Currency War Spreading

Posted on: by .

It seems that we are starting to see more and more capitulation by the Bears. Joe Kernan on CNBC Squawk Box has railed against every analyst that has called for a pull back for the last couple of weeks and now they are all gun shy and some of those Bears have converted to Bulls. Could it be that they too are coming to terms that you can’t fight the Fed and as Warren Buffett stated, bonds are a “terrible” investment? Perhaps, for now the VIX is not at the RED ALERT level, but it is getting low. It seems the market makes a solid leg higher, pauses for a couple of days, and then another solid move higher. No rhyme or reason, other than it is the only place to be and it is where the Fed wants us to be. So far we haven’t seen the mass retailers run to the market yet, perhaps soon. In some ways it kind of reminds me of the late 1990s right before the parabolic move higher. The catalyst for sell off will not be earnings or bad economic news (so far that has been ignored); it will be when the Fed STOPS their QE and money printing or is forced to. For now the Currency War has dragged in the periphery nations with more rate cuts.

Currency War Spreads

Jobless Claims
It seems the Labor Department’s new changes to the model and adjustments are working. The weekly jobless claims, ever since the new changes implemented have been coming down sharply. The Labor Department reported that weekly jobless claims fell to a “seasonally adjusted” low of 323,000, down 4,000. Of course the previous week was revised higher, so far they haven’t figure out how to fix that problem. This is the third straight week of declines below 350,000 since the recent changes. I am curious to know what the jobless claims would be prior to those changes, I guess we will never know since the Labor Department has not revealed what the changes were.

The news did help boost pre-market futures slightly, which have been down all morning.

Currency War

In the previous mention Market Previews, I have been discussing the Currency War. It is fought by Central Banks and the vast majority of the public and media are ignorant, ill informed, or frankly don’t care. However, this battle among central banks will have future massive and lasting impacts on trade, inflation, and over-all general economic health.

As Japan fired the first salvo that sent the Yen spiraling down against the Western currencies, Bernanke and ECB responded with a clear message that they will be launching their own attacks. The ECB cut rates and the Federal Reserve announced in their FOMC statement that they will certainly consider raising their money printing efforts (currently holding at $85 billion per month, I suspect it will ramp to $100 billion in the next few months).

Currency War impacts earnings
Currency War – Fed Action?
Fed Declares Currency War

The Currency War spreads

South Korea - Currency WarIndia - Currency WarAustralia - Currency War
Courtesy of wikipedia

Well the Currency War is starting to spread. South Korea, another big tech export nation, is being stung by Japan’s recent salvo and has announced their own rate cut, cutting 25 bps to a record low 2.75%. This came after Australia’s central bank cut rates and so did India’s. It a race to the bottom and the first to go is always the rates. The problem in the West is that Europe, Japan, and the US are already close to zero if not already there, they can’t cut rates any more – unless it goes into the negative. Imagine, buying bonds and PAYING the government lend them money (another hidden tax?). So when the nation gets to zero interest rate, the next move is just to start devaluing and print more money.

While the Currency War rages, these nations’ governments are ramping up spending and socialism to take the burden off the struggling economy. That means they are deficit spending (spending what they don’t have). Yet no one really wants to lend governments trillions of dollars on a devaluing currency that pays little to no interest (never enough to beat the rate of inflation). This means that the central banks, as they fight their Currency War, must also at the same time finance their government’s by becoming the largest purchaser of government debt.

Currently, the periphery countries still have some room to cut rates, but soon they too will be at zero interest rates as well. Yet the amazing debate and continual question is when and who will be the first to raise rates? Well, that is a good question, but is also easily answered. These central banks cannot raise rates as long as their governments are running massive deficits and compounding debt. A raise in interest rates will not only stall economic growth, the bigger issue is the solvency of the government that will be unable to pay the higher interest rates. In my humble opinion the central banks hands are tied from raising rates, until their respective governments are able to pay down principal on debt and eliminate (or at the very least, significantly reduce) their deficit spending.

Real GDP Growth

GDP Growth - Currency War
Courtesy of wikipeida

That brings us full circle to the first nation that has REAL GDP growth and when I say REAL I mean led by the private sector, NOT government. If the GDP is really growing and revenue increases into the government coffers, in so far as they can eliminate deficit spending and start paying down their debt, that will give the central bank room to raise rates and eliminate QE policies.

