Global Market Analysis/Forecast: Phase II : Central banks solution: EU QE2 (double EFSF), Fed Cap Yield (QE3)

The job numbers were a surprise for the market with only 18k jobs created against 97-105K expected. Meanwhile the important data is not the 9.2% unemployment rate but the participation rate at 64.1 percent. The employment-population ratio decreased by 0.2 percentage point to 58.2 percent yet this data does no not include the so called “discouraged workers”. Besides a week economic reality, the greater the economic concerns the better chances for a quick fix stimulus. Therefore, counter-intuitively the short term view on the market is rather positive assuming more stimuli is to come allowing assets to inflate for an other round.

Following we will interpret the most relevant market-moving headlines:

Ø  Greece, Italy top agenda at EU finance chiefs meeting – Reuters:  Top EU officials hold urgent debt crisis talks

•         ECB's Trichet, Eurogroup's Juncker to join Monday meeting

•         Concern grows over 2nd Greek bailout, threat to Italy

•         Getting private sector role in Greece may require default

ð     Since the Greek rescue package is almost a done deal, the way to open for a second bailout in September is first to increase the European Financial Stability Facility (EFSF) which is the asset purchasing program in Europe. There is a possibility of the EFSF to double in size. This would also allow Europe to put a safety net under Italy and calm the Markets.

ð     EFSF to Double: http://community.nasdaq.com/News/2011-06/forex-euro-selloff-resumes-after-comments-efsf-may-double.aspx?storyid=80905

Ø  Geithner Wants Biggest Budget-Deficit Cut Possible Now, No Short-Term Deal

Treasury Secretary Timothy F. Geithner said the Obama administration wants the most comprehensive deficit-cutting deal possible and reiterated that failing to raise the debt limit could have “catastrophic” consequences.

ð     As far as the US is concerned, this week-end, T. Geithner said he expects the debt ceiling to be raised by the end of next week. The debt ceiling needs to be raised before the eventuality of QE3. In fact, once they raise the debt ceiling, the problem of “who is going to buy the debt” will begin. To avoid interest rates to go out of control, the fed could launch a QE3 in a form of Interest rate cap.

ð     Pimco’s Bill Gross :"Next Jackson Hole in August will likely hint at QE3/ interest rate caps."

An, Interest rate cap is even worse than a defined QE program. Interest rate caps could mean a yield curve predefined by the Fed, where the Fed would buy as much US debt as necessary to meet the desired yield. Effectively, rather than a defined amount of QE we can suppose an unlimited budget, the last round of asset purchases was around 600billion. Note QE2 did not end since the amount is reinvested as maturity comes due… Here is the issue, The Fed representing already 70% of US Debt purchases:

- An unlimited program would allow the remaining US Debt holders to exit US treasuries by dumping them to the Fed.

- In this case there would be a systemic risk if the Fed end up buying more than 90% of Treasuries, this would mean a phony market or no market at all and could be the beginning  of a greater crisis based on subprime governments across the world. Meanwhile, this could take some time, first to materialize and then to be pointed out.

Warning: Risk Premium.

“No incentive in holding CDS and the ECB accepting junk bonds as collateral adds a risk premium to the market.”

Ø  ECB Suspends Ratings Threshold On Portuguese Debt As Collateral – Nasdaq: The governing council of the European Central Bank has decided to suspend the application of the minimum credit rating threshold in the collateral eligibility requirements for euro-system credit operations involving marketable debt instruments issued or guaranteed by the Portuguese government, the ECB said in a statement Thursday. The suspension will be maintained until further notice…

ð     After raising Interest rates to 1.50% on July 7th, Jean Claude Trichet also revealed a change in the rules binding the EFSF and the ECB. Suspending the rating requirement for the bailout fund gives a clear message to the market: The ECB rejected the assessments of the rating agencies and The ECB is willing to bend their own rules to rescue the Euro.

ð     During the question session J. C. Trichet reiterated:”No credit event, no selective default”. To the question: Is the ECB denying evidence or do they have a backup plan? We can argue that they have a plan which could be to increase the bailout facilities as this is in line with their latest proceedings.

Ø  Greek Rollover Probably Won’t Trigger CDS, ISDA – Bloomberg : “If it’s voluntary, any rollover or exchange doesn’t trigger CDS.”…

ð     First we can question how “voluntary” the restructuration is. Rolling over is reinvesting at maturity whereas in this case the maturity is prolonged without necessarily considering the liquidity neither the solvency of the Bonds. The liquidity issue is fixed but not the core problem which is the long term insolvency.

