Key Inflection Point For Asset Markets

We have found supports across many different asset markets from industrial metals to softs to equity markets. Vs this we have extreme political and central bank involvement in asset markets. Their actions are driving price potentially overwhelming the technical issues. Extreme spikes down are very possible therefore as the technical supports and up draft is temporarily over whelmed by these macro issues. This makes for potential sharp legs down as you get temporary failed up moves. As the sentiment and indicators remain over sold and supportive of an up move any negative legs down should short lived and therefore buying opportunities. Its risk reward. Its possible policy makers completely stuff it up but the probabilities suggest this is unlikely given the extreme levels we see. Even a fumbled attempt by the world’s elite at solutions should be enough short term to get us quite a rally.  I’d ref the UBS comments to support this though there are many external feeds suggesting the same.

The CRB index (commodity index) sums this up nicely for us..

Oil is the bell weather indicator for the entire commodity sector and her failure to go parabolic at the 115 area always was the key moment for 2011 and this occurred end of April.

Ever since the CRB has been in decline. Where and when oil bottoms we will find our entry point to rejoin the industrials, oil, etc. I haven’t traded oil since this may period. I was expecting an entry around the 88/89 level as forecast but no entry showed. She pushed south and continued on her way. Oil’s chart is demonstrating a near term base for her cyclical bear. This is coming as the CRB is at a key support. I’m therefore intermediate bullish industrials inc oil. I do expect a retest however of these supports during the next 6 months.

We continue to see the HUI and PMs in trouble here.. I get all sorts of emails and phone calls and goodness knows what else from friends and readers here regarding this asset class. No other asset class in the market is as prone to emotion it seems. We have had a wonderful run up. In 2011 both gold and silver have recorded their first parabolic chart breakouts. The fact these breakouts were limited is a good thing not a bad thing.  We flagged the parabolic areas spot on. Hopefully you banked some of the move. Now we likely have a little consolidation before the next wave up and perhaps the greatest parabolic wave seen in the last century or so.  The fundamentals remain exactly where they were.. blah blah.. Nothing has changed so for long term investors i wouldn’t lose one seconds sleep over these recent price moves.

Re the breakdown of the PM miners. The HUI continues to disappoint. We got the breakout which lasted about 2 or 3 weeks. The markets rolled over inc gold and the whole sector fell to the bottom of channel again. Technical theory suggests the channel should now break to the down side as we have a significant failed move. From failed moves come fast moves.. Having said this the HUI was under performing her underlying in the first place so can we expect a complete breakdown? I cannot tell you what will happen i can show that now we are at a support in an under performing asset class. A bounce is likely therefore from this support. This support is likely to get tested a few times and with meaning given the hedge funds like to short the HUI. I would ideally like to see the support broken to the downside and then this break of channel reverse in lightening speed to take price back to mid channel from where she can rebuild and reattempt to the upside breakout. We ideally want to see the shorts come forward with their best shot and get smashed. This would be the most bullish scenario for the HUI. I have barely moved on my HUI holdings or pm holdings. I’m a long term investor..

Here the HUI and GLD compared.

Putting this all together.. how can it be id be bullish all asset classes near term, bullish equity medium term, even industrials and pms medium term.. longer term bullish all asset classes due to monetary reasons and out performance hard assets.  Why the intermediate under performance of industrials and pms? We can see the monetary batten has passed to Europe, UK and Japan here. These countries will print to ‘save’ the perpetual DM money growth system. This means an out performance for the USD. As per the BIS the euro may become the funding currency in the medium term. In this scenario money supply can expand alongside USD relative strength (not super strength). All currencies will continue to lose purchasing power vs hard assets of course but some like the Euro ad GBP will have a period of being debased more meaningfully than the USD. This explains the under performance of the industrials and PMs in USD terms.

Having said all the above the PMs are the wild card. I continue to be a mainly buy and hold investor in the pms as they are thin markets vs a giant pool of currencies. The PMs continue to have stunning upside potential. Market time  some pm leverage if you like to market time but i strongly suggest holding a core for as long as money printers hold court.

