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):

Japanese bank goes bankrupt – Asia could have a festering banking crisis

The alarming aspect of a Japanese bank (Norinchukin Bank) that has just filed for bankruptcy protection is that it was bank that was not listed on the public markets. It was a private bank with over 4000 investors. Although it will be large enough to cause a ripple effect through the Asia markets in particular causing the HK dollar and iTraxx credit spreads to widen. I did indicate that a Japanese bank could be on the brink, that was briefly discussed in Consumers will punish the financial system for governments exuberant money printing – Be careful on equity market ‘rallies’ into next year.

This bank failure in Japan is not so much of a shock but more a revelation that the Asia banks (outside from Japan) could be now straining to hide any toxic junk they have. But regardless I suspect it will cause a withdrawal of confidence that Asian banks could somewhat come out unscathed from a global banking crisis. In saying that it would be worth watching movement of the Japanese Yen. There was speculation that risk aversion could send a reversal of the Yen highs, meaning the US dollar could gain ground with possible highs over the Yen. This didn’t happen short term, as the US Obama administration with their incumbent Reserve Bank could nationalise the whole US banking system (considering the bigger US banks total 20 different banks – all earmarked for huge Government equity stakes). This would further destabilize the USD as investors will be petrified at the massive moral hazard the US government will embark on; the stock market will sink on any reports of nationalisation as will the USD.

This can be seen in the below graph, speculation that the USD could reach 100 against the Yen were diminished after risk aversion caused the USD to be dumped and the Yen to be bought up again.

On a daily USD/Yen graph: Mometum at 37 days (last two lows) is showing a decline, CCI (1) 20 overlapped with the USD/Yen is showing a sharp decline, the CCI (2) is showing a sharp decline that could mirror lows made on 16 DEc 2008 when the USD touched 88 against the Yen.

(click on graph for larger image)

World Crisis scenarios for the 21st century – Worldwide economic depression – (update 17)

World Crisis scenarios for the 21st century – Worldwide economic depression – (update 17)

Japan is now in a depression. The Japanese economy has been followed extensively on morbius glass since the onset on the global recession. Japan was interesting situation as the country tried to secure exports with China after the US slumped. As we know China could be facing a very nasty downturn, hence it has effected export counties in the Asian region severally, namely Japan.

Japan also is a very good example that a stimulus package does not work, instead leading to distortions in the FX markets. In Japan’s case a high YEN, as opposed to collapsing currencies elsewhere. This is because money is being taken of of countries where their interests rates are falling and general capital flights (weak goverment t-bonds). So safe havens are sought out, the Japanese Yen is relatively safe comparable to very risky currencies like the EURO, GBP and USD. Of course this put pressure on Japanese exporting – so a continued downward spiral has occurred for the Japanese economy.

Japan is a bellwether for Asia, in which would indicate the US is but a whisper away from a depression (if it isn’t already in one). So with Japan as a good example of capital flights out of Western developed countries like the US and the UK (a discussed this can be seen with the rise of the Japanese Yen). This would also show that the markets are wary of countries that are trying to re-capitalize without outside investors. So as they print more currency and attempt to self capitalize, the market is now factoring two things: inflation and protectionism. Which are both inevitable, as governments with their incompetent policy makers will ignite inflation and a trade war.

(For Japanese related blog posts, please type “Japan” in the morbius glass search option.

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.

2009 – the fall of the US dollar, the rise of the Japanese Yen

The US dollar in the last 4 months towards the end of 2008 has been a great hedge. Especially against the commodity producing country currencies and the EURO. But it’s time, albeit short rise (after some heavy selling in early 2008 ) is finishing, in fact you could say it will be the end of the US dollar (as a base currency).

At some point in 2009, the US dollar will crash hard. As the world will go further into a severe economic slump. Unfortunately the money printing and ‘bailout packages will cease to have any effect of the markets (except causing the USD to collapse ), as company earnings will be very disappointing throughout 2009 and the coming US dollar sell off will effect global equity markets.

