Euro vs. Dollar Battle = Gold Wins

This last Correction in Gold could be an opportunity, here are some of the fundamental reasons:

1- As long as the Dow Jones index stays under 10,500 there will be Market uncertainty and investors could find refuge in gold..

2- New Government spending can lead to a 14.3 trillion deficit pushing USD down. This move could be consider as "a crime against the dollar" and a total loss of confidence in the currency which historically leads to a "fly to commodities". This would also support the thesis of a "Competitive depreciation" (under Forex).
REF : Democrats Propose $1.9T Increase in Debt Limit , abc News

3- Fears of inflation: If you open an economic book one definition of interest rates is "the cost of money". Interest rates at 0% just means money worth nothing. The rest is only details.
After the nomination of Bernanke as "Printer of the Year 2009" he will probably be reappointed and let Wall Street get cheap money a little bit longer.
Article: Ben Bernanke- Person of the Year 2009 - TIME

Meanwhile, the federal reserve disclose ambiguous reports about an eventual increase in interest rates, such announcement would definitely dive Gold prices down. The truth is that it is a typical manoeuvre to create the illusion of a controlled exit strategy and a slow increase in interest rates while they won't.

All those reasons leads me to the conclusion that the dollar will drop at term. As I explained in my 2010 forecast, USA and Europe will alternatively release currency depreciative news in the competitive depreciation race (described under FOREX in my previous post 2010-What's Next?). Thus, I consider there could be great swing trading opportunities in USD/EUR pair. However I consider Gold could develop a more sustainable growth.

What would make this analysis invalid would be:
- Better than expected job results
- Raise in interest rates (very unexpected)
- Default fears in Europe (Greece or Spain)

EUR/USD Technical Analysis:

(Click image)

Gold Technical Analysis:


Davos- Welcome to the Real Financial Paradises

Obama's Too Big to Fail plan limits proprietary funds to be invested in the market. This regulation (if voted) will not "de-leverage" the market as some analysts say but create a huge transfer of trading activities from the USA to Tax havens and have the inverse effect since there will be a massive creation of Hedge Funds (Alternative Investment funds) in the Asian and Middle East financial market drove by Star Traders and bankers avoiding hostile Regulations from Europe and USA. This Movement will be expanded with all the Financial regulation going on in France and the UK. (See: France joins UK to target traders in bonus tax move).


OECD and G20 Unco-operative Tax Heaven meeting was a political joke. Nothing was done, I studied the case when it was still fresh but to make the long story short here is a simplified chronology:

2nd of April 2009: At the London G20 summit "Tax Heavens" were listed in 3 categories: Black, Grey and White: From the beginning we notice that Hong Kong and Macau are not listed at all, thus they are not concerned. Notice United Arab Emirates are directly in the White list. We can also notice the special treatment of Singapore, Switzerland and Luxembourg in the "Others Section". Here the Official Report from the OECD.

7th of April 2009: Less than a week after , tax heavens do not exist any more: Except Costa Rica, Malaysia (Labuan), Philippines & Uruguay(still on the black list), there is no other country in the black list, they all have been listed now as “jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented”(Grey list).

For the record:

A week later, having found its name on the grey list, Switzerland reportedly announced sanctions against the OECD, namely, blocking some €136,000 it was due to pay the organization. The Swiss also threatened not to pay their annual €6.5 million fee to the OECD and even to block any progress on further cooperation with China, India and other emerging economies....Here is the Source

20th January: You can check it yourself where we are with the PROGRESS REPORT by the OECD. Notice yourself from an official report that only few and insignificant countries are under the label "Tax Heaven".

How could this happen?
Without going too much into the details, countries originally in the "grey list" made Tax Information Exchange Agreements (TIEAs) with each other so they are out of problem.
I though the purpose was to eliminate tax heavens. Now Tax Heavens are a united conglomerate since the banking secrecy is not abolished and now they have to take care of each other's frontiers to ensure their information is not released meaning tightening relations. Here you can find the updated reports and progress.