ð     Second, we can question the message sent to the markets: Because of the European countries and the ECB seem to be willing to bailout Greece at no matter what cost and given that such rollover wouldn’t be considered as valid to trigger CDS it clearly becomes less attractive to hold CDS. By following this logic there would be no incentive in seeking protection through CDS.

Market Recommendations:

Long term, buy on Dips: BG, FRES, XTA & BRBY,IMT, EMG

Longer Term:

è We could see a progressive money flow from bonds back to equities. We hope the liquidity injected by major Central banks to maintain bond prices will find a way into equities and other “hard assets”.

è  Recommended to hedge against inflation and a relative appreciation of emerging market currencies; shares of companies having a large part of foreign operations and with high pricing power (ability to raise prices easily due to a non elastic demand and very price elastic products) such as luxury goods operating in emerging markets and tobacco companies. Energy companies are limited to this effect due to government price regulation. In this case The underlying commodities such as Oil and Gas as well as Corn and other agriculturals are better off. Since they benefit directly from the ongoing "money printing" and stimulus.

For the end of July- August: ≈26/08/11

Ø  If the debt ceiling is raised and QE3/Yield Cap materializes bond and particularly US Treasury rates could go back to near October lows based on growing recession fears and negative Economic numbers.

Ø  More stimulus would turn “risk on” trades and inflation concerns where of more risky investments such as high yield emerging market bonds and Stocks could benefit.

Ø  Most importantly commodities and precious metals will benefit from the unintended consequences of the stimulus: Inflation

Macro Forecast for the next 2 months:

Economic concerns, jobs and debt crisis => Central banks solution: EU QE2 (double EFSF), Fed Cap Yield (QE3)

“When the debt ceiling is lifted, the US Treasury will need buyers. There are still no jobs and growth objectives are not being met, a good reason to launch QE/Cap yield plan while the European debt crisis makes America look good.”

From the previous report we are ending the 1^st Phase:

1^st phase: Recession Fears - June ~ Mid August 2011

ü  Fears that the Debt ceiling will need to be approved with deep cuts in government spending which can lead to a revision of GDP growth (less stimulus) 

ü  The Market will anticipate interest rate hikes from the ECB and/or the BOE. This can have a negative impact on growth prospects and exacerbate debt concerns (Greek restructuring…) in the EU 

ü  Most importantly, the end of QE2 was a strong test on how strong the recovery was and how much has been an artificial effect of the stimulus.

We have seen a counter- intuitive effect, whereas the stimulus is in the money market (bond purchasing program…) Equities and commodities were the ones dropping over recession fears (Less Stimulus or artificially low interest rates  = less cheap credit  = less consumption èless growth)

We are now heading to:

2^nd phase: A Short Term solution –~ Mid & End August 2011

• The Debt ceiling is raised but not enough cuts in government spending are done despite what republicans will certainly display as a “win”. The government is allowed to keep going into debt and push consumption (rather than production) 
•  Major Central banks lack of rigor and do not raise interest rates despite the potential inflation for the UK. As far as the ECB despite having rates at 1.5% the European Debt concerns will exige an other round of bailouts and a bigger EFSF fund which in effect adds further potential monetary injection (EU QE2)
• An increasing propaganda of QE3in a form of a Yield Cap is announced as a possibility and a “good thing” to ensure economic growth.

We could still see one or two weeks of downside, the real trigger will be either an increase of the European bailout fund or the US debt ceiling being lifted. Due to disappointing economic numbers and less inflation, Bernanke will have more arguments to push QE3/Yield Cap as a “necessary measure” to “ensure a recovery and for JOBS” whereas the real reason will be to stop the stock market fall, push inflation, depress the US dollar and try to boost exports. Perhaps QE3 could happen in August after a more disappointing economic numbers.

The Market Strategy:

•         Phase 1 was: Good for Bonds and Currency.

•         Phase 2: Is very good for Commodities (blue) and Precious metals (Yellow) and positive for the Equities (to a certain extent between 0 and 5% inflation.

 Mini Charts 12-07-2011 

(Click Image to Enlarge)

(Click Image to Enlarge)

   

Global Equity Market Analysis/Forecast: End of QE2, Market correction, Panic, QE3

Forecast for the next 2-3 months :  

End of QE2=> Market correction, Panic => Bernanke Solution: QE3

When QE2 ends, we can see a de-leverage process. If the FED try QE3 now it wouldn't be accepted. We need a market panic for the FED to have arguments so even those who are against QE3 will ask for it.