The US dollar decline into 2009 will also include the EURO. At the time with relative strength of the US dollar up to December 2008, the EURO was sold off. From highs of 1.48 ( 22nd September 2008), to lows of 1.23 (27th October 2008). With the USD now showing weakness the EURO has made some gains, refer to graph (click for larger image):

EURO now at 1.33

I think the EURO rally is short term, which will also see weakness in 2009, but with the USD sell off imminent; the EURO may stablise in a flat range. With EURO coming under pressure, more so against the Japanese YEN.

The Japanese YEN will rise significantly through out 2009, as most global currencies will get dumped, more particularly the USD.

Note on the USD index, USD/JPY graph, the comparative sell off of the USD index and the USD against the JPY – from March 2004 to December 2004. Then in September 2005 the USD index broke aware from paring with the USD/JPY (refer to graph, click for larger image), to go to highs of 124.00 USD. Now crashed to 91.51 against the Yen (as at 11/12/2008).

USD index, USD/JPY graph

With USD now dropping off it’s highs 88.46 (21st November 2008), now 83.28 (11th December 2008).

It is very possible we are going to see both the USD index and the USD/JPY parity in collapse (as it did early in 2004), as USD positions will close off towards the end of 2008 into 2009. There is going to be a definite sell on the USD right into 2009.

You might as well “write off” the whole Japanese economy

If they decide to cut rates to 0.25% (from the 7year low) and intervene with FX reserves (to try and drop the JPY gains).

Is there anything worth investing in Japan? Stocks are 20+ years of ‘going nowhere’, JPY is volatile (maybe a sell ‘short-term’), property (is history). The whole economy looks like it will never recover, ever.

When inflation comes back on board (and it will, with a vengeance)…Japan will be wiped off the economic map.

Watch Global Currency markets. Country bankruptcy ‘endgames’.

Hungary, Ukraine, Argentina, South Korea are countries that could cause a domino effect (within their regions) of risk aversion and panic, sending ‘interconnected’ economies into free fall. Bank of Korea just slashed rates down 0.75%, now siting at 4.25%. The South Korea Won has been hammered in the currencies markets, the barometer of a country’s economic situation is their currency. The Won is indicating that South Korea is going to be hit hard by the major consumption economy (USA) prolonged recession , this may cause the rest of Asia to go into a meltdown. Hence Asian markets liquidating stocks and running out of stocks into the Japanese Yen, powering the Yen to all time highs. This has caused the Yen to be favored over the Euro, which as one point was at 1.66 Yen on November 6th 2007, the Euro now is facing down, a good chance it could bounce off 1.00 Yen. This by no means indicating that the Japanese economy is booming, in fact Japan is a country that is so negative with an ailing stock market, the general market that doesn’t know where the bottom could be – the Nikkei could go much lower before any kind of rebound.

Nikkei (225) 23 yr graph, note the highs in 1990 just shy of 40,000 points, through to the current 7,649. That is 18 years of losses (long term)!

The Japanese YEN like the US dollar are considered low risk as opposed to the EUR, it could be surmised that European economy is collapsing more dramatically than Asia and the US. Ukraine just being bailed out by the IMF, Hungry cold be next and other European countries namely Eastern European could all start to face the reality of defaulting. Of course the big question is Russia’s economic situation?

If there is an ‘endgame’ in the markets would could see whole countries go bankrupt, a global slump with a slew of countries that are broke, from the Americas to Europe and parts of Asia

The constant reminder of volatility in the market is the intervention of all the global central banks and governments; this intervention is of course delaying a huge invertible outcome. Thus at the same time causing a market to become even more jittery.

One can solely blame intervention by global governments and central Banks for the volatility, check the VIX out:incredible.

The market simple can’t find a bottom. With a accelerated global slump occurring the worst thing the central banks and governments can do is pump money into the system and cut interest rates.

Especially with the extreme market volatility with emerging and developed economies currencies.

A range of currencies will be sold off dramatically in the market, if Argentina or a European country or countries start knocking on the IMF door. If South Korea looks for a bailout package, expect the Australian Dollar and New Zealand Dollar to crash below current supports. With the AUD most definitely heading below 0.60.