Saturday, March 21, 2009

Deflation/Inflation Conditions Chart

This chart was linked at the bottom of the blog post regarding inflation vs. deflation.

Will China See the Writing on the Wall?

China Sees the Elephant in the Room - Dollar Reserves at Risk

A couple of days ago, we learned that Chinese Premier Wen Jiababo is "worried" about China's holdings of U.S. government debt and wants assurances that U.S. Treasuries are safe investments. Phrased another way, the Chinese are asking the question: "why should we continue to hold U.S. dollar reserves?"

The elephant in the room, it appears, is that China has fallen prey to the fact that the U.S. has already issued more debt than it can possibly service in a low inflation (strong dollar) environment, and it continues to grow its budget deficit (and government debt supply) at a staggering rate.

The Chinese Premier asked a valid, albeit naive, question related to their U.S. debt holdings. With his back up against the wall, President Obama provided commentary eerily reminiscent of "the problem is contained" rhetoric which eminated from the Bush administration in the early days of the U.S. credit crisis.

If President Obama had the luxury of being blunt and truthful, his answer might have been a bit like this: U.S. monetary policy is abundantly clear in method and purpose - the central bank will print money in abundance until they have succeeded in counteracting the deflationary impact of massive credit destruction and inflating the value of assets held by U.S. banks. The net effect of this liquidity generation will be dollar deflation, price inflation, and a severe deterioration in the value of U.S. government debt (which is fixed in nominal terms, and repayable with deflated currency).

Where am I going with this? First, I am suggesting that the U.S. is legitimately concerned about a Japanese style economic stagnation or a 1930s style depression - this explains the green ink stains you have on your hands when you visit an ATM. Second, the Fed will error on the side of overstimulating money supply and underestimating the money multiplier - the American people and leaders have no stomach for a long and gradual solution to this crisis. And finally, an eventual normalization of the money multiplier will result in massive price inflation for goods, services and many financial assets - but massive devaluation of U.S. government debt. Yup, the Chinese, as the largest foreign holder of U.S. government debt, are screwed.

If the Chinese fail to anticipate this chain of events, the world will, within a few years, witness a transfer of wealth which is almost beyond imagination. The U.S. will not default on government debt - it will repay the debt with a severely devalued currency.

I do not, however, believe that China is unaware of these risks - and it is my opinion that they will undertake risky, yet appropriate, measures to protect the real value of their assets. I believe that China, by addressing the riskiness of their U.S. debt holdings in a public forum, is establishing the political cover needed to stem their losses by shifting parts of their vast wealth from U.S. government debt to assets which appreciate in nominal terms, such as equities - and China will be aggressive buyers of real assets, including commodities such as metals, energy and agriculture.

In order for the dollar to depreciate, other currencies will, by definition, need to appreciate. I am unwilling to make a bold prediction regarding this eventuality, except to point out that gold has a history as a monetary base - it tangible, has a finite supply and is costly to produce. The prospects of a return to some form of gold standard will grow to the extent that the supply of fiat money increases dramatically on a global scale. Gold is a very attractive asset at the present time.

Presently, I find the following investments to be particularly attractive:
Long TBT- short (inverse) play on U.S. Treasuries
Long GLD- gold bullion
Long GDX- gold producers
Long USO- crude oil
Long DBA- agricultural commodities
Long DBC- diversified commodities

With somewhat less enthusiasm, I am also attracted to the following:
Long UDN- short (inverse) U.S. dollar index
Long SLV- silver
Long UNG- natural gas
Long OIH- energy service companies
Long XLE- oil and gas producers
Long MOO- agricultural producers

Also, although equities are more attractive than treasuries, corporate debt is attractive given the fact that debt is serviced with nominal (not real) dollars, and credit spreads, on average) continue to discount a sustained deflationary environment. One way to play corporate debt versus treasuries is to be long LQD (high grade corporates) and HYG (high yield corporates) paired against a short position in treasuries (long TBT, inverse ETF) or short (TLT or IEF - long and intermediate maturity treasury ETFs).

Deflation Vs. Inflation

Investment Scenarios: Inflation vs Deflation

I've said all along that you need to be thinking ahead and preparing your portfolio for various potential economic and market scenarios. And, I've roughly broken down these scenarios into two environments: inflationary & deflationary. So, after much reading, pondering, and hypothesizing, I've come up with my broad gameplan for each scenario.

Inflationary Environment
In an inflationary scenario, the following positions should be poised to benefit:

- Long Gold: As a speculator's instrument, many argue that gold is an inflation hedge. Long also other precious metals and commodities in general.

- Long Oil: In a truly inflationary environment, oil is supply inelastic; any increase or decrease in price would not result in a corresponding increase or decrease in supply.

- Short Leverage: A common theme regardless of environment, really. Leveraged companies, companies who provide leverage, companies with leveraged consumers.... short them all. A deleveraging environment is ahead of us.