From the very official Tax Information Exchange Agreements, we do not find any agreement made by Switzerland or Luxembourg while they were suppose to do so. Switzerland, United Arab Emirates, Luxembourg and Singapore are just not there.

- Hong Kong , Singapore, Luxembourg, Switzerland and United Arab Emirates are the Legal Tax Heavens of the G20. To know if a country is a legal tax Heaven, just type it's name on the search bar of this Report. If it's not there, then it is a good place to hide!

- Money has no country, religion or religion whatsoever.

- Any Financial Regulation will make investors, bankers, traders and hedge funds go find a more friendly place: Hong Kong, Singapore, Switzerland, United Arab Emirates and Luxembourg.

*All OCDE official information about Harmful Tax Practices is public and can be found here.



"Ceteris Paribus"
This is the formula all economists use and they are right to do so... The question is: What would happen if all things were not equal? or what if there is another parameter we did not consider comes into place?.
In the financial markets, random parameters (news...) is the rule and not the exception that's why when making an assumption, good economists and all analysts should end up by saying "Ceteris Paribus" which can be simply be translated by: "Unless I am wrong".
One of the best investor's qualities in the financial markets is the ability to recognize quickly when they are wrong. This is why, every time I do an analysis or a scenario I will try to input a failing scenario particularly in technical analysis.


Too Big to Fail is Too Big to Exist?

With this new action from Barack Obama trying to scalp "Too Big To Fail Banks" into several smaller entities, he is touching a very sensitive area. Overall this would be a segmentation in several years converting Universal Banks (entities that include Investment risky business with Retail banking) back to separate entities.

For a little bit of story, since the Financial crisis, major Investment banks disappeared due to substantial losses, therefore they got bailed out by the government and/or merged with other banking institutions. Such as the case of Merill Lynch "inserted" into Bank of America. I said inserted because it was a government/bank deal since BOA bought it with government help/TARP.

Only Goldman Sachs and JP Morgan are still almost purely Investment Banks (in the US), therefore they should be less touched by this Obama project. That being said, Goldman Sachs could be a gold mine the 2 things that prevent me to invest in GS: 1- The stock price too expensive (and it's all abut price) 2- Can be brought down pulled by the Financial sector (SKF) since it has been lagging in this rally.

Back to the Banking reform, by doing this separation Obama's idea is to protect the "population money" from Retail banks so they are not being at risk in case of a substantial loss from the Investment section.
The market sell off was due to several fears:
1- Government intervention is almost never welcome by Wall Street
2- Banks will have to cover their positions invested in Hedge funds, themselves heavily invested in the Markets.
3- As I said in my previous post The Economy is Not improving that much, it was more a Stock Market Inflation effect
4- The market rose substantially since March leading to very important technical levels, investors took the news as an excuse to take profits.

Finally, the concept is a good thing overall, Too big to fail is definitely a big problem and this is what they should have done before the crisis. By being too big, corporations can exercise pressure upon government and thus force them to bail out. Being sure of this eventuality, those corporations would tend to take risky positions and show a lack of responsibility other words: "Too Big to Fail is too Big To Exist".But isn't it a inevitable effect of our Capitalist system?
Never-mind, even if the entities are "legally" separate, it won't change the fact that Important Bankers will have contact with each other and still be integrated in some way. There will still be ghost inter-connexions between Investment and Retail banks, just like there is ghost connexions between Investment banks and Hedge Funds.
The question is will it pass?
As I say, It doesn't matter they still will be doing the same thing and if a new financial crisis comes, "too big to fail or not" everybody will plunge since all interconnected.
It is another fancy regulation that will probably pass but with a foggy content just like the fake Tax even measure by the OCDE Since nobody is in the Black list any more (See: Davos- Welcome to th Real Financial Paradise).


2010- What's Next?

