Forex Market Analysis 29-09-2010

Long Term Perspective:
                The last big drop of the dollar grew concerns about the US economic and budgetary situation. The dollar could be in a downward spiral in the long term caused by the repeated Quantitative Easing. Investors expect the Fed to increase its balance sheet by at least half a trillion dollars by November [1] (see survey). The next Fed minutes are going to provide a clearer perspective. By increasing its balance sheet the Fed is boosting the US Bond market. In fact, many market watchers do believe for many good reasons that the Fed will always prefer inflation to deflation. The current policy is proving by multiplying the Quantitative Easing that they will use all available resources to avoid a deflation that could put America back to recession. Meanwhile, The secondary effect of such a longer than expected stimulus is a long term downward pressure on the US dollar and a systematic risk of hyperinflation.
                Another important issue rises as the global community could question the US dollar as the world's primary reserve currency as well as to be the international pricing currency for commodities. The political pressure between the United States and China regarding the currency market could fuel eventual conflicts during the G20 as U.S. lawmakers believe that China should revalue the Yuan by as much as 40 percent[2].
                After a big mediatized decline from October 2009 to June 2010, the Euro has passed the stress test of the European government debt crisis in the euro zone (Portugal, Ireland, Italy, Greece and Spain). Chances are that proposals concerning a change in the status of the reserve currency and commodity pricing currency surge as China and others have been calling for a new world reserve currency[3]. Even if this is not official, other countries such as Mexico have been diversifying their balance sheet with other currencies to limit exposure to the US Dollar to a certain extent[4].
                That being said it is very unlikely that the shift away from the dollar is to happen in the short term. Meanwhile it is important to consider that G20 in collaboration with the IMF might be working towards a gradual change in this domain possibly by implementing a basket of currencies (i.e Euro, Dollar ,Yen , Yuan...) ,commodities or an index as accepted reserve and mean for commodity pricing. In such a scenario, world political hierarchy and economic changes could accelerate with the trend of a growing share of emerging countries in the global economic landscape. This could lead to a big downward pressure on the US Dollar.
                Even if the long term perspective on the US Dollar can be shown as bearish, the Euro area has its own difficulties and continues to deal with the recent government debt crisis. Because of the current levels of the US Dollar, technical analysis and midterm perspective show a strong probability of a large drop of the US Dollar especially relative to the Swiss Franc (CHF) and to the Yen (JPY). In the longer term, The Australian dollar (AUD) and other "future safe heaven currencies" such as the Singaporean dollar (SGD) could gain power as well.

Medium Term perspective:
The recent decline in the Dollar has raised some concerns regarding other countries' ability to export.  There is recent speculation that the BOJ could ease next week[5] .We can talk about a competitive depreciation de facto weather it is in purpose or not. The process can easily be seen with the evolution of gold prices. The following charts show the overall downtrend of major currencies relative to gold.

Weekly bar chart - semi-log scale. Gold in Euros, U.S. Dollars, Aus. Dollars, and Yen. All charts with 20 week (100-day) Moving Averages.
If this process continues we can imagine the currencies going back and forth relative to one-another while the basket of the major currencies continues to depreciate relative to Gold. This could consequently boost commodity prices in the midterm and remove deflation fears associated with a double dip recession by many economists leading to a inverse risk of hyperinflation.

Short Term Perspective:

                Technical analysis suggest a possible upward move for the US Dollar in the short and medium term. This could be triggered by new mediatization of Europe's sovereign debt crisis. We could be seeing growing concerns within the next week about possible Greek debt restructuring[6] and Ireland following Greece's steps[7].

© Joé Thierry Arys Ruiz 29/09/2010.

Please feel free to contact me

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UK: +44 7 88 088 32 14

Adapt Chapter 9 bankruptcy code for Greece. Financial Times, Sept 28 2010.
[7] Markets fear Ireland is another Greece. Financial Times, Sept 27 2010.


Double Dip Recession or Hyperinflation - FED up the Economy


Are Double Deep Recession Fears Unjustified?