- Long Technology: Regardless of environment, technology will evolve and there will be demand for such advancements.

- Short Fixed Income: Weak domestic currency/monetary system means it will underperform and thus should be shorted.

- Long Emerging Markets: A weak domestic currency/monetary system implies higher returns can be found abroad in countries experiencing vast growth.

- Avoid staying in cash: Inflation means your currency is worth less every day. Fight it by not staying in it if at all possible.

Deflationary Environment
Many people are becoming increasingly concerned that deflation is in our future. And, this concern is duly warranted considering that deflation typically rears its ugly head after periods of prolonged globalization and global growth. Such growth leads to increased investment, a massive increase in production, and thus excess capacity all around the world. Such excess capacity then brings forth lower prices. In deflation, companies suffer while the consumer is the real winner. In a deflationary scenario, the following positions should be poised to benefit:

- Short Equities: In deflation, traditional investments should suffer simply because the underlying companies will see lower margins and losses. And, more often than not, certain companies will become insolvent.

- Short Housing: Rent rather than own. As prices collapse, stand back and let the landlords watch the values of their properties plummet.

- Long Fixed Income: Mainly sought after as a safe haven (much like gold in an inflationary environment). While by no means a 'top pick' for investing during deflation, it is an option for those who do not have access to short selling (the preferred position). Although fixed income yields should decline due to fed easing (to combate deflation), the underlying should theoretically depreciate much less than equities (which you do not want to be long). Seek better quality bonds.

- Short Leverage: Regardless of environment, deleveraging should be a big theme playing out in the future. Short any companies that have anything to do with leverage. In deflation, leverage begins to unwind and as such currency plays can be found. A massive leveraged carry trade in the Yen has taken place over the years and as such would be unwound in deflation, thus benefitting the Yen.

- Short Emerging Markets: The global boom that once fueled these nations quickly turns sour for them. Global excess means prices come down and companies suffer.

- Long Technology: Regardless of environment, technology will advance and will be in demand.

- Long Oil: Just like an inflationary environment, going long oil makes sense; but for different reasons. In deflation, you want to be long oil because it is demand inelastic (meaning that demand does not increase or decrease correspondingly with an increase or decrease in its price).

- Avoid debt and raise cash

- Long Gold: In extreme conditions (in any direction), gold can make sense. In deflation, it can make sense when acting as currency.


Whether in an inflationary or deflationary environment, portfolios can be poised to outperform. While the theme of deleveraging seems all but inevitable, the exact scenario(s) that will unfold are hard to predict. But, the possible outcomes stand roughly divided by the two scenarios outlined above. And, both environments offer unique investment opportunities poised to outperform. (See here for an additional set of stipulations regarding each type of environment).

Interesting Article from The Casey Report

Greater Depression Investment Trends - And How to Play Them

Many folks say investing would be quite easy if you had a copy of tomorrow's Wall Street Journal. In this guest article, Casey Research's David Galland eloquently explores the trends in place to help us forecast what we can expect the next 8 years to look like - and what actions you should take today to protect not only your investments, but also your way of life.

David is one of my favorite investment writers - I always look forward to the Friday afternoon missives he pens for Casey subscribers. Hope you enjoy.

There’s Always a Silver Lining
By David Galland, Managing Editor, The Casey Report

Here at Casey Research, we are trying not to be overly pessimistic, but there’s no denying the mass of bad news coming to us from all fronts: the forces of collectivism are using the cover of the crisis they largely created, aided and abetted by capitalism’s quislings, to roll over the individual.

Even so, contained within the dire reportage is also some very good news for you personally.

The Bad News

As fully anticipated, with its first budget plan, the Obama administration has fired a salvo into the side of the productive classes. (For those of you who are not U.S. citizens, feel free to use Team Obama as a proxy for what is likely to occur where you reside.)

Yes, we expected the $1.75 trillion budget deficit, which will, by the time all is said and done, come in a lot closer to the $2.5 trillion number anticipated some months ago by our Chief Economist Bud Conrad.

Yes, we expected the government to begin raising taxes, which they are proposing to do with vigor – starting with an increase of $1.4 trillion on the people who earn in excess of $250,000 a year. “Right on!” shouts the mob, on the way out the door to burn Porsches (which, Bloomberg reports, is now becoming something of a trend in Germany’s capital, Berlin).

For no other purpose than to keep the record straight, it’s worth noting that thanks to the government’s steady dose of inflation, $250,000 today will only buy you 77% of what it would have in 1998… and 56% of what it would have in 1988.

A decade from now, given the inflation rate we expect, the dollar’s purchasing power will erode by another 50%, and probably a lot more than that. In fact, at the current rate of money creation, by the time the dust settles, $250,000 might be the annual wage commanded by burger flippers.

But, hey, look at the bright side, at that point everyone will be rich!