Rich

p.s. in the last few minutes Germany has approved expansion of the EFSF. There is a surprise.. Onwards we go..

http://www.marketwatch.com/story/wall-street-futures-extend-gains-after-german-vote-2011-09-29

Good German Jobs data alongside yesterday’s reasonable durable good nos out of the US providing better data this week with no ‘off a cliff’ fall in the data.

http://www.bloomberg.com/news/2011-09-29/german-unemployment-falls-by-more-than-forecast-26-000-as-hiring-holds-up.html

Technical & Economic Indicators ‘TPPFs’ – (WellsF Report – Updated Friday/Sat Weekly)

We all hopefully fully understand the difference between the fundamental nos and technical trading issues. In my opinion both elements are important to build an effective multi asset, multi fx investment and trading strategy. Anything less is to subject yourself to immense risk and therefore swings in returns. Happy to expand this discussion in the forum area.

Its very hard work as a single trader, even as a co-operative of independent traders, to systematically gather the various data points month on month needed. From both a technical basis and economic indicator basis the work needed is overwhelming. Its too easy to drop something from the methodology due to time constraints. This scuppers the whole approach as it becomes inconsistent and therefore prone to error. Life, as we know, can get in the way.  There are fortunately all manner of external TPPFs (Third Party Proprietary Feeds) available to provide this data in a structured and timely manner. I have survey the TPPFs to this end.

No technical  or fundamental methodology will ever fit perfectly onto your own individual approach but some are a closer fit than others. I would comment that so long as the methodology is consistent you may be surprised by the results of even a limited set of indicator points.

Technically wise, I will expand the technical updates but for now i like the proprietary UBS updates. As said, no technical methodology will ever map perfectly to your own of reading of surveying the technical issues. The UBS technical approach is wide enough to be robust. Its systematic and therefore repeatable. They stick to their methodology and ignore geopolitics and news events. We can overlay these elements for ourselves.

What is lacking from my own practice and so this site is a systematic regular review of the fundamental data. for the economic indicators just as we do for the technicals. Hard structure is needed to ensure the systematic monitoring of the fundamental indicators and nos.

To this end, I have been reading and reviewing the weekly fundamental summary of the key economic indicators from Wells Fargo over the last month or so. I’m sufficiently impressed to add their weekly pdf updates to CS. I keep an open mind on substituting for another feed subject to this being reliable, effective and beyond litigation issues re republishing laws. (Merril Lynch were most unhappy to see their private client reports on this website so i’ve had to remove their recent reports on Oil and Gold. A lawyer from ML has kindly been in touch to inform me of their copy write rules – lol). I’m hoping Wells are a little more helpful.

The main stream central banks and systemic pillars eg the OCED, FED, BOE, IMF, BIS etc are generally behind the curve but for reference provides a fairly global chart of the key leading indicators updated on a monthly basis. Here the OECD

http://stats.oecd.org/Index.aspx?DatasetCode=MEI_CLI

Here the WF weekly fundamental indicators, Ill update subject to no legal issue in a few days.

WF-WeeklyEconomics_09232011

As i say, ill keep looking out for what i consider to be the most consistent third party methodology of the monitoring of economic indicators. I’m more interested in the raw data than the ‘correctness’ of the commentary in this respect. Consistent monitoring of the ‘right’ indicators and weighting these in a consistent manner is very important imo.

As a data update to the report from WF above the two data sets this week re US consumer survey and the new housing starts were both weak. One in line with WF view one worse. Either way not good. The data continues to worsen in general.. Today the US consumer durables nos inc capital goods nos. Just released and surprisingly better reflecting the strong corporate position no doubt.  Actual -0.1%.. consensus -0.4%. WF -0.9%.

http://www.bloomberg.com/news/2011-09-28/demand-for-u-s-capital-goods-climbs-most-in-three-months-in-recovery-sign.html

As a comment on the data within the WF report.. take a look at the US student loan outstanding loans chart. It has doubled from 2010. $150bn has been pumped into the system from student loans alone in the last year. They have increased exponentially from 2010. Student loans (like immigrant debt) is an excellent way to increase consumer lending (money supply). Both students and immigrants (also like the US black community) have very little to lose from adding debt. These are all segments of consumer’s who take very little encouragement to increase debt. They are therefore a key target for US and European money supply expansion programs.

