Confusion continues to reign in the developed markets with inevitable over spill into the EM markets.
Do we buy or sell the USD? Is the USD still a useful correlation for asset prices or not given its mainly composed of the relationship between the USD and the Euro? Both have negative interest rates. Both are highly liquid and lent very freely for financial speculation. It is therefore the least bit useful to use either of these as a judge of financial asset performance? And, more importantly, as the key input to black box algorithms?
Imo, the relationship is not terribly useful any longer. It is only useful, imo, in the very short term as USD strength is an indicator of deleverging or leveraging by financial participants. Ie no one borrows USDs and buys US assets it seems. 90% of participants borrow USDs to buy overseas assets and so even something like the S%P downgrade of US credit drives the deleveraging process of selling overseas assets and paying back usd borrowings by short term financial players. If downward pressure sustains more longer term borrowers of financial assets are forced to sell assets and pay back borrowed USDs. This is the process we are in at present. It is a short term phenomena driven by trading dynamics which over power the fundamentals of the situation. The key for private investors is, as always, not to over leverage. Leverage (money) is limitless and near free with zero interest rates but it is a sword that cuts both ways and must be used by private investors very cautiously.
Equity Indexes – Asia got killed over night in response to the deepening US and Euro issues. Nothing has been fixed in the developed world of course without more money printing participants are starting to realize a double dip will occur. If money printing occurs companies are trading at a significant discount in Asia if money printing doesn’t occur the deflationary collapse scenario occurs and companies are overvalued. We are in a similar position to the 2008 collapse but at a higher nominal level.
Importantly here, seeing the wood for the trees:
The dow is now lower than she was at the 2008 lows, measured in gold. That is correct. She is now a multiple of 6.5 of the gold price. On the 2008 lows she was a multiple of 9.2 or so. So in spite of the higher nominal low, in gold, the dow is 30% lower than she was at the 2008 lows. As money is debased from waves and waves of money printing monetary units will be worth less and less vs hard assets. This is the theory and this is the practice we can see. We must be clear that cash is losing value vs all assets inc the dow in spite of the lower gold dow ratio and the recent sell off of equity indexes. F0r silver bugs, silver has spectacularly out performed gold rising from a ratio of dow/silver of 733 to 277 or so in the period. These are the big trends and these, in all probability, will sustain forming higher lows and higher highs, for as long as the process of ‘inflation eroding debts’ sustains. We are still at the start of this process.
Technically, we have indexes at long term supports and at very extended levels. A bounce looks highly likely from a technical stand point. We have swung wildly from very bullish to very bearish in just a few short weeks. Volumes have spiked up last week. Last week’s volume dow cash was literally double the week before. Extreme volume spikes can signify extreme levels being hit and therefore short term turning points. As the long term trends look broken theory suggests the bounce up will be challenged again and a battle will then occur between the longs and shorts in the coming months. Monetary driven V recoveries in asset prices have been common place however and so continue to trade according to big monetary issues rather than near term technical patterns.
Fundamentally we have central bankers and governments scrambling for the monetary levers, again. Its all they know to do but imo it will likely come with fresh trade war type capital controls. The one and only lesson learnt from the last waves of money printing was that that the new money will flow to where government interference, regulation and taxes are low and where entrepreneurial ism is high. This is not the developed world for now. The new money simply flowed into assets and overseas. The next wave of Qes will therefore likely be accompanied by regulation and capital controls. This will make our life’s more complicated as we seek to avoid the expropriators actions. Interestingly asset participation by developed market consumers is at an all time low. The people are busy selling their houses, stocks and precious metals. This is perfect for the money printers as they liquefy this cash very easily without the side effects of inflation as the ratio of cash and near cash to the ‘new cash being printed will remain at a high level. The Zimbabwe/Mexico scenario will be avoided for as long as this ratio remains high.
More to follow..
All the best Rich
(5 votes, average: 5.00 out of 5)
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