The further details of Obama’s budget plan are a hodgepodge of this and that, some of which we even agree with (like cutting business subsidies). On the whole, however, the overarching mandate appears to be to thrust the hand of government, like some motion picture kung fu villain, deep into the heart of American enterprise.

And government’s expansion is far from over. The news continues to pour in…
  • Citigroup to get another $25 billion bailout from the U.S. Treasury.
  • Treasury officials work on bailout plan for auto parts manufacturers.
  • President Obama exploring automatic workplace pensions and an expansion of unemployment insurance.
  • AIG, now a government lap puppy, takes another big loss, and is again looking to its master for another handout.
  • Speaking of lap puppies, Fannie Mae, has lost another $25 billion and is looking for $15 billion more from the Treasury. The value of this zombie institution’s net assets is now a negative $105 billion, and eroding. Great investment of your tax dollars, eh?
  • Then there’s the new administration’s cap-and-trade green tax… a stunning new initiative that will bring many U.S. businesses to their knees.
  • There is more, so much more, including a $638 billion reserve fund for healthcare reform in the president’s budget that loudly broadcasts that, “Yes, we’re going there.” There being nationalized health care.
However, there’s also some good news to be found in the way things will be.

The Good News

My fellow citizens of planet Earth, it is now abundantly clear that the trend toward socialism in all its many disguises is about to, once again, shift into high gear.

We’ve been here before, encouraged by the words of Karl Marx, a distinctly unsuccessful individual (to read his life story is to read of almost unending misery, poverty, and discontent) but a decidedly successful phrase-coiner, knocking the world off its axis with his “From each according to his ability, to each according to his need.”

While no one with any real sense of history, not to mention economics, can take any overt joy at the prospect of the dark clouds of collectivism looming high in the sky above us, there is, if you pay close attention, a very big opportunity in all of this.

Namely, we are now presented with a relatively rare chance to see with some clarity into the future.

Imagine if eight years from now you could step into a time machine and zip right back to this very moment. How much money do you think you could make?

Well, just because the chattering masses have the blinders on as they march forward to their collective penury doesn’t mean we need to join them. And, if we are even a little bit careful, we won’t.

So, what is it about the future we can now see? Some broad strokes…
  • Currency depreciation.
  • More taxes.
  • Rising interest rates.
  • A price capitulation in real estate, with a collapse in commercial.
  • Exchange controls (now that Team Obama is raising your taxes, you don’t really think they’re going to let you pick up your wealth and leave, do you? The window for global diversification will soon be closing.)
  • The return of mega-labor unions.
  • Trade wars, shooting wars, and other forms of heightened geopolitical tension. (This is a topic we are discussing at greater length, backed up with specific recommendations, in the March edition of The Casey Report, released on March 3. Among its many highlights, Doug Casey has contributed an article titled “Street Fighting Man” about the prospects for social unrest.)
Provided you keep your personal wealth profile low (there was a reason Sam Walton, founder of Walmart, drove a beat-up pickup truck), your financial powder dry, and, maybe most important of all, retain your sense of humor, the opportunities in the unfolding crisis will be abundant.

Whatever you do, don’t be complacent about what’s coming.

We are long past the point where doing nothing is an option. Review your personal finances, cut out unnecessary expenses, talk to your accountant about tax planning, and, if you’re a U.S. citizen, consider moving at least some of your wealth out of the country while you still can (but please, don’t try to hide it… that’s a fool’s errand). If you own gold, only you and your spouse, if you have one, should be aware of it.

Ask yourself, “If I just dropped in from eight years in the future, what measures would I take?”

Now, take them.

One Difference Between Good and GREAT Traders

The good trader limits risk, but the great trader also maximizes opportunity. -- Brett Steenbarger

Why I Trade

I've never really stopped to think before why I trade. Here are a few reasons:

  • To Make a Living. "It's a living!" Making money to pay the bills is a necessity. It's is also a commandment from God.
  • I want to make a lot of money. I want to be able to buy a ranch. That's why I keep putting pictures of ranch scenes at the top of this blog. I want it to be a daily reminder of what I'm working for.
  • I want to be independent and free from the need to work for someone else.
  • I want to be in control of myself and my destiny.
  • It drives me to develop greater and greater discipline.
  • It allows me to use leverage and amplify my profits faster than most other professions.

Overlooked Qualities of Successful Traders

From TraderFeed and Brett Steenbarger:
One of the things I most enjoy about working with traders in various settings--prop firms, hedge funds, and investment banks--is the opportunity to see how successful traders actually succeed. I'm constantly amazed at the variety of strategies and skills that can be joined to create profitable approaches to trading and investing.

During this most recent road trip, four characteristics of successful traders--ones that are commonly overlooked--have jumped out at me, and I thought I'd pass along:

1) The Constant Desire to Improve - I met with a group of traders who have been successful over a period of many years. Nevertheless, they were participating in day-long meetings, including a seminar with me, to build on their success for the coming year. It was very clear that they are continually searching for new opportunities and strategies. They also value continuing education, keeping up to date with what's happening in their areas. They track their performance and, individually as well as a group, are setting very specific goals for improvement.