In the UK mid 2012 all new nurses must have a degree. They are to be offered interest free loans. This will involve hundreds of workers needing debt before they can work in the public sector. This is a very expansionary monetary policy and could even be successful to ‘stimulate’ a cycle of money supply growth in the wider economy as ‘education’ related jobs are created. As we may recall from New Labour’s discussions around policy strategies.. ‘education spending has excellent multiplier effects’. This is very true and it is especially stimulative if the additional spend is simply from zero interest debt or (money printing effectively).

All good stuff.. the very best

Rich

Buy Stocks – ‘Intermediate Low – Buy Weakness’ UBS Update

UBS are of the view that the low is likely in for this leg of the cyclical bear. They do leave the door open to a retest of the lows of this leg in the next week or so but recommend any such move as a ‘buying opportunity’. October rebound scenario. Sectors etc are in the report. Summary, buy pro risk on session (inc banks as a trade) weakness as a multi week run up in asset prices is likely to occur.

UBS-weekly27-09

I would concur with this approach. My shorts are significantly lighter than they were. I’m holding less than half of the position i was in this respect and i’ve added more equity with a little leverage. I’ve also shifted some assets from utilities and fixed income to pro risk. I still hold a large USD position and have not covered this as yet.  The euro money printing may prove beneficial for the euro in the very short term as it will prevent a breakdown in the euro. But more euro supply is unlikely to support her in the medium term. This plays into pms and commodities. The stage is set for equity markets to rebound but commodity prices to lag a little inc gold and silver. The USD may stay surprisingly strong. USD equities are likely to be an excellent asset class over the next couple of months therefore.

News wise it seems very likely we get significant monetary actions over the coming weeks. The equity rally could be quite significant. The ‘technical damage’ is clear but i wouldn’t get too carried away by this technical damage issue. Ok, we have to respect what wiser and older heads tell us in this respect but i would again point to tables and other asset charts from prior monetary lose markets. Did the 50 to 70% annual Mexican retraces in their asset markets provide enough ‘technical’ damage to stop their nominal asset bull markets from sustaining?

Clearly the answer was a resounding NO. I don’t deny ‘technical’ damage will be an issue and may raise its head now and again on weakness but a far greater issue is monetary action, imo.  Governments and central bankers are 100% certain to get nominal asset prices to rise so long as they have a printing press at their disposal. You are truly optimistically naive if you believe notions of democracy will stand in their way.  The paradox continues.

Update to the CRB (commodities index) that i put up the other day.. nicely bouncing off the trend line.. I suggest we will see renewed crb weakness before the real push on however in tandem with USD relative strength for a while.

 

All the best

Rich

The EFSF Monster to be ‘Monetarily Super Charged’ via Debt (Inc BIS USD/Euro Credit, Update)

Europe is at her inflection point. Germany must approve super charging the EFSF. She must sanction turning on the monetary monster created May 9th 2010.

We have explained and investigated the rise of the euro bond through the EFSF before here:

http://www.capitalsynthesis.tech/eurozone-greece-statement/

The EFSF is a new debt issuing entity. Her ‘capital’ is simply debt issued by euro states. This ‘capital’ is about to be geared. We now have a ‘flick of the switch moment’. As we predicted, the EFSF ‘monster’ is to be turned on through being ‘leveraged’ or in a plainer English, simply, taking on more debt.

(Europe’s monetary strategy involves money supply expansion through debt issuance. The US’s monetary strategy involves money supply expansion through money printing. It is a wafer thin line that divides them in truth).

The Fed’s reluctance to expand her balance sheet last Wednesday has very purposefully, imo, passed the monetary ball to the Euro zone. The ECB has already expanded her balance sheet but more monetary juice is clearly needed. The EFSF represents a new debt issuing entity that can leverage her newly formed balance sheet and issue bonds against the entire euro area’s people and guarantees.  This is a very key moment in European and world monetary history therefore.

Events are unfolding rapidly now due to the ever weakening economic data. The EFSF is, therefore, on the verge of  being “monetarily super charged” via a massive leverage program.  Permission of European states is needed. In Germany this means parliament and the lower house must approve the move. The German vote in parliament is scheduled for this week. The sequence of events required are in motion and seemingly unstoppable. This is a hugely significant moment in European and world history.

From Reuters at the G20 summit:

“No details were given of how the EFSF might be altered, although French Finance Minister Francois Baroin used the word “leverage” in comments to reporters”.