2010 Forecast
Well what's important it's what's next. In 2008-2009 We have transferred the problem from banks to Governments. Now we have to know if Governments can pay, every payment in gov debt is based on expected growth or revenues.  As an example the US debt is close to 12 us trillion. Which is 40,000 per American, more than 110,000$ per tax payer (http://www.usdebtclock.org/) and US citizens should pay it today since it's growing with interest; this is a big issue.Consequently, governments will have to raise taxes.

US and European countries sponsored by China (Hold most of the US Debt) can simply not pay their debt at this level. They either restructure it in some way so they don't have to pay a part of it and find new resources to be able to pay it. Here are the several possibilities to do so:

1.a/ Default:
Unlikely  at a Federal level this would be a catastrophe that would afraid investors, this option is then not the most appropriate for obvious reasons besides a peaceful relationship between China and USA and their relatives alliances ,practically the whole world.

1.b/ Not paying part of it
By allowing few but not all the Municipal bonds to default, the Federal government can lease it's debt as long as the headlines do not make people panic so much, so this method can be used in a silent manner. For Europe it's more difficult to hide a country such as Greece or Spain eventual default so we can imagine the European Central bank in coordination with the IMF to bail out. That makes me think that EUR/USD will play yo-yo during a little bit more time following the headline, one day the US bonds the next week a EU country eventual default. For swing traders it can be a playground.

2/ Rise Taxes
This is the inevitable law of budget deficit and Keynesian stimulus packages, a political bluff to raise government popularity.The bad news is that usually those packages have a short term perspective and when it's time to pay, raising taxes is then inevitable leading to a lower consumption and a counter economic situation. May they invent new "eco-taxes" or whatever, the money will be used for government to pay back their debt.

3/ Depreciation
The monetary system is in danger, with China not respecting the free flow rate of exchanges and Central banks inventing funny words like "Quantitative easing" (stands for printing money like idiots) the problem is that there will be a point when inflation will show it's nose and there will be no other choice but to substantially raise interest rates that's when this cumulative bubble explodes. We have seen that over and over again but the Fed still don't understand , adding a crisis to the previous one until the whole system collapse is that the exit strategy? Should we experience Darwinian or Schumpeter's creative destruction instead by not bailing out? I don't know, we never tried. In both cases it will be a "bloody mess".
Today, money is nothing more than paper with the rest of confidence you still want to give it since it is no more backed by gold. Back in the Bretton Woods system gold was 35$/ounce. Today it's 1100$, we either needed a lot of gold lately or that's inflation (actually both).

If somebody tells me "Cash is King" I would reply "King has no clothes".The bottom line is that hyperinflation is knocking at the door and a depreciation is a fancy way to pay China with toilet paper, unfortunately robbing all citizens from their purchasing power in the process.

4/ Pay with a Mix of Assets and Cash
This may sound ridiculous but China played dumb but they are not. They are aware of this situation so what's the solution for them? Well asking for assets. In a way they already did by robbing patents from western companies, they are paying themselves with technology and now they even start to take over companies instead of paying for the useless government debt. The method: hold government debt to have a position of power and then manipulate government so they can buy everything, if you don't trust me take a look at what's happening in Africa.

We can deduce a fall in the USD that we have already seen, so maybe EUR is going to continue climbing but we may assist to what we can call "Competitive devaluation", you heard it right. After the USA, everybody launch stimulus packages and bail outs to devalue their currency. A strong Euro is no good for exportation for Europe so we will probably see a second wave of stimulus package and a bail out of nations like Greece and Spain so there will be news about random spendings or fears of default, the whole purpose is to not allow the Euro to climb too high, too fast. The question is "Where is Maastricht criteria?". For me the best currency is the Swiss franc CHF but they possibly launch stimulus packages to compete in devaluation as I said. That being said, Switzerland is maybe the only country in which the stimulus would really work because of based in Structural and not conjectural projects, competitive areas like Research and Development, biotech etc. So CHF is for me a stable currency, maybe not a rising one but at least a stable one.