2) The Ability to Press Their Advantage - The really good traders are aggressive; no doubt about it. When they're seeing the market well and have good ideas, they aren't shy about using their size and pressing their advantage. Lesser traders are very quick to take profits and are risk averse re: losing those profits. The very successful traders keep their risk management, but don't hesitate to become more aggressive when they see opportunity. They remind me of boxers who, seeing opponents hurt, will go for the kill. The less successful traders seem to lack that killer instinct.

3) Emotional Resilience - The very successful traders have a great attitude about losing. They know it's going to happen. They don't take it personally. If anything, they try to find learning experiences from losses. Elsewhere I have written about how good traders view a losing trade as "paying for information". A trade with an edge that doesn't go their way either tells them something important about the market, or it tells them something about their execution. Either way, it's a potential learning experience. Resilience means that the excellent traders trade well out of a hole. They can be down money for day, week, or quarter and continue to make the same good trades they would normally make.

4) Creativity - We normally think of creativity as a trait that belongs to artists, but it also is quite noticeable among traders who have been successful over many years. They find edges in the most unlikely places. They look at interesting relationships within the market they're trading, and they find unique relationships from one market to another. One trader very recently told me of a strategy that exploited the way one market was priced related to a similar market at certain time periods. I would have never thought of that idea in a million years. He was making consistent money from the concept.

As I write about these four qualities, I'm struck by how they also can be found among very successful athletes, entrepreneurs, and performing artists. When you're a career trader, you truly are an entrepreneur, running your own business. Many of the same enterprising qualities we find in the business world are present in spades among excellent traders.

Three Relentless Steps Toward Becoming a Great Trader

From Brett Steenbarger:
One of the goals of my book Enhancing Trader Performance was to figure out what makes successful performers tick--in any field of endeavor. What I learned in researching the field was that talent--inborn abilities--are necessary for success, but not sufficient. It's how people channel their talents by structuring their learning processes (i.e., their building of skills) that ultimately determines whether or not they become elite performers. Here are three straightforward ways you can structure your learning to make the most of your talents:

1) Keep score. Relentlessly. When Lance Armstrong's performance team works with him, no aspect of performance is ignored. They measure his stance in the bike to minimize wind resistance; they measure his pedaling frequency to maximize his speed and minimize his effort; and they tweak the design of the bike to achieve every possible edge. His cycling performance may be art, but behind it is plenty of science. So it is in other performance domains, from NASCAR to chess to ballet: the greats study what they do to constantly improve. Take a look at the performance metrics that professional traders collect to figure out their strengths and weaknesses. They figure out how they perform in rising, falling, and flat markets; they evaluate their performance as a function of being long or short and as a function of time of day. Keeping score builds the motivation to continuously improve, but it also tells you which improvements to make. Track every trade you make: How much did it go against you while you were in the trade? How much did it go your way after you exited? How could you have recognized that it was a winner (so that you could have scaled in with more size) or a loser (so that you could have exited with minimal loss)? The really great performers make themselves a subject of study.

2) Study the market. Relentlessly. There's a reason why the great basketball and football coaches review game tapes obsessively with their teams. There's also a reason why chess grandmasters play and replay games from past tournaments. So much of performance--especially in trading--boils down to pattern recognition, and so much of pattern recognition boils down to multiple, high-quality exposures to the marketplace. A program that I use called Market Delta breaks down trades by their size and by whether they were transacted at the market bid or offer. That way, we can see if large traders are leaning to the buy or sell side. A replay feature in the program enables us to review each market day and see how the buying or selling unfolded. This provides us with many more of those high-quality market exposures than we could ever hope to get from simple live trading. In my book, I mention a learning technique used by many of the most successful traders I've known: they videotape their trading and then review the tapes after the close. It's a great way to review what the markets did--and how you responded. After a while, the patterns jump out at you.

3) Read. Relentlessly. Particularly for the independent trader, trading can be an extremely isolating activity. It's easy to get locked in your own head, your own ideas. If you look at the life histories of expert performers in various fields, you find that most of them have not been isolated. They have had mentors at various points in their careers to help them learn and grow. How can you pick the brains of the world's greatest traders and investors? Books and blogs offer one important avenue. True, there are many fluff books and self-absorbed blogs, but there are a few written by the pros that are worth their weight in gold. Right now, I'm reading Inside the House of Money by Steven Drobny. It's a wonderful collection of interviews that gets inside the heads of global macro traders. I'm also reading Ken Fisher's new text, The Only Three Questions That Count. He explodes a number of market myths and models a way of thinking about markets that has led him to consistent success as a money manager. Take a look at blogs written by Barry Ritholtz and Bill Cara; read the extensive Q&A sessions posted by Charles Kirk in his Members section. You may not agree with all their conclusions, but you'll learn how they think about markets. That is mentorship-by-observation.