Concerning equity I think last few days plunge is a short term bear movement, the reason I believe this is the dominance of negative headlines focusing on fears of a double deep recession. Now don't get me wrong, those fears are justified but if you remove the feelings and the negativity and look at the real numbers you still see positive growth and a new German model surging as an example for the whole euro area.
Is it true that if we do the inflation adjusted growth you can have in some cases negative numbers and I want to underline the point that inflation adjusted growth should be the benchmark but I think this issue of inflation covering GDP growth is going to emerge during the fourth quarter rather than today. We are not yet in this position.
Obviously we are going to collapse the Monetary system with big changes within the world currency hierarchy and a government debt crisis to be handled. But honestly everybody has this debt and currency crash idea on the back of their minds, this is no more secret, the key is to know the timing. I don't think it is the time now for fat fingers to pull the trigger. I think the market is going to go through a last rollercoaster ride before we really crash.

The Fed is acting short term
The Fed extensive quantitative easing cumulated with the Fed basically buying its own debt is feeding the fear sentiment because the the fact and the matter is that they are acting like they were back in the middle of the crisis.
This is a short term move for treasuries and for debt obviously we saw the treasuries outperform the stock market and it may continue within the next few days or weeks but there will be a time when the monetary policy will have to go back to normal with an exit strategy and at this point there will be a huge problem with this debt. The Fed is trapped by its own mistakes and is keeping throwing the boomerang harder and harder but the solutions are only short term. The problem now is that the actual solution is in itself a systemic risk.

Global Growth
Now We have to think globally, the global GDP is going to be positive certainly with emerging markets becoming consumers and not only producers. This is because of three main factors: the first is that they don't have that much of a debt relative to developed countries. The second is related because of they do not have the issues relative to the government debt, they have a certain margin of debt they can still use; they are not thinking about increasing taxes. Whereas in the other hand the developed countries will have to lower their leverage and among the parallel solutions they will have to increase taxes among other things. The direct consequence is a transfer of direct investment from developed to emerging countries where there is basically everything to build. The third is that their currencies, emerging markets currencies are still pretty low which allow them to continue to export.
So in a way I am positive on the overall economy but there is really an issue in regards of a possible hyperinflation in countries like the US. On the other hand Europe and more specifically Germany is trying to limit this effect with the initial idea of having a slow but secure growth by being more rigorous and I believe "the German way" is becoming an example for other EU countries, as a result we have seen an outstanding growth of 2.2% (April-June equivalent to a 9.1% a year!).

To conclude I am positive on the overall stock market but in the case of the us I believe that the upward potential is not necessarily based on growth but rather inflation as I explained on the article the stock market inflation periodicity theory. The other thing I don't say in my article is that developed countries corporations are heavily invested in emerging markets where they obtain a large part of their growth and actually intensifying their foreign operations. So I believe US and European corporations results are going to be excellent but this not necessarily means new jobs in the home countries. that is why we see corporate results above expectations but still record unemployment numbers.


Political Toughts - Blame it on the People/Gov not Banks

It seems that lot of people have a real issues with banks. I see Banks here, Banks there; Banksters everywhere, conspiracy theories...

Subprime Crisis Cause?= Banks

National Debt Cause= Banks

Money Printing= Banks

There is not enough lending to businesses=Banks

There is too much lending to insolvent people=Banks

I am sorry but from where I stand, politicians were the ones who forced banks to lend to insolvent people so "everyone can own a house" this is the fault of irresponsible people who borrowed more than they could afford thinking that housing will always go up.
Public spending is the wrong allocation of money spoiled by Keynesian/socialist politicians themselves voted by the irresponsible,selfish and economically non-educated people seduced by the idea that the government can do a "stimulus" but the money is never back in other words more spending than income or even economical profit.
the whole inflation issue is caused by the same policies that put interest rates artificially low so everyone can get in deep debt.
People ask the banks to lend businesses and then they blame them because they lent to anyone. It's easy for the Media, politicians or anyone to blame it all on banks. But the truth is that stupid people and politicians are the real cause of this mess. Truth is Banks did what they where told to do.
So blame it on the government that pushed banks to lend to anybody without verifying solvency. Blame it on the banks who agreed to do so but there is also a share for the people who acted stupid living life they couldn't afford. But obviously the politicians won't go out to say: "Hey voters, it's your fault!"... I just found that video that resumes exactly what I think.