The US through Geithner is urging the Euro zone to leverage up. The Fed’s inaction increases the pressure.

http://www.newser.com/story/128678/timothy-geithner-to-europe-leverage-efsf-bailout-fund.html

http://www.spiegel.de/international/germany/0,1518,788082,00.html

http://www.forexlive.com/blog/2011/09/23/emu-fin-mins-to-discuss-leveraging-efsf-at-october-meeting/

http://www.breakingviews.com/2011/09/16/Euro%20zone.aspx?sg=nytimes

http://uk.reuters.com/article/2011/09/15/eurozone-idUSL5E7KF1CX20110915

http://www.zerohedge.com/news/germany-demands-managed-greek-default-and-50-bond-haircuts-exchange-expanding-efsf-peripheral-f

Rich

p.s. We have commented before here metrics around world money supply growth. A new report from the BIS (Bank of international settlements) confirms what we already suspected. IE that USD debt is surging though not in the US, or in DM markets but in EMs.  A rising USD could lead to a nasty de-leveraging process in Asia and S.America. Pegs or appreciation by EM states to the USD provides stability and stimulus as USD debt becomes more serviceable as the USD is debased. If/when the USD debasement reverses vs EM currencies its could set in quite a de-leveraging process and is bad for world money supply growth. Vs this the euro is increasingly being used as a funding currency by EMs. This trend could well develop especially in light of the EFSF as above and increasing euro liquidity injections. If the ECB lowered rates and the Euro debases vs Em Fx the pillars for a sustained move to the euro as a funding currency would be in place. To monitor this watch these two metrics. ECB interest rates and Euro/EM fx pairs. Here the report:

BIS-USD credit

Dr Marc Faber Succinctly Summarizes on Reuters.. 22nd Sept

Dr Faber’s track record is really something. Here on Reuters from the 22nd summing up the history and forward perspectives perfectly for us.

“Globally something is awfully wrong”.

http://insider.thomsonreuters.com/link.html?cn=uidTWASIA&cid=265773&shareToken=MzpkMzJjMDcxNi03YTcyLTQ5YzAtYWEyZC05ZWY4Y2MyZGFiMjU%3D&start=0&end=303

“I think the US dollar will continue to strengthen”.

“Meaningful slowdown in the Chinese economy coming. Will it collapse or slow down is a different issue. I think some sectors of the chinese economy will collapse”.

“Even the Republicans will write a letter to the Fed – you have to ease. Everyone will again applaud the Fed when they print money”.

“I’m not selling my gold”.

Here Faber on the Greek issue..

“I don’t know any private investors who owns Greek bonds”.

http://insider.thomsonreuters.com/link.html?cn=uidTWASIA&cid=266242&shareToken=MzpiOTk4MWJjNy03MmY0LTQ4YjYtOTc4NC0xODg5NTQ5NjNmYTY%3D&start=0&end=230

Rich

 

 

Silver Loses 25% in Two Days..

Post the non expansion of the Fed balance sheet silver has been the worse performing major asset class in the markets in the last 2 days. Silver futures today have dropped 17.7%. This represents their biggest one-day percentage decline since least 1984. Technically trading silver is a very dangerous business. I prefer to be a long term investor with my silver. I therefore don’t hedge my precious metal. Consequently the last two days have stung a little though we must remind ourselves that this correction has merely taken us back to jan 2011’s price level. Over the last 9 months silver has still outperformed almost all equity indexes, to the up side, note. Silver investors must remind themselves of these details.

I see CME raised margin requirements on Gold, Silver and Copper on Friday. From MW.

‘Initial requirements for gold’s benchmark contract rose 21% to $11,475 per contract, from $9,450 and maintenance margins climbed to $8,500 from $7,000 per contract. Initial requirements for silver’s benchmark contract rose 16% to $24,975 per contract, from $21,600 and maintenance margins climbed to $18,500 from $16,000 per contract. Initial requirements for copper’s benchmark contract rose 18% to $6,750 per contract, from $5,738 and maintenance margins climbed to $5,000 from $4,250 per contract’.