In my humble opinion the market is going to see an important correction over the next 6 weeks the reason being:

Scenario 1:

• The Debt ceiling will need to be approved with deep cuts in government spending which can lead to a revision of GDP growth (less stimulus) 
• The Market will anticipate interest rate hikes from the BOE and ECB. This can have a negative impact in the UK economy and exacerbate debt concerns (Greek restructuring…) in EU 
• Most importantly, the end of QE2 will be a strong test on how strong the recovery is and how much has been an artificial effect of the stimulus.

?         We may see a counter- intuitive effect, whereas the stimulus is in the money market (bond purchasing program…) Equities and commodities could be the ones dropping over recession fears (Less Stimulus or artificially low interest rates  = less cheap credit  = less consumption = less growth) A similar movement to what we have seen when S&P Downgraded the US economic forecast.

What could invalidate my views is:

Scenario 2:

• The Debt ceiling is raised but no major cuts in government spending is done. Government keeps going into debt and push consumption (rather than production) 
•  Major Central banks lack of rigor and do not raise interest rates 
• An increasing propaganda of QE3 as a possibility and a “good thing” to ensure economic growth.

IMHO, What is more likely to happen is a correction as explained in Scenario 1. This, in effect will allow a technical correction after the sharp rise since march 2009. Then, this will give more arguments to Bernanke to push QE3 as a “necessary measure” to “ensure a recovery and for JOBS” whereas the real reason will be to stop the stock market fall, push inflation and devalue the US dollar to gain competitiveness (more exports). Perhaps QE3 could happen end of July beginning of August after the market drop and QE2 ended.

I attached the previous document with the different sectors,

• Scenario 1 is Good For Bonds and US currency (Gray Colour)
• Scenario 2 is very good for Commodities (blue) and Precious metals (yellow) and positive for the Equities (to a certain extent <0-5%inflation>)

Following, Charts and illustrations:

Updated Chart on the Stock Market Inflation Periodicity Theory

http://tacoinv.blogspot.com/2010/02/stock-market-inflation-periodicity.html

(Click the image to enlarge)

For the FTSE, markets are interconnected:

 *Models by: Joé Thierry Arys Ruiz , 11/05/2011 - All rights reserved

Forex Market Analysis 29-09-2010

Long Term Perspective:

                The last big drop of the dollar grew concerns about the US economic and budgetary situation. The dollar could be in a downward spiral in the long term caused by the repeated Quantitative Easing. Investors expect the Fed to increase its balance sheet by at least half a trillion dollars by November [1] (see survey). The next Fed minutes are going to provide a clearer perspective. By increasing its balance sheet the Fed is boosting the US Bond market. In fact, many market watchers do believe for many good reasons that the Fed will always prefer inflation to deflation. The current policy is proving by multiplying the Quantitative Easing that they will use all available resources to avoid a deflation that could put America back to recession. Meanwhile, The secondary effect of such a longer than expected stimulus is a long term downward pressure on the US dollar and a systematic risk of hyperinflation.

                Another important issue rises as the global community could question the US dollar as the world's primary reserve currency as well as to be the international pricing currency for commodities. The political pressure between the United States and China regarding the currency market could fuel eventual conflicts during the G20 as U.S. lawmakers believe that China should revalue the Yuan by as much as 40 percent[2].

                After a big mediatized decline from October 2009 to June 2010, the Euro has passed the stress test of the European government debt crisis in the euro zone (Portugal, Ireland, Italy, Greece and Spain). Chances are that proposals concerning a change in the status of the reserve currency and commodity pricing currency surge as China and others have been calling for a new world reserve currency[3]. Even if this is not official, other countries such as Mexico have been diversifying their balance sheet with other currencies to limit exposure to the US Dollar to a certain extent[4].

                That being said it is very unlikely that the shift away from the dollar is to happen in the short term. Meanwhile it is important to consider that G20 in collaboration with the IMF might be working towards a gradual change in this domain possibly by implementing a basket of currencies (i.e Euro, Dollar ,Yen , Yuan...) ,commodities or an index as accepted reserve and mean for commodity pricing. In such a scenario, world political hierarchy and economic changes could accelerate with the trend of a growing share of emerging countries in the global economic landscape. This could lead to a big downward pressure on the US Dollar.