It takes a relentless pursuit of excellence to become excellent: that is what I learned from my performance research. You can only sustain such a pursuit if you truly love what you're doing; if it captivates your very being. If you're not relentless in your pursuit of trading success, perhaps it's not that you need discipline or motivation. Perhaps trading is not the domain in which you were meant to excel. What my daughter Devon taught me is that somehow, somewhere there is a kind of productive activity you were meant to do. And when you find it, you will be relentless, because you want to be doing nothing else.

Six Keys for Trading Success

From Traderfeed and Brett Steenbarger:
In my last post, I mentioned that a generous blog reader shared his intraday trading approach with me last week. His ideas seemed sound, so I suggested that he contact Henry Carstens, an experienced systems developer. Henry, I told him, could test his trading ideas and perhaps suggest improvements, while avoiding the problem of curve-fitting. The reader, trusting that Henry and I would not divulge the particulars of his method, patiently explained his setups with numerous examples. Within a matter of hours, Henry had backtested the ideas over the past five years of trading. What Henry's report revealed tells us quite a bit about what it takes to be successful as an intraday trader. My subsequent conversations with the trader revealed yet more. Here are six lessons from our experience with a successful short-term trader:

1) The successful trader is selective. The trader's approach took about 1300 trades in a five-year period, or about one a day. It spent more time out of the market than in the market. As a result, it did not rack up huge commission overhead. Instead, it only took very high percentage trades. Without any optimization whatsoever on Henry's part, the system had almost 80% of trades as winners. This selectivity makes for very high risk-adjusted returns. Most of the time, the trader's capital was not at risk. He only entered the market when he could make money consistently. He had clear ideas regarding execution that enabled him to get into the market at favorable prices, minimizing losses when the trade didn't work out and maximizing gains when he got the moves to his target.

2) The successful trader has made the approach his or her own. When I talked with the trader by phone, I sometimes had trouble following his thinking. He spoke quickly about hitting the red line or the brown line on his charts and casually mentioned important trading ranges and levels. It was clear that this way of trading had become part of him. The way he set up his charts is the way he thinks. No doubt this internalization helps him see when the market is acting normally and when it is not, enabling him to quickly act upon opportunity or threat. Only considerable experience, watching markets day after day and studying charts upon charts, makes it possible to internalize a method to that degree.

3) The successful trader has found a niche. The trader did not just send me one or two charts illustrating his method; he sent dozens. On the phone, when he talked about his approach, there was real enthusiasm in his voice. It was clear that this kind of trading had captured his interests, skills, and talents. That creates a virtuous cycle in which success leads to more excitement which leads to more learning, which creates further success. He didn't try to trade instruments or time frames for which his approach--and his skills--were not suited. He focused on his strengths.

4) The successful trader is creative. I think it's fair to say that his approach is a short-term trend-following method. His way of evaluating the market trend, however, is unique. He is definitely not just looking at the same old 14-period oscillator that comes pre-programmed in most charting applications. Similarly, he has clear stop points and price targets, but these are defined in a unique way, based upon the market conditions he's observing. This "out-of-the-box" thinking style is common to successful traders, I've found. They look at markets in unique ways that help them capture shifts in supply and demand.

5) The successful trader is always seeking improvement. If our trader is already successful, why does he need to talk with Henry? He knew that, by sharing his ideas, he would learn a great deal about the strengths and weaknesses of his trading. Sure enough, Henry found that the average size of the trader's losers was larger than it needed to be. A simple modification of stop-loss rules improved the system's performance meaningfully. Similarly, by putting a filter on the system--only taking trades if certain conditions were met--the average profit per trade went up significantly. That could aid position sizing. The trader knew he had something good, but good wasn't good enough. He wanted better.

6) The successful trader is persistent. One thing I want to stress: the trader's methods were very sound--and Henry found ways to make them better--but they were not perfect. Out of about sixty months analyzed, fourteen were losers. The drawdowns were not hellacious, but there were periods of flat performance and drawdown. What that means is that a successful trader needs to have the confidence to ride out these periods of poorer performance to get to the periods of success. That is one reason why it's so important to find a way of trading that you can make your own. You're more likely to stick with a method that fits with how you think (and that fits with your skills) than if it's something you've blindly copied from others. Our trader believes in his method, and that gives him the brass ones to hang in there during relatively lean periods.

Note that our trader is not a mechanical systems trader. What Henry did was test out his major ideas and identify their strengths and weaknesses if they were traded consistently, with discipline, as if they were a system. If you are a successful trader, this is a valuable exercise. It will break your trading into components and show you how each component is contributing to profitability. It very often shows how the components can be slightly modified to produce even better results. By looking under the hood, so to speak, and making a couple of adjustments, we can meaningfully improve upon our success. There are very few trading strategies that cannot be programmed and tested, including complex chart and indicator patterns. The results can be most enlightening.