The fact and the matter is that Banks did not want to lend to insolvent people initially but then politicians forced them to lend, basically they told them: "Lend to anybody, I don't know how but do it" then banks who knew it was madness did not wanted to carry the risk so they asked the investment banks to securitize them so they did, mixed those bad loans with the good ones with financial engineering and asked the rating agencies to rate them AAA. Time elapsed and people started to speculate and bought houses they couldn't afford and were seduced by housing sell forces... The market began a mess and rating agencies saw the average loans get more and more speculative but instead of downgrading them they review their notations so a AAA would have been a BBB years later and so on until AAA really equals FFF (joke) but they had pressure because if they would have rated the mortgages as they should have done, the whole market would collapse so they didn't... Now investment banks could sell back those bad loans (made by the people) to the people but also to other countries in Asia and Europe, and everybody was happy as long as the housing prices were going up, but suddenly the house of cards collapsed.

Now nobody wants to admit it was their fault and certainly not congress, neither the people nor the financial institutions. Not only the USA ruined themselves but their ruined other investors in EU and Asia by selling them those high yield toxic papers.

Look we all know the system is unfair and yes corporations rule the world but hey it is what it is and I can't see how we can change it. All you can do is acknowledge and protect yourself.

I wish there was a fair system with high social mobility, I wish the developed countries did not take advantage of the emerging countries. Because if you want fairness then wealth should be transferred to the exploited emerging countries. In order to get equilibrium developed countries would need to review their standard of living to the downside (wages...) and it may actually happen but look at Greece, I don't think they are willing to do so. So as long as there is an unfair system I will rather sit back and watch.


I don't think Anarchy promoted by conspiracy theorist is a better solution. Change should be made but with an order and peace, the problem is that if the UK overtax the banks and corporations, they will move to a less regulated place and indeed create a worse situation (Unemployment...), people should understand that. I am not saying I agree with that, I am just saying that is how it works.

See:Davos- Welcome to the Real Financial Paradise

What we need is a world regulation for finance but a regulation that applies everywhere, because if not, then the money will go where it is not regulated, for now each country is sovereign so you can't force them to regulate their market so in a way a world gov/regulation is what could save developed countries to keep their wealth.

Concerning the Greek problem:

Briefly in numbers:

  • Greek government workers received what are called "13th- and 14th-month salaries."
  • retire with pensions at 53!
  • Government spending like stupid is not even addressed in the article
What is the result of those charming socialist/populist politician policies?

  • Government spending accounted for 50 percent of GDP!
  • Greece's deficit-to-GDP ratio from 8.1 percent
  • Income was only 37 percent of Greek GDP
  • Greece is in a recession and inflation is already high
Now, don't tell me "poor greeks" I am not saying that all became lazy and unproductive , there is certainly honourable Greeks but I feel ashamed for them because they will have to pay for their pairs and the previous irresponsible generations.
I wonder how Germans feel, because they have been working hard (retirement age at 67 and debating  to 69)and being  responsible and now they are going to ask them to work more for Greeks. And They are the bad guys! For god sake!
Sometimes I feel the world is upside down.

I would like to hear from Germans what they would say if I tell them that they don't have to worry about their tax money, in few years politicians in Greece will continue their Keynesian measures. Who do you think they will listen to? the debt holders or the streets?

The crisis is not the problem, the crisis is the solution of this mess, by trying to retain the monetary/gov debt collapse they are just pushing it further and making it bigger, the problem is that the ones who are ending paying it are the honest people who worked hard (in this case the Germans) for the lazy ones, that's the whole problem about socialism and human nature.

