Sunday, October 23, 2011

Global Markets Update - 22nd October 2011

As indicated last week, the ideas to further monetize debt keeps on continuing as a cruel joke on people across the board. On the surface it seems all ok with Euro inching back towards the 1.4 mark and GBP inching towards the 1.59 mark, a roaring Dow [that target was anyways pending regardless of the news steroids - just that it seems a bit over the top right now] - so what the hell is going on - first and foremost, at least for Dow, FTSE and Nifty, it is all an induced volatility to gain maximum out of the FnO business as the entire market knows there is nothing more pending in terms of stock market rise any more for a pretty good period of time.

The stark reality is hitting us straight in the eye with rising CDS premiums i.e. hot money is relatively sure of default on debts sovereign as well as corporate debt. Fed is contemplating another round of QE [at least that is what markets are expecting] and yet another round of inflation on the cards; the euro zone, so far has been very cautious not to activate the printing presses like US and UK have already done but it now seems like it may just end up doing so to delay the inevitable.

Fundamental case in point is that if the fiat currency has not been able to pay up for debts for decades of growth periods, for sure it is not going to be able to pay off for this debt now and who is going to buy this debt?? Banks are under-capitalized when it comes to stress tests, and do not have liquidity to lend for business credit; yet every dose of QE is jumped upon and all sorts of items like corn, crude oil, soybeans, live cattle, pork bellies and the laundry list goes on - is lying in the books of the banks! Is a bank supposed to hoard pork bellies and live cattle or is it the responsibility of the bank to pay interest to savers and lend for economic growth???

This is one of the most cruel jokes being played by hot money, governments and central banks on the struggling middle class. With each passing week, the manufacturing segment, one after the other is talking about pay cuts, job cuts due to escalation in costs. Yet on the other hand, the purchasing power of those bills in the wallets/purses be it dollars, euros, yen, rupees or whatever is decreasing; private label purchases are increasing exponentially and growth forecasts are getting grimmer - so the writing on the wall is clear - let us not get halucinated by what we see on the screen and let us focus on what the reality is and be prepared for another set of turbulent times.

For those who find some of the jargon mentioned above a bit over the top, just look up Investopedia for terms like debt monetization, CDS [Credit Default Swaps i.e. Insurance if your borrwer fails to pay you] etc. In simple terms, it simply means we have a plain vanilla cake of 1 kilo; initially we thought we have enough and 4 pieces of the cake would take care of the party; suddenly, some more unexpected visitors came and we for sure do not have more cake; so we decided to make 8 pieces of the cake; this game of 1-2-4-8 is repeating itself through a vicious circle and we have come to a stage where we probably have 1000 pieces of cake - wow 1000 pieces of the cake is fantastic BUT the cake WAS 1 kg AND CONTINUES to be 1kg [and a lot has been evaporated now due to heat] so 1000 pieces is good but unless the cake is made big, no positive outcome is possible.

With elections around the corner in a number of places, a lot of white lies are being spit on the voters' faces and they happily take all of that with a smile because the markets are roaring out of no where. Anyways if this money printing nonsense goes on, all that we are going to see is a sudden rise in commodity prices and lesser purchasing power when people go to markets to buy essential stuff. Speculators will go on and on and then the headlines will be 'markets melt down severely overnight' - our 'leaders' want us to experience something worse than the Lehman Brothers debacle as we move on.

Even a liberal country like US as far as education is concerned is facing an increasing number of universities pulling out of scholarships - the news headlines will talk about standardized tests being unfair but the bottomline is that tax collections are not enough and corporations are not in a position to spend as they used to in the past - let us make no bones about that. 401k retirement accounts built from the hay days of internet bubble have seen no tangible growth in value of portfolios. On top of that, austerity measures are being forced upon people just to ensure that a sovereign debt default can be post-poned for as long as possible. Double whammy again as cost of living is going up and purchasing power is going down - nature's law dictates that creation of something fruitful needs an innovative mind and a lot of hard labor. Financial engineering and printing money like there is no tomorrow won't cure the real problem but rather make it more and more problematic.

There is a silver lining for a lot of people right now with these roaring markets - time to withdraw the cash and hold on tight to it licking whatever losses have already been affected. If indeed people get smart this time, there should be more and more redemptions and cash hoarding for a brief period. This is not the time to enter stocks or commodities but time to exit. The very psychological handicap that people have i.e. 'I have to be invested in something' is being milked upon to maximum by the big ponzis of the investment banking world. How else can one explain such massive fluctuations being induced on the bourses every day - simple write one end of the options and with the premium received buy the other end of the options and just keep on repeating the game again and again because again; the 'mass psychology' of traders is that 'I must have some longs and shorts with me all the time'!

The Euro can roar towards 1.4-1.42 as well probably but it is just a few days away from dropping to 1.2 and if the printing presses go on full steam, it will probably end at parity to the dollar. Let us not get misguided by the fact that this is a fight between US and China regarding currency and bonds - wrong wrong wrong. This is the state of modern day Cold War between Europe and US in the form of Tit for Tat and the Germans including members in Merkel's own party have shown their intelligence by outlining consequences of debt monetization. Whether it meets its eventual goal in the right form or no, time will tell but as of now, seems like we are heading into a large financial tsunami.

It will just take 3 days to wipe out values drastically making people brood as to why they got misled into being invested. Staying out of the market with cash for 3 to 4 months doesn't do any harm. In fact the potential to get bargain deals across all asset classes couldn't get better again for those who missed the rallies from 2008-2009 period - now that is something one shouldn't have missed and this is one of the best blessings by supernatural forces that a similar opportunity is coming in again.

So for global markets, let us remind ourselves that the highest denomination currency bills of Euros and Dollars and Pounds are not in the hands of these very countries even as the printing presses are getting activated. In terms of quantity and quality, they are in the hands of emerging economies.

Coming up next - outlook and a brief version of our team's proposed path moving forward [with inspiration from Conquer The Crash by Pretcher Jr and access to research papers available for free by Nadeem Walayat and team on (link provided in home page of this blog)]


nalin said...

nagraj ji....u r awesome, ur analysis r damn convincing...!!xhetani of mmb.

Suraj said...

Dear Nagraj Sir,
Excellent post.
It seems from your post that all asset prices are increasing but eventually will crash soon.

In this regard and to my last query and your reply to it, at what price range($)I should sell or start selling physical gold(100gms, cp rs22000, cmp rs26500) and silver(8 kg,cp rs60,000, cmp53000). Is there a fair chance of silver reaching my cost price before going down. and any further opinion in this regard.

A few days back You had advised me to sell 50% and it is at the back of mind.
Although I am not leveraged but also I do not have any spare cash to buy stocks or bullions when the crash happens at present.

Sorry if I am bothering you.