According to the theory, a correction of such magnitude signals a cyclical bear and a threat to the secular bull. For many fundamental reasons i would totally refute this view. In the near term, silver has much rebuilding to do. She has fallen as if she were purely an industrial metal and not a monetary store of value. We must respect this for the moment. If you are long already you have to wait. If you are lite of silver you should wait but small cost averaging at these levels is fine, although i would keep them lite. A technical level approaches around 26.5 or so.. You could take this entry on a spike if you method allows as a long term entry. As a trade you would do better to wait for a re-emergence of the secular bull to emerge. I have exposure to the metal and her miners. I cannot add here with leverage. I have to wait for a trend to reemerge. Option calls are an instrument to consider though the volatility is too large to really make then suitable now. Technically silver needs time to recover from this price action. Fundamentally she has never looked better as the worse it gets the more certain we are that monetary actions will soon follow. Silver has to demonstrate convincingly she is a monetary store of value rather than an industrial metal. For the moment she has not proven that case. There will be much to add to this over the weekend..

All the best Rich

p.s. supports on the crb not so far away..

Weekend update.. here the specialist PM Hedge fund Manager Ben Davies on KWN.. Note Ben trades with leverage and he has to be very careful with his fund’s entries and exists. He has an excellent track record.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/9/24_Ben_Davies_files/Ben%20Davies%209%3A24%3A2011.mp3

And here the weekly market update and comments from Gold and Silver dealers via KWN ‘weekly metals wrap’.These guys are executing for clients and generally dealing in the physical. This assists in understanding the different perspectives on entries on the PMs.

http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/9/24_KWN_Weekly_Metals_Wrap.html

Rich

30 Year Treasuries at 3% Yield – Fed ‘Twists’ & Targets the Long End

No expansion of the balance sheet.

The Fed to:

1) Roll over expiring short term treasuries on to long term treasuries

2) To actively sell $400bn of short end treasuries and buy longer dated treasuries

3) To roll over mortgage back securities that the fed holds on her balance sheet to push mortgage rates lower.

Immediate comment from me would be:

1) Negative for Pms..

2) Positive for USD.

3) Positive for US housing market (will take a while to feed through).

4) Positive for overseas owners of US long dated treasuries.

5) Good for Corporates as lowers Corporate debt yields.

6) No change for Em economies

7) Short term bearish for markets.. we have a capitulation move in the next few weeks is my estimate.. im holding shorts and USDs..

8) Likely to flatten yield curve though Fed may be surprised by how many overseas holders of tbonds press the sell button.

9) Negative for Mortgage Reits.. this will push down margins a little.. as a competitor bidder – the fed

10) In the medium and longer term it makes stock yields look more attractive as relative to bonds and cash they represent better value post today’s news.

Initial comments.. All the best

http://www.marketwatch.com/story/fed-decides-on-400-billion-bond-swap-2011-09-21

Rich

UBS Technical Update – Cyclical Bear in Motion – Interim Final Leg Down in Next 2 weeks..

Of course its all probabilities. The Nasdaq is in breakout to the upside. The UBS technical team are sticking to their bearish forecast of the final interim lows to occur at lower levels. A move above 1230 would negate the UBS view.. I cited 1210 SP500 which we are still struggling with. Lets see.. Rich

UBS-Weekly20-09

Today Stagflation, Next Stop Hyper Inflation

US jobless claims rise again this week. Manufacturing PMI data from across the world weakens as world wide inflation continues to surge as all measures of money supply surge upwards. Please join the dots folks. A tsunami of wealth transference has started and is progressively accelerating.. Please be ready and prepared. If you are still in cash the clock is ticking.

US GDP continues to weaken:

 

http://www.forexnrg.com/u-s-jobless-claims-report-us-initial-claims-inclined-last-week-september-15/

US Inflation taking off with the latest CPI figures released last week beyond the boom year of the 2007 CPI highs .. she is at her 2006 levels and around a percent lower than her 2008 levels when oil hit $150 and soft commodities made nominal highs. Surely news papers should be asking why inflation is so high when demand is so weak but alas they are silent.

http://www.bls.gov/news.release/cpi.nr0.htm

Chart of Euro and US PMI data:

http://www.global-view.com/forex-trading-tools/econ/usmpmi.html

US money supply continues to expand ever onward:

http://www.federalreserve.gov/releases/h6/current/

As does world money supply in fact.. And here some useful charts that fill out some of the issues inc money velocity and consumer debt levels which explain some of the lag in super inflation truely taking hold.

http://nowandfutures.com/key_stats.html

Here Henderson’s latest Sept report on the Global economy inc some nice charts and comments regarding Henderson’s house view that we have a rerun of the 70s.. i say its far far worse than the 70s.. that was a warm up for this, the main event.. imo.. Henderson’s bearish view on the world produces a bullish view on equities.. On this they are correct.. imo..

