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Buzz on the Street: G-20 Flops as Europe and China Panic


Some of this week's most insightful and timely vibes.

All day and every day, some of the stock market's best and brightest traders and money managers share their ideas, insights and analysis in real-time on Minyanville's Buzz & Banter. Click here for a 14 day free trial.

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Monday, November 8, 2010

Do We Need to Fear Gold and USD Going Up Together?
Yaron Sadan

Spoiler alert: If you're a serious inflationista, stop reading here. For those readers who are still open-minded and like to look at some other ideas…

For a while, I've been tossing around the different implications of inflation or deflation, stagflation or biflation. The ideas get complicated with ZIRP because at the limit, free money makes all relationships incoherent (think of the implications of negative TIPS yields, while experiencing deflation-like low rates in the 5 year treasuries; or the blowing out of the 10-30 spread – good for banks riding the curve, but for economy when banks prefer to lend to US goven't rather than businesses).

The theme that I've been most inclined towards is some sort of biflation. To the same extent as "stagflation" was unthinkable until the 1970's, biflation right now is unthinkable. Biflation will occur when we have deflationary pressures through a stronger dollar and lower asset (equities, bonds, real estate), coupled with increasing rates (contrary to any policy the Fed will implement). It means that cheap dollars won't be recycled into risky assets and government securities. It is a new paradigm, and one which the Fed is not equipped to handle with its current set of tools.

Let's start with the dollar. What would cause it to go up? The dollar will go up when investors realize two equally important things: the euro is flawed and eventually doomed and the yen is doomed.

Click to enlarge

How soon can the flight from the euro and yen begin? I think the turning point is upon us. Greece was a wakeup call that no one heeded and investors pressed the snooze button. Ireland is the next one. And if we fail to wake up, more calls will come. Already, German's are starting to grumble about having to bailout their profligate brethren.

Taking one step back, the role of a currency is four-fold:

  • as a medium of exchange
  • as a measure of value
  • as a unit of account, and
  • as a store of value

Each currency has some advantages and disadvantages in each category (for example, it's really tough to use gold units in an accounting ledger, but it is better as a storage mechanism than a piece of paper that can be printed at will).

That digression brings us to why the USD and gold can go up together in this scenario. As flight from the euro and yen becomes a reality, US deflationary pressures will heighten with a stronger currency. At the same time, fear will drive assets towards gold. As one trader never fails to mention to me, "Gold will peak on fear, not greed". He speaks truth. Perhaps its my own cognitive dissonance that allows me to think that gold and the USD can go up together, but the key is relative to what? I'm not making a call on which one will outperform on a relative basis (to each other). Rather, relative to all other assets or stores of value, both will benefit.

Which brings us to the ineffectiveness of the Fed. With a steep yield curve, banks have less and less motivation to lend to businesses – why should they if they can earn NIM by lending to the Fed? They shouldn't. The translation mechanism from Fed to consumer is broken and QE is going to increasingly be seen as a pro-establishment, pro-Wall Street bonuses measure and the average US citizen will retaliate. First, let's recognize that a steepening yield curve is not beneficial to anyone but the banks, and maybe that's important as they try to fix their balance sheets, but maybe they should just take the charges and move on instead of putting taxpayers on the hook. Second, the money rushing around now looking for yield and return in risky assets is much like the money sloshing around in 1999 -- misappropriated and bound for disappointment.

I have been discussing some of these themes for a long time, and have only been partially right (for example, metals have rallied since I spoke about them 2 years ago, but the yen is up significantly since last year when we went short). What makes me think now is any different? Even a broken clock is right twice a day. True. Yet, I will push back by saying that I was also early in advising clients to play it safe in 1998 and 1999 -- 2 years early, in fact. However, the eventual collapse that clients avoided was not worth the potential upside. The same is here. The yen might go up from here, but the significant risk is to the downside. Same with equities. They might rally more, hit new temporary highs for a few days or weeks or months, but they will falter and it's not worth the risk.

So, after a huge run-up, QEII, elections, massive moves in currencies and gold at record highs, energy rallies (I like energy long term), unemployment numbers that are mixed at best, etc. I am wary and believe the fingers of instability are large and worrisome. We are indeed in a new normal, but it will not be a black swan when the corrections come.

A European Catalyst Waiting for Attention
James Kostohryz

Ask yourself one question: What is going to happen to turn around the downward spiral in Greece, Ireland, Portugal and the other European peripherals?

If you think nothing, then it is time to looking for the prospect of a serious global correction. If you are banking on more rescue action from European authorities, who could blame you?

I will only say this. People are not taking this as seriously as they should. In particular, the second round of trouble will be uglier than the first. Uglier due to the more advanced state of human hardship in the crisis countries, and uglier due to bailout fatigue in the rest of Europe and Germany in particular.