This is the typical example of a person that earns 1,000$/month go to the bank and ask for a million dollar home to the bank, the bank refuse and then a politician shows up and says "vote for me and I will force the bank to lend you and I will issue government debt to give you the money" (but he don't tell that they will have to pay one day, if not them, their children), the person vote for the politician and gets his loan part from the bank, part from government....

It's the story of the irresponsible guy that got loan after loan living above his means and then refuse to pay and say: "It's the banks fault because they lent me the money!" Now somebody have to pay and they will ask his neighbour to do it. I personally think it's the irresponsible guy who should be blamed because he is stupid as F***. and I feel angry for the guy who has to pay. The banks are just intermediaries and try to take advantage of the situation so it's pretty smart even if not very moral to take advantage of the stupidity of the majority, but you can't prevent people from acting stupid.

About Money Supply

"Money supply needs to increase to cover interest; money supply should only grow at the rate of the economy to avoid boom/bust and inflation"- Theory

Absolutely, but here once again the problem lies in human nature and speculation. In practice we cannot increase the money supply properly because we don't know at which exact rate the economy will grow. Also, some other metrics make economist think that "it's always better to supply more than not enough money, because an increase in money supply can stimulate growth".

I personally believe that since accurate financial planning is hard to obtain the best solution could be to simply let investors carry the risk, even if that is precisely what causes bubbles, the difference here is that I would let the bubble burst and not try to retain it so the risk taker gets busted (ai. insolvent or risky investor) hoping that:
1- in the process Wealth created remains ex: infrastructure, tangible materials etc.
2- Prices readjust
3- Some kind of Creative Destruction emerge

I am not saying it is the utopic solution, I think is the more realistic/ feasible one, in my humble opinion.
The main problem are:
1- There will be sharp periods of rise and fall, (but normally the system would improve each time)
2- People who cannot adapt are left behind, in some kind of economic Darwinism,.
3- The ones with the money who anticipated the crash but also the prudent that didn't speculate, are left with an advantage.
4- Wealth could be extremely volatile and mobile.

The 4th point involves a possibility of the developed countries to be owned if they speculate too much and so the not leveraged countries could own after a crash.

By the way this is exactly what is going to happen, bad debt leveraged countries= countries with high debt and low growth= Developed countries (USA,UK,Spain...EU) will collapse if they continue to increase their debt making the problem bigger instead of "deleveraging", and then not-so-leveraged countries= Emerging, China, would own. In a way it's just and fair because they have been exploited and couldn't profit for a long time. But in the short term I doubt it will happen, but probably the transfer would be progressive. In other words, leave the developed countries go to the new business friendly places (what companies are and will do). We can expect the new industries to develop directly whith new technoogy focusing in renewable energy already. So in a way, we have reasons to be optimist on the global economy but aparently many people should adapt and work rather than complaining.



12-04-2010 Forex forecast on AUDCAD review AUDUSD GOLD

*Remember, in the long term: We are bullish on Gold and bearish on AUDUSD as the US monetary policy normalize (raise interest rates) and the RBA stabilize it's interest rate.

AUDCAD: Target: .9470 Support: .9220Resistance: .95 and .9620
For the next week we still expect the federal reserve to raise it's discount rate so the spread between the discount rate and the fed funds rate would go back to 1%, back to normal (before the quantitative easing) to further normalise it's monetary policy.


Fed Moves Emergency rate

The Federal Reserve raised on Thursday 18th the discount lending rate by a quarter point (from 0.25 to 0.75). The futures of the stock market overnight plugged directly after the announcement and it sent the Asian stock market to negative territory -2%.
After a long period of low interest rates inflation will be the threat for the next 2 years, The quantitative easing strategy is come to its end. The symbolic raise in the discount lending rate is the first milestone for future raise for benchmark interest. In the short term, we expect chairman of the federal reserve Ben Bernanke to ensure that the raise in the benchmark interest rates is not imminent while it actually is. As soon as we see low unemployment we can forecast a raise at any moment.

