearer quality):

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