Friday, March 20, 2009

Worst Week for Dollar in 23 Years

Treasuries Do a Head Fake

Or should we call this a Fed fake? This is the daily chart. Thus far, we have seen no follow-through following the Fed's decision on Wednesday.

Stocks Staging a Rebound

Treasuries Tumble Too

The 10-year is flat, but this chart shows the 30-year bond, which the Fed has not indicated it will buy.

Stocks Break Down, Tumble Into Triple DIgits

It appears that the recent stock rally is in danger of ending today.

CBO Report Confirmed -- $1 Trillion More of Deficit

This absolutely staggers my mind that we are now spending nearly $3 for every dollar our government takes in! This is not only unsustainable in the long term. It is unsustainable now!

Stocks Giving It Back

EC President Predicts "Convergence" of U.S. and Europe

From FT:
The US and the European Union are finding common ground in their efforts to strengthen global financial market regulation in spite of differences between Anglo-American and continental European cultures, the European Commission’s president said on Friday.

Wow! Scary!

Stock Futrures Explode Higher After Being Down All Night

Thursday, March 19, 2009

First In, Last Out (FILO)

In a recession, it is generally the case that those sectors that lead the way into the recession are usually the last ones to exit it.

EURUSD and Gold

Also from dailyfx:

The correlation between Gold and the US Dollar has recently recovered. Gold has historically been used as a hedge against US Dollar weakness, but recent market dynamics actually showed precious metals prices move virtually lock-step with the US currency. Overall risk trends meant that investors would seek the safety of both gold and the USD versus major counterparts. Yet the Fed’s recent actions put the US Dollar’s safe-haven status into clear doubt, and gold prices are once again moving inversely to the Greenback. The turn in correlation is arguably an ominous signal for the US Dollar.

Euro Seen As More Safe Than Dollar

I had noticed over the past few months that the Euro and the U.S. stock market appear to be positively correlated, but I had no explanation for the phenomenon. When the S&P 500 moved higher, even on an intra-day basis, so did the Euro. Now today, I saw this on

The Euro/US Dollar has held a near record-high correlation to the US S&P 500, emphasizing that both currencies are firmly linked to global risk trends. The recent upturn in global risk markets bodes poorly for the US currency. Indeed, S&P 500 losses were a key source of support for the historic safe-haven currency. Yet recent events suggest that the US dollar may in fact lose its safe-haven status against major world currencies. The US Federal Reserve’s Quantitative Easing has sparked fears that the USD will lose its luster as a reserve currency. It will be critical to watch EUR/USD – S&P correlations going forward.

CBO: Deficit To Mushroom $1 Trillion More

News wires this evening are indicating that tomorrow, the Congressional Budget Office will send to President Obama a report indicated that the federal deficit for this year will be $1 trillion more than estimated just one month ago.

Bond Traders to Fed: "If You Want to Buy U.S. Government Debt, Then You Can HAVE It!"

World Economy Contracts -- First in 60 Years!

From Breitbart:

The International Monetary Fund Thursday said that the world economy, reeling from financial crisis, was on track to shrink for the first time in 60 years in 2009, by as much as 1.0 percent.

In a report prepared for the Group of 20 meeting of finance chiefs last week in Britain and published Thursday, the IMF slashed forecasts from two months ago to a global contraction of between 0.5 percent and 1.0 percent. The latest IMF projections were sharply lower than those in the World Economic Outlook update published on January 28 that had put global growth at an annual rate of 0.5 percent.

"Global economic activity is falling -- with advanced economies registering their sharpest declines in the post-war era -- notwithstanding forceful policy efforts," the IMF staff report said.

The full story.

Stocks Stumble

Will China Unload Its Treasuries on the Fed? They Should!

The Fed has now given China the perfect “out” to begin selling its treasuries. For each treasury the Fed buys, China can dump one on the market without affecting the global supply and demand. They can sell their U.S. government debt back to the U.S. and the American people will be stuck with both the debt, and the obligation to pay it. What a strange world! With the explosion higher yesterday in treasuries, China can sell them for a substantial profit to the Fed and exit laughing their way all the way to the bank. They would be foolish not to!

UN Says Ditch the Dollar

From Reuters:

A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar.
Here's the full story.

Gold on a Roll!

Yesterday morning, gold was headed sharply lower at $885/oz. Today, gold has jumped $85/oz., and is now priced at $960/oz. Gold is on a roll! The latest Fed action is not instilling confidence. It's doing just the opposite.

Leading Indicators Down .4%

The indicators that point to the direction of the U.S. economy 6-9 months down the road are pointing down for that time frame. This is particularly stunning given that some of these indicators are influenced by monetary expansion by the Fed, and these are inevitably pointing higher. The fact that the rest of the are pointing not only down, but much lower, is dragging the stock market down today.