"Back to Normal Business"
Investors consider the world's financial system has been saved while there has been no substantial change in the financial system, investment banks and speculation can be back to normal business until the next bubble explodes.
Is it good news or bad news?
The change is actually some good news for the financial industry:
* This confirm the consolidation of the financial industry
* Financial institutions do not need "a rescue or emergency rate" that low since the profits and overall confidence between banks improves.
*Now the financial industry is stabilized, investors expect the real economy to confirm improvement with better results translated into corporate results.

Form a Forex perspective:
This is a normal move after the big fears of inflation due to the quantitative easing for too long Federal reserve has printed too much money.
Now we are going to fight inflation. If the inflation is as high as I think, we can expect the US Dollar to drop long term with short term consolidations every time the fed move the rate higher like on Thursday 18 feb, even if the raise was exclusively applied to the discount rate, investors can imagine a further tightening monetary policy.

Conclusion: We can see short term strength in the US dollar but probably long term fall.

If Central banks start to move rates independently, then we will be able to take carry trade opportunities each time. However, I suspect the Fed and ECB to raise fund rates in coordination in a similar fashion they lower them during the crisis.
*The Euro remains weak and maybe too dangerous to play against the dollar at this early stage after the Fed move. I would not recommend a buy in EUR/USD yet.

*However, a good technical opportunity can be to short USD/CHF.

Capital Markets
While I forecast a relative growth for the capital market indexes. I don't believe it is going to be a growth fundamentally based on the economy performance but the "Stock Market inflationary effect". Headlines will probably look for good news as a justification for the coming highs in the stock market while most of the primary effect will be inflation. We may see an relative growth in the stock market with corrections each time we see a raise in interest rates. The growth in interest rates will probably be gradual and carefully planned in the long run, as longer as it can be.
This is a typical effect, basically, we see cheap money (low interest rates) invested for a low price in the stock market (from March to April) then a short stabilization effect for the economy to respond slowly (April to February). Following we may see a lateral/down market due to profit taking and a remaining uncertainty for the next month and half. Then a sustainable growth in price with rhythmic correction each time interest rates are set higher. This last period is expected to last "as long as it can be sustainable for the borrower" i.e until the share of the interest payment in the annuity is higher than the amortization.
Strong inflation would be publicized as good inflation generated by an improvement on the economy and the stock market going up with financial reports justifying it but the actual reason is inflation and the consequences of the quantitative easing. (See: Stock Market Inflation Cycle, previous post).


The Stock Market Inflation Periodicity Theory

(Click the image below to enlarge)
*Model by: Joé Thierry Arys Ruiz © Traders & Analysts C.O. 2010 - All rights reserved

Phase A) Apocalypse: Crisis, Panic and Drastic Monetary Policy
After a Crash, Central Banks starts to lower interest rates drastically to stop the panic and incite investors to invest in the stock market motivating risk appetite with a low revenue in bonds. The problem is that confidence is gone and there is panic everywhere, the stock market plunges with short term picks/highs each time there is a drastic move to the downside of interest rates.

Bottom: Bottom in interest rates, Undervaluation and hope

Once interest rates can't go lower i.e near 0% , and the stock market has completely crashed. An undervalued stock market opportunity is pointed out and hope is feeding risk appetite. "Interest rates can't go lower, companies are fundamentally undervalued and the risk/reward worth it."

Phase B) Bounce:
Despite an economy still fragile, the stock market rises sharply principally because of two main factors:
The first is the tendency of the market to oversold a situation in advance in case of a further crash. The equity market often being used as a future indicator for the economy, oversold and overbought situations remain based on discounted future events. Equity is trading near par value and fundamental investors start to raise the buy flag.
The second and probably most important factor is the anticipated inflation who begins to surface, due to a weak monetary policy. Strong hands (Big Bankers, Institutional Investors, money managers...) enter the market: "If it doesn't climb for the economy it will climb because of inflation".

