The Dying Dollar: Rumours and Misinformation

Thursday, October 15th, 2009

Martin Wolf writes an interesting column in the FT.com October 13, 2009:

It is the season of dollar panic. These panic-mongers are varied: gold bugs, fiscal hawks and many others agree that the dollar, the dominant currency since the first world war, is on its death bed. Hyperinflationary collapse is in store. Does this make sense? No. All the same, the dollar-based global monetary system is defective. It would be good to start building alternative arrangements.

We should start with what is not happening. In the recent panic, the children ran to their mother even though her mistakes did so much to cause the crisis. The dollar’s value rose. As confidence has returned, this has reversed. The dollar jumped 20 per cent between July 2008 and March of this year. Since then it has lost much of its gains. Thus, the dollar’s fall is a symptom of success, not of failure.

This is an idea that we have covered at some length during the course of the year, so it is a dear subject for us to feature, as it goes hand in hand with the raging debate between equity bull and bear, and deflationist vs. reflationist.

During the first quarter of this year, when equity markets were tanking the dollar was strengthening, and that was a direct result of the market taking a large long position in the dollar, via cash instruments and other short term government securities. By February 2009, the Fed’s cash position had reached such an untenable shortage because investors and banks were hoarding it, that the Fed and Treasury Department were forced to resort to Quantitative Easing (QE) measures that added $2-trillion of printed liquidity into the credit market. Most in the market missed the fact that there was, at the time, a panic among monetary authorities that the physical supply of cash would run out.

With the Dow benchmark crossing over 10,000 yesterday, and other markets attaining commensurate or higher levels, is it any surprise, given that US$450-billion has moved from money market funds alone to be re-invested, that the dollar is faltering? In the simplest of terms, the global equity markets’ slingshot recovery has led to a slingshot devaluation of the dollar.

Superficially, the shortage of cash in February was deflationary. In the present, the flood of liquidity from QE, plus the US/UK Zero-Interest-Rate-Policy, are fueling re-investment in risk assets, and driving the dollar to an out-of-balance devalued state. To put it mildly, if this is the current basis for long term inflation, it too, is rather shallow.

The most likely scenario at this stage would be monetary intervention - and that means that while gold may continue to rise a little bit further from its current highs, it is due for an IMF selloff in concert with the G20, all of whom have a vested interest in seeing the greenback at higher levels against the Euro, Yen, and RMB.

The less likely scenario rests with whether or not the Fed can convince its public that the economy is expansionary, thus enabling them to reinstate an interest rate, which too, would raise the dollar’s value and repatriate cash from assets to the money market.

Our suspicion is that the Canadian dollar’s recent run and that of other non-dollar centric currencies would end upon either scenario.

Therefore, there may be a strategic currency-based opportunity in buying US dollar denominated assets, and preferably in short term government securities. If you have the stomach for it, the real opportunity may be in longer dated US government bonds, as either intervention or re-instatement of interest rates would result in lower long term yields.

Tags: Alternative Arrangements, Avw, Bull And Bear, Canada, Cash Instruments, Cash Position, Collapse, D1, Death Bed, First World War, Global Monetary System, Gold, Gold Bugs, government securities, Hawks, Img Src, liquidity, Martin Wolf, Misinformation, Monetary Authorities, Mongers, Openx, Qe, Random Number, Rumours, Treasury Department, Trillion
Posted in Gold, Markets | No Comments »

Stock Markets - What to do now

Thursday, September 3rd, 2009

Risk aversion has re-entered the investment equation with risky assets such as equities and commodities bearing the brunt of the selling orders, while gold bullion, government bonds, the US dollar and the yen are attracting safe-haven money.

The global stock market pullback seems to be gathering momentum with three markets on my radar screen now trading below their 50-day moving averages, indicating a reversal of the secondary trend. These markets are China, Hong Kong and Chile, with most others uncomfortably close to this intermediate support level (see table below). I am of the opinion that more markets will fall below the 50-day lines and that we will at least see some degree of reversion to the key 200-day moving averages (often used to distinguish between primary bull and bear markets). The table provides the key levels, as well as the declines since the recent highs.

Click here or on the table below for a larger image.

For some ideas regarding the short-term direction of the Nasdaq Composite Index, Adam Hewison’s short technical analysis (INO.com) provides valuable insight. Click here to access the presentation.

It was interesting to catch up on the views of Albert Edwards, global strategist of Société Générale, in yesterday’s Financial Times. Donning his familiar bearish colors, he said: “Once again, equity participants are missing the big picture. For despite clear signs from the business surveys of some sort of second half recovery, firm evidence is emerging that the global economy is sliding towards a full-blown deflationary episode once this recovery falters.