Trade Wars Heating Up Between U.S. and China, Mexico

Mexico has now put tariffs of as much as 45% on dozens of products from the United States because of trade violations made by the United States in its NAFTA treaty. This could cost millions of American jobs. But at least the Teamsters are happy! We have started a trade war over 100 Mexican trucks? Have we all gone insane?

$1.25 Trllion! That's the Amount of the Fed's New "Stimulus Package" Yesterday

These radical new interventions into the financial markets today amount to the world's largest science experiment -- on the U.S. economy. They have doubled down the bets! We have become the world's largest guinea pig! They are playing god with our global financial system! No one really knows what the ripple effects and unexpected consequences will be! My bet is that it will not be good!

Hey Fed! Quantitative Easing Didn't Work Last Time, So What Makes You Think It Will This Time?!

The financial markets are flat almost across the board today, as they digest the staggering jolt that the Fed delivered just 13 hours ago. Gold shows some signs of life, as the precious metal has given back about $10 of its $62 meteoric rise from yesterday. Grains also haven't moved very much from the price levels attained following the global jolt, but soybean futures have also continued to rise modestly higher, rising another 9 cents since the 5 pm evening open. Just about everything is higher -- except the Dollar. Inflation has instantly surged! But following that shock, most things haven't done much. It's as if the shock to the financial markets have left them like a deer in the headlights -- too stunned to move!

Now the huge question becomes this: Will this unprecedented creation of monumental amounts of new money result in controllable inflation, as the Fed hopes, or will it wreak such severe damage to our global monetary system that it will throw the world into devastating havoc and uncontrolled economic calamity? I am certain it will be the latter. But for the moment, we can possibly expect temporary rallies and artificial relief euphoria. But as those ripples begin to move outward, look out!

Wednesday, March 18, 2009

Grains Leap On Evening Open as Fed Stokes Inflation

Grains close trading each day at precisely the hour that the Fed releases its decision. Thus, the first chance grains have to react to the Fed's decision is at 7:00 pm EST, when the grain markets re-open for evening trading. Gaps in the futures market are extremely rare, but this gap higher is solely a consequence of the Fed decision to inflate at any cost. The next time someone says that a weaker Dollar isn't inflationary, I'll show them this chart!

The Fed's policy to deal with the economic crisis can be summed up in one word:

Bet on Inflation!

The Fed has decided to double down its bet to create inflation!

Fed Expands Balance Sheet to $3 Trillion!

From Marketwatch:

The Federal Reserve on Wednesday surprised financial markets and committed to buy $300 billion in longer-term Treasurys to help the struggling American economy recover.
The Fed also tweaked its other credit-easing programs by committing to buy more mortgage-backed securities and agency debt and include more asset-backed securities under a new credit facility starting this week.
Most analysts had thought that the Federal Open Market Committee - the policy making arm of the central bank -- would keep the weapon of buying Treasurys in reserve in case of a crisis.
The decision to buy Treasurys shows that the crisis is here.

All Currencies Rocket Higher As Dollar Plunges

This the chart for the British Pound, but all other currencies are doing the same!

Dollar Falls Off a Cliff

Stocks Love the Fed

Gold Skyrockets $62 on Fed Rate Decision

Look at the shock to the financial system caused by the Fed deciding to print even more money to buy longer-term treasuries. There will be hell to pay!

Shock: Fed Buying Long-Term Treasuries

Gold Has Collapsed Through Support

This confirms that gold has reached it zenith for the time being. Gold has fallen rather forcefully through the lower trend line support level, shown as the lower green line. I never thought I would see this, but it appears to be tied to the stock market rebound. Investors seem to be feeling a little less vulnerable.

Recovery and Back to Black

Stocks Slide Deeper Into the Red

The Dow has now slipped further into the red, with the Dow down now 100+ points. Let's hope this doesn't doom our rally!

IBM In Talks to Buy Sun Microsystems?

A merger possibility among two technology giants? Wow! It has kept the NASDAQ futures from slipping into negative territory with the other stock index futures. From Marketwatch:
Sun Microsystems Inc. saw its shares shoot up by more than 66% Wednesday following reports that it is in talks to be acquired by IBM Corp. for as much as $6.5 billion in a deal that would put hardware back at the core of Big Blue's operations and bolster its computer-server business, according to a published report.
Sun (+65.4%) climbed $3.31 a share to $8.27 after the Wall Street Journal reported that a deal with IBM could be reached this week, but that the talks are not certain to go through.
Here is a link to the full story.

Waiting for the Fed Statement

The higher CPI has weakened stock futures somewhat, but I expect that we will be primarily in waiting mode today for the Fed statement at 2:15 pm EST today. I don't expect that stocks will move powerfully in either direction until the Fed issues its statement.