                Even if the long term perspective on the US Dollar can be shown as bearish, the Euro area has its own difficulties and continues to deal with the recent government debt crisis. Because of the current levels of the US Dollar, technical analysis and midterm perspective show a strong probability of a large drop of the US Dollar especially relative to the Swiss Franc (CHF) and to the Yen (JPY). In the longer term, The Australian dollar (AUD) and other "future safe heaven currencies" such as the Singaporean dollar (SGD) could gain power as well.

Medium Term perspective:

The recent decline in the Dollar has raised some concerns regarding other countries' ability to export.  There is recent speculation that the BOJ could ease next week[5] .We can talk about a competitive depreciation de facto weather it is in purpose or not. The process can easily be seen with the evolution of gold prices. The following charts show the overall downtrend of major currencies relative to gold.

Weekly bar chart - semi-log scale. Gold in Euros, U.S. Dollars, Aus. Dollars, and Yen. All charts with 20 week (100-day) Moving Averages.

If this process continues we can imagine the currencies going back and forth relative to one-another while the basket of the major currencies continues to depreciate relative to Gold. This could consequently boost commodity prices in the midterm and remove deflation fears associated with a double dip recession by many economists leading to a inverse risk of hyperinflation.

Short Term Perspective:

                Technical analysis suggest a possible upward move for the US Dollar in the short and medium term. This could be triggered by new mediatization of Europe's sovereign debt crisis. We could be seeing growing concerns within the next week about possible Greek debt restructuring[6] and Ireland following Greece's steps[7].

© Joé Thierry Arys Ruiz 29/09/2010.

Please feel free to contact me

 Joé Thierry Arys Ruiz

JoeThierryArys@hotmail.com

http://tacoinv.blogspot.com
FR: +33 6 45 37 08 46

UK: +44 7 88 088 32 14

---

[1] Fed Will Boost Balance Sheet by $500 Billion: Survey. CNBC, Monday, 27 Sep 2010

[2] Sharp Yuan Rise Would Create Problems For China's Economy -People's Daily. The Wall Street Journal, Sept 26 2010.

[3] : U.S. set to be a posse of one on China yuan at G20. Reuters, Sep 26, 2010 ;

Ex-PBOC Adviser: China To Diversify Reserves; Yuan To Rise. The Wall Street Journal, Sept 27 2010.

and China Reiterates Call for New World Reserve Currency. Bloomberg, June 26 2009.

[4]Mexico says has more room to accumulate reserves. Reuters, Sep 22, 2010.

[5] FOREX-Dlr aided by talk of BOJ easing, Fed to try QE-light. Reuters, Sep 28, 2010.

Japan to "ease policy appropriately if necessary". Reuters, Sep 26, 2010.

[6] Investors eye options for managing debt burden. Financial Times, Sep 27 2010.

Adapt Chapter 9 bankruptcy code for Greece. Financial Times, Sept 28 2010.

[7] Markets fear Ireland is another Greece. Financial Times, Sept 27 2010.

Double Dip Recession or Hyperinflation - FED up the Economy

 

Are Double Deep Recession Fears Unjustified?

Concerning equity I think last few days plunge is a short term bear movement, the reason I believe this is the dominance of negative headlines focusing on fears of a double deep recession. Now don't get me wrong, those fears are justified but if you remove the feelings and the negativity and look at the real numbers you still see positive growth and a new German model surging as an example for the whole euro area.
Is it true that if we do the inflation adjusted growth you can have in some cases negative numbers and I want to underline the point that inflation adjusted growth should be the benchmark but I think this issue of inflation covering GDP growth is going to emerge during the fourth quarter rather than today. We are not yet in this position.
Obviously we are going to collapse the Monetary system with big changes within the world currency hierarchy and a government debt crisis to be handled. But honestly everybody has this debt and currency crash idea on the back of their minds, this is no more secret, the key is to know the timing. I don't think it is the time now for fat fingers to pull the trigger. I think the market is going to go through a last rollercoaster ride before we really crash.

The Fed is acting short term

The Fed extensive quantitative easing cumulated with the Fed basically buying its own debt is feeding the fear sentiment because the the fact and the matter is that they are acting like they were back in the middle of the crisis.
This is a short term move for treasuries and for debt obviously we saw the treasuries outperform the stock market and it may continue within the next few days or weeks but there will be a time when the monetary policy will have to go back to normal with an exit strategy and at this point there will be a huge problem with this debt. The Fed is trapped by its own mistakes and is keeping throwing the boomerang harder and harder but the solutions are only short term. The problem now is that the actual solution is in itself a systemic risk.