I recall in April having the feeling that the market could blow to the upside. All of the sudden, the problems that had been simmering in Europe for several months all of the sudden became the global headline. And what felt like a runaway market all of the sudden started to fall apart. I'm not saying it will happen like that this time. But it is just a reminder that issues become "ISSUES" just like that.

Is Pullback Already Finished?
Michael Paulenoff

All of the action off of Friday's high at 1224.50 in the emini S&P 500 exhibits corrective form, which "warns" us that when it is complete another upleg should be forthcoming that thrusts the e-SPZ to new highs projected into the 1232-1240 target zone.

With that in mind, we need to ask the question: Is the pullback already finished? As long as today's low at 1214.75 remains intact, my optimal scenario indicates that a new upleg is underway. However, if the e-SPZ loops down and breaks 1214.75, then the correction will continue into the 1211-1205 target zone prior to my expectation of the start of a new upleg.

At this juncture, only a sustained breach of 1202 will weaken the bullish technical set-up off of the November 3 low at 1179.50.

Click to enlarge

Tuesday, November 9, 2010

Market Notes
Kevin Depew

Some brief market notes:

  • We are now in a 1-4 week window where upside progress will fight the headwinds of TD Sell Setups in the major indices.

  • There remains, however, an outstanding SPX qualified TD Prop Up target of 1287.42.

  • My expectations were that the 1287 target would be met after a corrective move, but we shall see.

  • Gold recorded a DAILY perfected TD Sell Setup yesterday. Of more interest is the perfected sell setup looming on the MONTHLY chart. December should record a sell setup. With respect to price targets, the 1414.82 relative retracement level remains disqualified and the next level is 1431.78, which is also near the TD Prop Up target at 1430.61. If I were trading gold I would be selling into these levels.

    Click to enlarge

  • Silver also looks similar to gold and has gone parabolic the past few sessions, exceeding a disqualified relative retracement level at 27.50 with the next at 28.29. The MONTHLY is also nearly identical to gold here as its finally caught up a bit, with a perfected sell setup looming for next month.Below is the yearly chart for silver. Note that the solid green line is a qualified TDST break, which means that after we record a perfected sell setup in 2011, we should see a correction for a couple of years before progressing to a full TD Sequential Sell Signal 13, which would obviously occur at higher prices.

    Click to enlarge

  • There are many fundamental reasons for silver to appreciate that do not include debt/currency crises or fiscal emergencies. For gold, there are far, far fewer, and this I believe is reflected in the long-term yearly gold chart, below, which shows a TD Combo 13 Sell Signal in place as well as a TD sell setup this year. If I were a betting man, and I am, these charts tell me that metals allocations should be restricted to silver.

Position in silver

Minyan Mailbag: Emerging Markets
Kevin Depew

Professor Depew,

With all this liquidity sloshing around and finding its way into EM, would you let me know which EM looks best on a DeMark set up?

-Minyan V


Looking at things on a WEEKLY basis, the EEM ETF is recorded a TD Sell Setup last week.

Drilling down further into specific markets, virtually all of these country-specific ETFs are on similar WEEKLY sell setups. A word of caution; sell setups, 9s, do not present automatic sell or shorting opportunities.

Remember, a 9 forms when you have 9 consecutive closes greater than the close four bars earlier. This is the momentum stage, typically followed by trending. While there is a high probability of a 1-4 bar corrective move after the momentum segment, the fact we have so many indexes across the globe speaks to two things 1) the power of liquidity and 2) the fact that a new up trend is definitively in place. That could change... after all, the trend is your friend until it's the end... goes the old cliche.

And now, for something which you did not ask for, but which I will offer up anyway because in thinking about these markets this also occurred to me.

For some reason, most people are determined to fight this momentum and attribute it all of it to excess liquidity. Perhaps they are correct. But it is also possible that something else is underway that is actually bullish for global equities prices.

In 2005, we knew the size of the real estate market in the U.S. would have dramatic spillover effect, globally, once it began to unwind. We expected that the complexity and cross-country linkage of derivatives would cause a secondary ripple effect across global markets once it became exposed, and we further expected that the transfer of debt from private to public would also expose the weakest and most vulnerable countries without the ability to either grow or tap debt markets to postpone their reckoning would create further ripples. All of that has and is happening.

But markets and corrections function in both price and time dimensions. What no one expects is that there may be new ways to create economic growth that are independent on non-productive consumption. Not all debt is bad. Not all consumption is bad. Not all companies are bad. Not all markets are bad.

I know that is not what people who are invested, literally, in the utter collapse of the global financial system want to hear, but my view is becoming clearer with respect to survivable companies, markets and assets on a longer-term basis and as it does, I am seeing more survivors making the cut.

In some respects it is very simple to distill everything down to one thing: fiat currencies are printed by lascivious central banks which, abetted by vapid politicians, are united in their intent to exploit for short-term gain the indefensible wealth of the masses via inflation and taxation. There, in one sentence I have just described the entire history of money and politics in an exchange economy.

-Kevin Depew

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