Henderson-globalview

So we march onward.. things are going to get yet more paradoxical. The greatest wealth transference for a century, perhaps even millennia, on a global basis,  is about to occur. The trend of sustaining demand at higher price levels is well underway. Most likely the trends will take a few years before they go parabolic ie until the monetary expansion can be self sustaining through the banking system. But the process has started and is moving forward relentlessly now.

All the best Rich

 

DX/Asset Prices – Inverse Correlation Breakdown – Opportunity or Threat?

Its been “the” inverse correlation which has driven black box trading systems, hedge strategies, risk on and risk management trading systems of the last few years.

Very simply as the dollar index declined asset prices rose, especially those assets priced in USDs ie commodities. Every correlation and inverse correlation must have some logical basis to support the moves. The inverse correlation was explained by the weight of the FED’s actions vs other fiat currency central banks actions. The FED employed a debasement strategy of the USD vs other fiat currencies to support US exports in an attempt to re balance the US  economy away from a purely consumption model towards a more balanced produce and consume model. The FED’s strategy was to dump USD liquidity on participants to enable us to borrow USD’s at zero interest rates. This allowed us to purchase yielding and capital appreciating assets whilst funding costs were essentially zero. For a few years, at least, this has been a profitable venture.

The strategy worked on the basis that the USD would be the funding currency. Ie that other central banks would not match or out match the FED’s easing actions. The perfect one way trade was in play.. ie borrowing USDs and purchasing appreciating foreign denominated assets allowed the perfect scenario of capital growth, yield, zero interest rates whilst the liability of the funding currency declined in value.

dx-inverse

http://www.financialsense.com/contributors/jason-kaspar/can-dollar-weakness-mean-equity-weakness

The question looking ahead is why is the inverse correlation breaking down? Should we be worried and what next?

Firstly, why is it breaking down?

The DX (dollar index) is a construct of the USD vs the EUR, GBP, JPY, CHF, AUD, CAD (in this order).

Its become very clear that the debt and structural issues that the US faces are not simply confined to the US. The eurozone, Britain and Japan all face very similar issues. Therefore borrowing USDs to purchase euro assets and expecting these euro assets to both rise in value in addition to the euro rising in value to the USD has become an unlikely event. Participants have, en mass, discovered that euro liquidity (money printing) is very likely to equal that of the fed on a relative basis. And that this is equally true to the GBP and JPY areas. As each one of these relationships falls over expect equity waves of equity weakness due to the USD being relinquished as a funding currency to be replaced by GBPs Euros and whatever else.

At this point I’d just like to take a small step back and provide a little monetary and economic theory for those with appetite to explain these issues in more detail.

Austrain theory (and indeed ‘common sense’) tells us that demand stalls at each progressive sequence of price rises. Ie as prices rise, due to money debasement, the real economy struggles to absorb the waves of price increases. (We can see this occurring right now all around us). This strangles demand and the gdp stalls. So, as GCSE students should know, this marks the start of the super inflationary cycle or a deflation wave depending on actions taken. I.e. if central banker’s print demand is sustained at the new price level gdp rise, money is debased, prices will rise so that demand will soon be threatened again and central banks will have to sustain prices and the newly inflated levels or face deflation. This is all text book stuff and frankly almost boring as its so straight forward. Bernake et al are all well aware of these issues, imo. Bernake also knows that money supply (and therefore inflation) can be embedded in a system without the very transparent need for central bank money printing ie QE. The banking system must be the enabler for sustained inflation (or money debasement) and therefore new co banks and other bank supportive measures inc ‘sale and lease back’ programs must be enacted. Only when we see these programs truely adopted en mass will we have a self sustaining super inflationary cycle. This will be the signal to go all in with leverage and ‘bet the farm’ on inflation.(For long term followers of this website and prior boards two v.important words for you, subject to ‘historic vol’ allowing the entry,  OPTION CALLS!) All the central banks in the west are working to the end (have no fear) of implementing self sustaining super inflation but none are there yet. Until we see the strategies enacted meaningfully we will continue to see high 70s style volatility  (albeit, imo, with nominal higher highs and lower lows).