Global Growth

Now We have to think globally, the global GDP is going to be positive certainly with emerging markets becoming consumers and not only producers. This is because of three main factors: the first is that they don't have that much of a debt relative to developed countries. The second is related because of they do not have the issues relative to the government debt, they have a certain margin of debt they can still use; they are not thinking about increasing taxes. Whereas in the other hand the developed countries will have to lower their leverage and among the parallel solutions they will have to increase taxes among other things. The direct consequence is a transfer of direct investment from developed to emerging countries where there is basically everything to build. The third is that their currencies, emerging markets currencies are still pretty low which allow them to continue to export.
So in a way I am positive on the overall economy but there is really an issue in regards of a possible hyperinflation in countries like the US. On the other hand Europe and more specifically Germany is trying to limit this effect with the initial idea of having a slow but secure growth by being more rigorous and I believe "the German way" is becoming an example for other EU countries, as a result we have seen an outstanding growth of 2.2% (April-June equivalent to a 9.1% a year!).

To conclude I am positive on the overall stock market but in the case of the us I believe that the upward potential is not necessarily based on growth but rather inflation as I explained on the article the stock market inflation periodicity theory. The other thing I don't say in my article is that developed countries corporations are heavily invested in emerging markets where they obtain a large part of their growth and actually intensifying their foreign operations. So I believe US and European corporations results are going to be excellent but this not necessarily means new jobs in the home countries. that is why we see corporate results above expectations but still record unemployment numbers.

The Stock Market Inflation - Periodicity Theory - Part 2

The Stock Market Inflation - Periodicity Theory

Video Explaining the Stock Market Inflation Cycle

From the previous post :

http://tacoinv.blogspot.com/2010/02/stock-market-inflation-periodicity.html
(Original text and Explanation)

The Original post is from feb. 2010 and can be found HERE

Original Image

From the previous post :

http://tacoinv.blogspot.com/2010/02/stock-market-inflation-periodicity.html
(Original text and Explanation)

Political Toughts - Blame it on the People/Gov not Banks

It seems that lot of people have a real issues with banks. I see Banks here, Banks there; Banksters everywhere, conspiracy theories...

Subprime Crisis Cause?= Banks

National Debt Cause= Banks

Money Printing= Banks

There is not enough lending to businesses=Banks

There is too much lending to insolvent people=Banks


I am sorry but from where I stand, politicians were the ones who forced banks to lend to insolvent people so "everyone can own a house" this is the fault of irresponsible people who borrowed more than they could afford thinking that housing will always go up.
Public spending is the wrong allocation of money spoiled by Keynesian/socialist politicians themselves voted by the irresponsible,selfish and economically non-educated people seduced by the idea that the government can do a "stimulus" but the money is never back in other words more spending than income or even economical profit.
the whole inflation issue is caused by the same policies that put interest rates artificially low so everyone can get in deep debt.
People ask the banks to lend businesses and then they blame them because they lent to anyone. It's easy for the Media, politicians or anyone to blame it all on banks. But the truth is that stupid people and politicians are the real cause of this mess. Truth is Banks did what they where told to do.
So blame it on the government that pushed banks to lend to anybody without verifying solvency. Blame it on the banks who agreed to do so but there is also a share for the people who acted stupid living life they couldn't afford. But obviously the politicians won't go out to say: "Hey voters, it's your fault!"... I just found that video that resumes exactly what I think.

The fact and the matter is that Banks did not want to lend to insolvent people initially but then politicians forced them to lend, basically they told them: "Lend to anybody, I don't know how but do it" then banks who knew it was madness did not wanted to carry the risk so they asked the investment banks to securitize them so they did, mixed those bad loans with the good ones with financial engineering and asked the rating agencies to rate them AAA. Time elapsed and people started to speculate and bought houses they couldn't afford and were seduced by housing sell forces... The market began a mess and rating agencies saw the average loans get more and more speculative but instead of downgrading them they review their notations so a AAA would have been a BBB years later and so on until AAA really equals FFF (joke) but they had pressure because if they would have rated the mortgages as they should have done, the whole market would collapse so they didn't... Now investment banks could sell back those bad loans (made by the people) to the people but also to other countries in Asia and Europe, and everybody was happy as long as the housing prices were going up, but suddenly the house of cards collapsed.

Now nobody wants to admit it was their fault and certainly not congress, neither the people nor the financial institutions. Not only the USA ruined themselves but their ruined other investors in EU and Asia by selling them those high yield toxic papers.