What we do know is that currently NONE of the Western/Developed nations fit into this category. In Europe, Japan, and the US the government IS the GDP and their domestic economic growth is anemic. We are seeing a rise of Socialism; even Communism in Europe and Socialism is becoming more accepted in the US as well. Austerity has become a dirty word, which means responsibility, accountability, and liability of national balance sheets and debt are nowhere to be found in the halls of government. Even the Reinhardt/Rogoff paper published in 2010 on public debt and used by politicians as a road map is starting to fall under more and more scrutiny and ignored. Harvard’s Reinhart and Rogoff Publish Formal Correction

Perhaps that will give room to the BRIC nations to take a real lead, they could be the ultimate winners in this Currency War.

Changing the Data to Fight the Currency War

The US government has even taken drastic and radical action to change the matrix of the economic data we use to measure this nation’s economic health and employment. CPI will be changed to the new C-CPI-U, which further lowers the reported rate of inflation. GDP has been radically expanded to include “non-tangible assets”, which will significantly lower the debt to GDP ratio and get the debt/deficit critics off our back, and the Jobless Claims and unemployment (U3) pay-roll and house-hold surveys, models, and “seasonal adjustments” have been changed. All these changes reflect a far better economy than the previous methods have stated. One can’t help but be skeptical and wonder, are things getting better or are all these changes masking the reality that our domestic economy is in stagnation? Economic Lies

These changes will certainly, intended or not, mask the significant ramp up in debt that is being created by the Currency War among central banks.

What are investors to do?

This leaves us as investors in a pickle and it is understandable that so many analyst and economist reflect trepidation about the current market rally. While there are certainly great companies and sector growth, that doesn’t mean everything is a good buy. We are also seeing net revenue contractions. Unfortunately, with no other alternative investments – primarily bonds, it forces investors seeking potential returns into the equity market (for better or worse). We are certainly not in the “crowded” trade syndrome yet, but even Warren Buffett is echoing the concern with his comments about the Treasury bond market.

For now the market continues to be the only place to be, but watch the VIX and for parabolic moves. Hedge your bets and against future volatility. It’s not that the market should see a correction from fundamentals, but rather a trade that becomes crowded on the back of leverage and margin usually doesn’t end with mellow results.

Support & Resistance

INDU 15,000
We are holding well and moving higher. The Currency War has now drawn in the periphery nations that are starting to cut rates and boost their exports. Leveraged assets continue to move into equities, searching for potential. I would mark the 15,000 level as support for now. I also saw some traders wearing the Dow Jones 15,000 hats – I always hate seeing that, don’t cheerlead – it’s a bad omen.

NDX 3000
I really think a boom in technology could be a saving grace for the market, but from where? I reported yesterday on some possibilities and they could be a few months to a year off, but I think we could be in for a tech run at some point. I would expect to see some selling pressure at 3,000, but we could still break through and move higher.

SPX 1600
The SPX is doing well, but the market is staring to move parabolic and that is never a good sign for long-term Bulls. You want a steady climb higher and never knee jerk parabolic moves higher. The VIX has remained in the 12+ range, so I have not become concern about any corrections yet, but I am keeping an eye on the VIX. I would look at 1600 as short-term support.

RUT 950
The RUT has broken through and the 950 level is now short-term support. The 10-year yield is at 1.8%, but I expect the Federal Reserve to keep a lid on that. The “Fix” is in and as Warren Buffett stated, the bonds are “artificially” high because the Fed is propping them up. I think we could move towards 1,000 in the RUT in the short-term. For now the equity markets seems the only place to be and we are seeing more and more get pulled into the market as it continues it run higher. Just watch out for parabolic moves and big drops in the VIX.

How far could the market run? I am not sure; it is moving based on a very limited choice for investors. The Fed is forcing investors into one asset class, equities and it is working. The Fed certainly hopes that the rising market creates the “Wealth” effect and to a certain point it has. However, in order to use this wealth people need to sell those assets in order to spend. The other problem is that the job market is still very weak and domestic growth is even weaker.

We saw the housing boom and boom move parabolic for over a year in the end, driven higher until the shoe-shine boy and coffee-shop gal were the last ones into the market. When there is no one left to buy, that marks the top. We have a ways to go, but unfortunately this time, unlike the housing boom and bubble, there are not as many jobs to fund shoe-shine boys and coffee-shop gals with capital to invest. Additionally, there is limited access to credit and margin for the masses, since many are still under a mountain of debt.

Maybe the Fed will step in, like the Japanese central bank (JCB) and start buying equities and futures to drive them higher? Why not?

Comments are closed.