CPI Jumps, Dollar Tanks

Higher-than-expected CPI for February has pointed toward higher inflation, pushing all major currencies higher against the Dollar. This CPI shows that inflation is ramping up sooner and faster than expected. These two charts showing the Euro and British Pound springing higher against the Dollar at 8:30 am EST are symbolic of this phenomenon.

Euro - the Euro has risen 10 of the past 12 days! You should see the daily chart (not shown).
British Pound - it tumbled on release of a surprising unemployment rise in UK, but rose again upon release of the rising CPI data in the United States.

Tuesday, March 17, 2009

Heeeeere Comes Inflation: All Commodities Have Now Bottomed

In perusing all the various commodity charts after hours, I've realized that there isn't a single commodity future that hasn't bottomed in the past few days and weeks. This is the chart for perhaps the most famous of commodity futures to a novice or non-trader -- pork bellies! Needless to say, this chart doesn't just show a bottom; it shows a bull market! (By the way, pork bellies are what bacon is made of!)

This Blog May Go Private

I began this blog as a personal diary of my trading. At the time, it never occurred to me that anyone else would read it or even take an interest in it. Over time, I've found myself writing more and more for what other people might read rather than as a personal journal. Now, I've recently discovered that it is possible for this blog to be entirely private, so that only I can read it. I'm considering doing that so that I can once again use this blog solely as a log for my own personal trading.

Trade Wars! Mexico First, but Then Who?

Many people are aware that trade wars were one of the exacerbating elements that deepened and worsened the great depression. However, few people know that tucked into the recent "stimulus" package was the first salvo in creating a similar modern-day trade war. New restrictions were placed on trucks coming into the United States from Mexico. Mexico is now in the retaliating by placing new restrictions on 90 products from the United States. How many American jobs will be lost because of these new restrictions as a direct consequence of the "stimulus" bill that was supposed to create or save American jobs? Doesn't this sound like the 1930's all over again? Should we expect different consequences this time just because the calendar reads 2009?

In trade wars, there are no winners and losers. Everyone loses!

Stocks Rocket to Another Stellar Day

Stocks closed today nearly at new highs.

Crude Oil At Nearly $50

Stock Index Futures Take Rocky Road Higher

It has been a tough slog today, but stocks have been able to hold onto gains better than the previous few days.

Here Come the Credit Card Write-Offs!

From Bloomberg:

European stocks fell for the first time in six days as rising credit-card defaults at American Express Co. dragged financial shares lower. Asian shares rose, while U.S. index futures fluctuated between gains and losses. BNP Paribas SA and Barclays Plc slipped more than 3 percent after American Express, the largest credit-card company by purchases, reported higher delinquency rates.
Also from Bloomberg:

Almost three-quarters of U.S. companies with fewer than 500 employees are experiencing a deterioration in credit or credit- card terms at a time when half of them depend on credit cards as a primary source of financing, according to a December survey by the National Small Business Association, a trade group with more than 150,000 members.

The increase in credit-card costs has forced some business owners to stop using their cards, and at the same time declining credit limits are cutting their access to cash...
Apparently, the credit choke-hold on business hasn't eased as much as the news media had been suggesting over the past few months.

Fed to Expand Programs Further to Prevent Worsening

From Bloomberg:

The Federal Open Market Committee, gathering today and tomorrow in Washington, needs to redouble its efforts after the central bank’s balance sheet shrank 17 percent from a $2.3 trillion December peak, Fed watchers said. The retreat came even as Bernanke acknowledged the chance that the unemployment rate will exceed 10 percent for the first time in a quarter century.

“It takes massive balance-sheet expansion to generate significant easing in financial conditions,” said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York who used to work at the Treasury. “More needs to be done.”

This week’s FOMC meeting could mark a shift toward more aggressive monetary expansion to fight deflation after demand waned for many of the Fed’s existing programs.
Read the full story here.

This is troubling, because it suggests that, contrary to what Mr. Bernanke said in his 60 Minutes interview over the weekend, the Fed believes the economy may contract even more. Why else would they express the need to expand their programs and balance sheet even more?

Monday, March 16, 2009

Ouch! Gains Now Gone!

What Happened to the Stock Market Rally?

Wow! Things can change quickly, can't they? The stock market rally has fizzled and is nearly flat for the day. What happened? With 35 minutes remaining in the trading day, it is still possible for the market to recover, but this is a very powerful sell-off!

A Rising Tide Raises All Boats

That goes for commodities, too!

The Euro Rises, As Europeans Demonstrate More Spending Restraint

It is no coincidence that the U.S. dollar is sinking as the Euro is rising! Compare this chart with the last one I posted. The Europeans over the past weekend told America that our out-of-control spending was even too stratospheric for them!

Dollar Starting to Sink Again

And as the Dollar slides, commodities rise!

Bear Market Rally Continues to Build

The stock market continues to rally to even higher levels. Nice rally! Each day, I am setting my stops below the lows of the previous two days. When the reversal comes again, I want to get out -- fast! I will take my money and run!