Look we all know the system is unfair and yes corporations rule the world but hey it is what it is and I can't see how we can change it. All you can do is acknowledge and protect yourself.

I wish there was a fair system with high social mobility, I wish the developed countries did not take advantage of the emerging countries. Because if you want fairness then wealth should be transferred to the exploited emerging countries. In order to get equilibrium developed countries would need to review their standard of living to the downside (wages...) and it may actually happen but look at Greece, I don't think they are willing to do so. So as long as there is an unfair system I will rather sit back and watch.







P.S:

I don't think Anarchy promoted by conspiracy theorist is a better solution. Change should be made but with an order and peace, the problem is that if the UK overtax the banks and corporations, they will move to a less regulated place and indeed create a worse situation (Unemployment...), people should understand that. I am not saying I agree with that, I am just saying that is how it works.

See:Davos- Welcome to the Real Financial Paradise

What we need is a world regulation for finance but a regulation that applies everywhere, because if not, then the money will go where it is not regulated, for now each country is sovereign so you can't force them to regulate their market so in a way a world gov/regulation is what could save developed countries to keep their wealth.

Concerning the Greek problem:

Briefly in numbers:

• Greek government workers received what are called "13th- and 14th-month salaries."
  
• retire with pensions at 53!
  
• Government spending like stupid is not even addressed in the article
  

What is the result of those charming socialist/populist politician policies?

• Government spending accounted for 50 percent of GDP!
  
• Greece's deficit-to-GDP ratio from 8.1 percent
  
• Income was only 37 percent of Greek GDP
  
• Greece is in a recession and inflation is already high
  

Now, don't tell me "poor greeks" I am not saying that all became lazy and unproductive , there is certainly honourable Greeks but I feel ashamed for them because they will have to pay for their pairs and the previous irresponsible generations.
I wonder how Germans feel, because they have been working hard (retirement age at 67 and debating  to 69)and being  responsible and now they are going to ask them to work more for Greeks. And They are the bad guys! For god sake!
Sometimes I feel the world is upside down.


I would like to hear from Germans what they would say if I tell them that they don't have to worry about their tax money, in few years politicians in Greece will continue their Keynesian measures. Who do you think they will listen to? the debt holders or the streets?




The crisis is not the problem, the crisis is the solution of this mess, by trying to retain the monetary/gov debt collapse they are just pushing it further and making it bigger, the problem is that the ones who are ending paying it are the honest people who worked hard (in this case the Germans) for the lazy ones, that's the whole problem about socialism and human nature.

This is the typical example of a person that earns 1,000$/month go to the bank and ask for a million dollar home to the bank, the bank refuse and then a politician shows up and says "vote for me and I will force the bank to lend you and I will issue government debt to give you the money" (but he don't tell that they will have to pay one day, if not them, their children), the person vote for the politician and gets his loan part from the bank, part from government....



It's the story of the irresponsible guy that got loan after loan living above his means and then refuse to pay and say: "It's the banks fault because they lent me the money!" Now somebody have to pay and they will ask his neighbour to do it. I personally think it's the irresponsible guy who should be blamed because he is stupid as F***. and I feel angry for the guy who has to pay. The banks are just intermediaries and try to take advantage of the situation so it's pretty smart even if not very moral to take advantage of the stupidity of the majority, but you can't prevent people from acting stupid.

About Money Supply

"Money supply needs to increase to cover interest; money supply should only grow at the rate of the economy to avoid boom/bust and inflation"- Theory

Absolutely, but here once again the problem lies in human nature and speculation. In practice we cannot increase the money supply properly because we don't know at which exact rate the economy will grow. Also, some other metrics make economist think that "it's always better to supply more than not enough money, because an increase in money supply can stimulate growth".

I personally believe that since accurate financial planning is hard to obtain the best solution could be to simply let investors carry the risk, even if that is precisely what causes bubbles, the difference here is that I would let the bubble burst and not try to retain it so the risk taker gets busted (ai. insolvent or risky investor) hoping that:
1- in the process Wealth created remains ex: infrastructure, tangible materials etc.
2- Prices readjust
3- Some kind of Creative Destruction emerge

I am not saying it is the utopic solution, I think is the more realistic/ feasible one, in my humble opinion.
The main problem are:
1- There will be sharp periods of rise and fall, (but normally the system would improve each time)
2- People who cannot adapt are left behind, in some kind of economic Darwinism,.
3- The ones with the money who anticipated the crash but also the prudent that didn't speculate, are left with an advantage.
4- Wealth could be extremely volatile and mobile.