Theory over, back to the DX.

The key point to take away is that the net money supply effect is short term negative as dollars are repatriated by participants but this deleveraging process is simply being replaced by central bank money printing. So we have a short term debt purge by financial participants as the DX inverse breaks down.

Where next? What follows after this temporary US deleveraging ceases..? The key inverse correlation is not, imo, the DX  to assets. The key correlation is money supply to asset prices. I cannot chart this adequately at present but if you could i have a strong feeling that money supply due to central actions is exploding and that we actually dont need a chart to see this. If we took euro, gbp and jpy with the USD money supply and charted her vs asset prices i know instinctively what this chart looks like. The money supply is exploding upwards, once again, enabling demand at the new price levels and so attempting to embed inflation in the system.  There is a short term deleveraging of USDs but this can and will very quickly be replaced by other finding currencies. Assets will rise as fiat money is lent and expanded.

The summary is all (developed) fiat money vs asset prices will continue to lose value in concert vs assets, inc equity prices but ex government bonds. That, it is always necessary to look beneath the volatility of ‘near term’ market prices to unpick the key fundamental issues that will drive prices and trends of tomorrow. Only this sort of analysis will provide the back bone to support trading and investing strategies as short term deviations from long term trends and issues unsettle you.

I strongly believe that the DX debasement inverse correlation was a short term indicator within an overall process of fiat money debasement. This is simply all she was, nothing more. The DX inverse correlation was a chapter within an unfolding story with many twists and turns as participants understanding develops. The general fiat debasement continues unabated and assets with high earnings ratios are an opportunity for asset allocation at this time. (Recognizing that volatility will persist until inflation becomes truely embedded through the banking system rather than QE programs).

Rich

 

UBS – Weekly Technical “Equity Capitulation – Entering Mature stage of the Bear Leg”.

UBS aiming for 1020 as the possible downside target for sp500. In spite of the bearish call “don’t sell” is the UBS call ie simply a cyclical bear within the secular bull.. which mirrors my own view given the monetary ‘strategy’ which will be employed. (ie MONEY PRINTING). The UBS view, in summary, is that we are close to an ‘important tactical low’  but that this bear may be ‘complex’ and last well into 2012.

 UBS-Weekly13-09

I’m in the mountains.. report more meaningfully very soon.

All the very best..

Rich

GOLD vs GOLD MINERS vs DOW

Here below an interesting and useful chart.

Gold continues to be the best performing asset in the market as she has been for a long period now. She breaks out when the dollar gains and when the dollar is debased. She breaks out when equity rises and when equity falls. She is for filling her age old function as a preserver of purchasing power, a store of value. As we can see from the chart gold has out performed the gold miners, significantly of late.

In the last few weeks gold miners have started a significant divergence from the equity indexes. This move has lead to a breakout for the unhedged gold miners of a long range bound period for them. A price breakout occurring at a time of wider equity weakness is very positive. This is significant and hints at a strong period for the gold miners that could well play catch up and out perform gold in the coming quarters, especially if gold strength continues alongside equity rebounds.

The ‘perfect’ scenario is significant monetary lose conditions ie qe3 plus across several currencies. This would be supportive of gold as well as equities. The result could be the long awaited ‘rush’ to the gold miners and start of their beta move vs gold. Certainly the cheapest way to secure gold is via the miners ie in terms of gold in the ground measures, etc.  Finally, you can also see the red line of the dow jones index on this chart. This is a very sorry looking index i must say. Relatively purchasing power continues to decline for those with no or minimal precious metal exposure. Negative yields continue as does the money printing. Cash (inc chfs), bonds, equities and most commodities seem to offer little by the way of purchasing power maintenance.

Is it any wonder Soros referred to gold as being the ‘ultimate bubble’.. This will be something to witness indeed. A history and a lesson to tell our grandchildren of. For disclosure, I hold gold and silver mining equities, option calls on the equities, futures on the gold and silver, physical etfs and finally, the physical it self which i hold outside of the euro area banking system.

Rich