“We heartily concur with GMO’s Jeremy Grantham who remarked recently that after 20 years of more or less permanent overvaluation of US equities, we saw just five months of under-pricing through the March trough. Do bursting global equity valuation bubbles really end like this? Of course they don’t.”

Doug Kass of Seabreeze Partners and a columnist at TheStreet.com, who accurately called the March bottom, is also now outright bearish, as discussed here with CNBC’s Larry Kudlow.

Source: CNBC, September 1, 2009.

According to Kass (via TheStreet.com), one should now do the following seven things:

1. Build up cash reserves by reducing exposure to equities and credit.

2. Upgrade one’s portfolio to quality. Eliminate secondary and tertiary stocks that have benefited the most from the second derivative and statistical economic recovery.

3. Longs: Concentrate on market-share-gaining multinationals that are self-financing, that do not rely on the kindness of strangers to fund growth and that will benefit from a lower US dollar.

4. Shorts: Consider shorting stocks that are levered to the capital markets and the consumer - for instance, brokers, asset managers and retail-related stocks.

5. Err on the side of conservatism over the balance of the year, and recognize that, at times, it’s more important to place a priority on limiting the potential loss on capital above the possibility of sacrificing lost investment/trading opportunities.

6. Reread the books written by the old masters of trading, investing and even poker in order to gain a greater investment perspective. One should always try to learn more, and one can from George Soros, Jim Cramer, Barton Biggs, Jim Grant, Charles Mackay, Rich Bernstein, Doyle Brunson and others who have written of their experiences.

7. Gain or regain a better balance in one’s life. Whether it’s gardening, exercising, vacationing, going to sporting events or reading, it’s important to clear one’s head, step back a bit and gain a better perspective — it’s healthy food for the body and mind.

Kass concludes: “I believe that, similar to back in March 2009, we may now be at a fulcrum point in the US stock market. It is, again, time for a variant market view. My advice is to reduce your risk profile by raising cash, upgrading the quality of your trading/investing portfolio, chill out a bit, read some books and words of advice from the best there is/was and, generally, to err on the side of conservatism in the months ahead.”

Be cautious out there!

Tags: Bull And Bear, Business Surveys, China Hong Kong, Commodities, Doug Kass, Equity Participants, Equity Valuation, Global Stock Market, Global Strategist, Gold, Gold Bullion, Government Bonds, Investment Equation, Jeremy Grantham, Moving Averages, Nasdaq Composite Index, Radar Screen, Risk Aversion, Risky Assets, Seabreeze Partners, Term Direction, Thestreet Com
Posted in Emerging Markets, Gold, Markets | 1 Comment »

Picture du Jour: Stock markets – it’s all about confidence

Tuesday, May 5th, 2009

A key requirement for the recent stock market gains to be more enduring and for the bear’s corpse to be put to rest, is the restoration of investor confidence. A few comments regarding this issue are highlighted in this post.

As shown in Sunday’s “Words from the Wise” review, a confidence indicator worth monitoring is the Barron’s Confidence Index. This Index is calculated by dividing the average yield on high-grade bonds by the average yield on intermediate-grade bonds. The discrepancy between the yields is indicative of investor confidence. There has been a solid improvement in the ratio since its all-time low in December, showing that bond investors are growing more confident and have started opting for more speculative bonds over high-grade bonds.

Not surprisingly, a strong historical relationship exists between the Barron’s Confidence Index and the S&P 500 Index’s 12-month rate of change.

Click on the image below for a larger graph.

The improvement in the Barron’s indicator augers well for the outlook for equities - specifically for the return of confidence - and provides further evidence that US stock markets are mapping out a base development formation. The early January highs and 200 day-moving averages are the next important targets and a break above these levels would signal the completion of the base formation and a secular bottom (as has already been seen in leading markets such as China and Brazil). (The Nasdaq Composite Index is also already above its January high and 200-day line.) Meanwhile, the speed and magnitude of the rally argue for markets to consolidate and possibly retrace some of the past eight weeks’ gains prior to launching an attack on longer-term indicators used to distinguish between primary bull and bear markets .

Tags: Amp, Barron, Bear Markets, Bond Investors, Bonds, Bull And Bear, Confidence Index, Confidence Indicator, Corpse, Discrepancy, Graph, Investor Confidence, Magnitude, Moving Averages, Nasdaq Composite Index, Nasdaq Index, Rally, Stock Market Gains, Stock Markets, Targets, Term Indicators
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