The 4th point involves a possibility of the developed countries to be owned if they speculate too much and so the not leveraged countries could own after a crash.

By the way this is exactly what is going to happen, bad debt leveraged countries= countries with high debt and low growth= Developed countries (USA,UK,Spain...EU) will collapse if they continue to increase their debt making the problem bigger instead of "deleveraging", and then not-so-leveraged countries= Emerging, China, would own. In a way it's just and fair because they have been exploited and couldn't profit for a long time. But in the short term I doubt it will happen, but probably the transfer would be progressive. In other words, leave the developed countries go to the new business friendly places (what companies are and will do). We can expect the new industries to develop directly whith new technoogy focusing in renewable energy already. So in a way, we have reasons to be optimist on the global economy but aparently many people should adapt and work rather than complaining.

Cheers,

12-04-2010 Forex forecast on AUDCAD review AUDUSD GOLD

*Remember, in the long term: We are bullish on Gold and bearish on AUDUSD as the US monetary policy normalize (raise interest rates) and the RBA stabilize it's interest rate.

AUDCAD: Target: .9470 Support: .9220Resistance: .95 and .9620
For the next week we still expect the federal reserve to raise it's discount rate so the spread between the discount rate and the fed funds rate would go back to 1%, back to normal (before the quantitative easing) to further normalise it's monetary policy.

Fed Moves Emergency rate

The Federal Reserve raised on Thursday 18th the discount lending rate by a quarter point (from 0.25 to 0.75). The futures of the stock market overnight plugged directly after the announcement and it sent the Asian stock market to negative territory -2%.
After a long period of low interest rates inflation will be the threat for the next 2 years, The quantitative easing strategy is come to its end. The symbolic raise in the discount lending rate is the first milestone for future raise for benchmark interest. In the short term, we expect chairman of the federal reserve Ben Bernanke to ensure that the raise in the benchmark interest rates is not imminent while it actually is. As soon as we see low unemployment we can forecast a raise at any moment.

"Back to Normal Business"

Investors consider the world's financial system has been saved while there has been no substantial change in the financial system, investment banks and speculation can be back to normal business until the next bubble explodes.
Is it good news or bad news?
The change is actually some good news for the financial industry:
* This confirm the consolidation of the financial industry
* Financial institutions do not need "a rescue or emergency rate" that low since the profits and overall confidence between banks improves.
*Now the financial industry is stabilized, investors expect the real economy to confirm improvement with better results translated into corporate results.

Form a Forex perspective:

This is a normal move after the big fears of inflation due to the quantitative easing for too long Federal reserve has printed too much money.
Now we are going to fight inflation. If the inflation is as high as I think, we can expect the US Dollar to drop long term with short term consolidations every time the fed move the rate higher like on Thursday 18 feb, even if the raise was exclusively applied to the discount rate, investors can imagine a further tightening monetary policy.

Conclusion: We can see short term strength in the US dollar but probably long term fall.


If Central banks start to move rates independently, then we will be able to take carry trade opportunities each time. However, I suspect the Fed and ECB to raise fund rates in coordination in a similar fashion they lower them during the crisis.

Strategy:

*The Euro remains weak and maybe too dangerous to play against the dollar at this early stage after the Fed move. I would not recommend a buy in EUR/USD yet.

*However, a good technical opportunity can be to short USD/CHF.

Capital Markets

While I forecast a relative growth for the capital market indexes. I don't believe it is going to be a growth fundamentally based on the economy performance but the "Stock Market inflationary effect". Headlines will probably look for good news as a justification for the coming highs in the stock market while most of the primary effect will be inflation. We may see an relative growth in the stock market with corrections each time we see a raise in interest rates. The growth in interest rates will probably be gradual and carefully planned in the long run, as longer as it can be.
This is a typical effect, basically, we see cheap money (low interest rates) invested for a low price in the stock market (from March to April) then a short stabilization effect for the economy to respond slowly (April to February). Following we may see a lateral/down market due to profit taking and a remaining uncertainty for the next month and half. Then a sustainable growth in price with rhythmic correction each time interest rates are set higher. This last period is expected to last "as long as it can be sustainable for the borrower" i.e until the share of the interest payment in the annuity is higher than the amortization.
Strong inflation would be publicized as good inflation generated by an improvement on the economy and the stock market going up with financial reports justifying it but the actual reason is inflation and the consequences of the quantitative easing. (See: Stock Market Inflation Cycle, previous post).