Stock Market
Hyperinflation is the next issue. It will stop the economy so growth expectations won't match. Meanwhile we have seen the stock market rising pushed by cheap money (near 0% interest rates) but the companies (assets) are not really improving that much as far as their tangible value. This is the definition of what I call it  "Stock Market Inflation".
The Stock market as an indicator of the future of the economy confirms my fears of hyperinflation.
So what is going on?
The stock market rise not because of the prospective economic growth, it rises because currencies worth nothing, and when you need more currency to buy an asset (inflation) you see the asset price rise artificially. So yes the stock market may continue it's ascendancy but I would be more interested in seeing the Stock Market / inflation performance. And since I don't believe the biased inflation numbers released I would like to see the Stock Market/ Gold performance.
How much the stock market has really since March?
-here is the answer, FLAT! if not underperform..(click the image)

Old Supremacies are Dead
Power is moving, Old supremacy continents are dead and big investors play by the rule "Money has no nationality" when the orange is pressed they move on to the next place following this criteria: Growth, no taxes, security.

I would opt for a spot where all Big fortunes will want to go to hide. Somewhere with tax protection, non revolutionary environment, neutral and safe. Maybe Switzerland considering the double potential, Currency+ Stock Market but it maybe a too old trick.
Switzerland: EWL (MSCI Switzerland Index)

Everything converge to a decrease in confidence about currencies and a "false bullish market". Why false? Because in the developed world, as long as we see quantitative easing, high unemployment rates and low growth (PIB inflation adjusted). There will be nothing but stock market inflation and possible inflation that would actually not make you money, just in the best case scenario, preserve it.
In the near term Gold is the real protection, untill we see real growth. We can meanwhile see some corrections when fears of raising interest rates.
To invest in Gold:  GLD (SPDR Gold Shares), DGP (Gold Double Long).

Oil: We are probably experience what we have seen in 2007-2008. Oil prices go higher. Once again, headlines will say that this is a good sign and that this is because of the confidence in the economic growth is back BUT NOT. Oil will go higher because money worth nothing and investors will look for commodities to protect themselves. So maybe the economy will support oil, but most of it will be speculation just like in 2007-2008 in the early days of the financial crisis. If bought at a good price, oil could be a good alternative if the economy do recover it will push higher and the other way, it may be used as a protective asset commodity. Again oil sometimes moves dramatically because of professional speculators so always remember to put the stop losses.
To invest in Oil: USO (United States Oil), UCO (Ultra Crude OIL),

Emirates: I know they were having trouble lately but I think this is an opportunity not something to be scared about. Actually, I think the biggest investors use to let market crash before buying things a lot cheaper and for me the Dubai crisis is the perfect example of what big investors would buy. Large Banks are under attack from the perspective of increasing taxes from governments, and as I said Money has no country or religion so the one move you could do is to buy Emirates cheap. I will probably write more on this subject in the next days but Emirates are definitely a good investment.
To invest in Emirates: EEM (Emerging Markets)

For those who like Risk
As I said China is not going to let the fake payment happen, they are already getting their money back with technology when implanted in China and they will buy more western companies. The problem is the systemic risk of political revolution so play china can pay but it's risky. Following few ETFs:
- FXI (China 25), XPP(China 25 Ultra), EWH (Hong Kong index), FCHI (China Hong Kong listed)

You may want to have a diversification with India: EPI (Wisdom Tree India Earnings)
or a mix: FNI (Chindia) --> for this one research must be made first but it seems to be a good performer.

Please comment I would be happy to be contradicted and find arguments to make me think.

By the way I am currently looking for a job in the financial arena if someone knows a position please feel free to contact me at: JoeThierryArys@hotmail.com


TTACO - Traders & Analysts Club Online Opens!

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TTaco: Joé Thierry Arys Ruiz