The Stock Market Inflation Periodicity Theory

(Click the image below to enlarge)

*Model by: Joé Thierry Arys Ruiz © Traders & Analysts C.O. 2010 - All rights reserved

 

Federal Reserve Fund Target Rates are available here

Phase A) Apocalypse: Crisis, Panic and Drastic Monetary Policy

After a Crash, Central Banks starts to lower interest rates drastically to stop the panic and incite investors to invest in the stock market motivating risk appetite with a low revenue in bonds. The problem is that confidence is gone and there is panic everywhere, the stock market plunges with short term picks/highs each time there is a drastic move to the downside of interest rates.

Bottom: Bottom in interest rates, Undervaluation and hope

Once interest rates can't go lower i.e near 0% , and the stock market has completely crashed. An undervalued stock market opportunity is pointed out and hope is feeding risk appetite. "Interest rates can't go lower, companies are fundamentally undervalued and the risk/reward worth it."

Phase B) Bounce:

Despite an economy still fragile, the stock market rises sharply principally because of two main factors:

The first is the tendency of the market to oversold a situation in advance in case of a further crash. The equity market often being used as a future indicator for the economy, oversold and overbought situations remain based on discounted future events. Equity is trading near par value and fundamental investors start to raise the buy flag.

The second and probably most important factor is the anticipated inflation who begins to surface, due to a weak monetary policy. Strong hands (Big Bankers, Institutional Investors, money managers...) enter the market: "If it doesn't climb for the economy it will climb because of inflation".

Phase C) Commercialization: Consolidation

Stimulated by a first intensive bounce of the equity markets, weak hands (non institutional investors, buy and hold public funds...) start to enter the market motivated by a strong marketing from institutional sales. Meanwhile, fears of inflation surge and uncertainty for the economy remains, strong hands take some profits and part of the paper is transferred from strong hands to weak hands. A short period of sideways/down fluctuations is the effect of these fears. Sales forces says: "Every drop is an opportunity to buy".

Phase D) Duration:

1-Monetary Management:

This is where Central Banks have to dose between inflation and growth. Central Banks have to prepare an exit strategy to remove the surplus of money that has been injected trough low interest rates. The whole strategy consist in slowly raise interest rates to fight inflation without stopping economic growth.

2- Deficit Management:

From a government perspective they have to deal between economic growth and budget deficit. After rescue plans, Keynesian policies, bailouts and stimulus packages, the budget deficit has exploded and the whole issue is to restore a balanced treasury by both reducing public spending and raising taxes; all without impeaching economic growth.

Phase E) Exhaustion

*Monetary bubble and the monetary inflation prime:

If both monetary and deficit management is well done then a relative long period of sustainable growth is possible. Meanwhile, by repeating the process from phase A to D over and over again, we notice that the monetary mass has been growing exponentially while the economy has had its ups and downs in a linear fashion. Failing partially in both removing the money that has been "printed" and restoring a government treasury balance simply leads to the effect of adding a monetary bubble to another. The consequence is that each crisis becomes stronger. The same happens for private and public debt, part of the debt and monetary surplus is cumulated as the process is repeated. Precisely this remaining cumulated monetary mass constitutes  what we can call a "monetary inflation prime".

*Slow Growth:

While the effects of the several monetary and government stimulus becomes more or less effective. The stock market has been pushed in phase D by general confidence a better shape of the economy, and the consequent inflation generated by growth.

However the previous inflation prime, the inflation created by the quantitative easing, can reduce economic growth.

Top: Interest rates are too high and the share of the interest payment in the annuity is higher than the amortization of the good itself. The investment for example mortgages becomes unattractive since the situation could be similar to a perpetual debt.  In this situation, credit delinquencies and default in payment surges resulting in another credit crisis. Bond market yields are high and risk appetite is reduced driving equity down.

*Model by: Joé Thierry Arys Ruiz © Traders & Analysts C.O. 2010 - All rights reserved

Next Crisis:

If the monetary inflation prime is low, then we can barely notice it's negative effects on the economy. Then, the inflation rate released is published and promoted as "a purely natural effect of a strengthening economy". The problem Surges when this "monetary inflation prime" is high enough to entirely compensate nominal growth. This leads to a void or negative effective growth (inflation adjusted GDP) then we could see a Monetary  and/or Government Debt bubble explosion.