Phase C) Commercialization: Consolidation
Stimulated by a first intensive bounce of the equity markets, weak hands (non institutional investors, buy and hold public funds...) start to enter the market motivated by a strong marketing from institutional sales. Meanwhile, fears of inflation surge and uncertainty for the economy remains, strong hands take some profits and part of the paper is transferred from strong hands to weak hands. A short period of sideways/down fluctuations is the effect of these fears. Sales forces says: "Every drop is an opportunity to buy".

Phase D) Duration:
1-Monetary Management:
This is where Central Banks have to dose between inflation and growth. Central Banks have to prepare an exit strategy to remove the surplus of money that has been injected trough low interest rates. The whole strategy consist in slowly raise interest rates to fight inflation without stopping economic growth.

2- Deficit Management:
From a government perspective they have to deal between economic growth and budget deficit. After rescue plans, Keynesian policies, bailouts and stimulus packages, the budget deficit has exploded and the whole issue is to restore a balanced treasury by both reducing public spending and raising taxes; all without impeaching economic growth.

Phase E) Exhaustion
*Monetary bubble and the monetary inflation prime:
If both monetary and deficit management is well done then a relative long period of sustainable growth is possible. Meanwhile, by repeating the process from phase A to D over and over again, we notice that the monetary mass has been growing exponentially while the economy has had its ups and downs in a linear fashion. Failing partially in both removing the money that has been "printed" and restoring a government treasury balance simply leads to the effect of adding a monetary bubble to another. The consequence is that each crisis becomes stronger. The same happens for private and public debt, part of the debt and monetary surplus is cumulated as the process is repeated. Precisely this remaining cumulated monetary mass constitutes  what we can call a "monetary inflation prime".

*Slow Growth:
While the effects of the several monetary and government stimulus becomes more or less effective. The stock market has been pushed in phase D by general confidence a better shape of the economy, and the consequent inflation generated by growth.
However the previous inflation prime, the inflation created by the quantitative easing, can reduce economic growth.

Top: Interest rates are too high and the share of the interest payment in the annuity is higher than the amortization of the good itself. The investment for example mortgages becomes unattractive since the situation could be similar to a perpetual debt.  In this situation, credit delinquencies and default in payment surges resulting in another credit crisis. Bond market yields are high and risk appetite is reduced driving equity down.

*Model by: Joé Thierry Arys Ruiz © Traders & Analysts C.O. 2010 - All rights reserved

Next Crisis:
If the monetary inflation prime is low, then we can barely notice it's negative effects on the economy. Then, the inflation rate released is published and promoted as "a purely natural effect of a strengthening economy". The problem Surges when this "monetary inflation prime" is high enough to entirely compensate nominal growth. This leads to a void or negative effective growth (inflation adjusted GDP) then we could see a Monetary  and/or Government Debt bubble explosion.

Click the image Below to enlarge the forecast:
Updated Forecast as of : 12/07/2011

        (Click the image above to enlarge)


Speculative EURAUD

While going throught a decending channel, a counter trend but maybe effective move can be played. Positive european news about the Grece can lead to a sharp rally of the euro with the sellers covering their short positions. This is a risky, since maybe too early move but it can be payfull using good risk management by seting a stop in case bad news surge.

Buy Stop: 1.53056
Stop: 1.52230

The opportunity of the day USDCHF

Employment numbers in Switzerland better than expected+ Uncertainty in the markets + good potential Technical pattern if 2 candles close under the next resistance.

(Click the image to enlarge)


Update on "Competitive Depreciation" EUR/USD

After breaking an extremely important support I have expanded the "Competitive Depreciation Band" It seems that a new area of support has been referenced and hold on for the moment.
The oversold situation seems to slowly change directions. Meanwhile the volume that pushed the Euro at his lows was high, we need a strong volume on the way back too, if we don't see a reversal move with strong volume we could go further down for the euro.

(Click the image to enlarge)


Technical Analysis CAD/JPY

Click the image to enlarge

Technical Analysis EURAUD



Euro/ Dollar: The Depreciation Race

Last pressure on the Euro was due to the market's fear of Greece default and Spain deficit exposure in the media. Meanwhile Joaquin Almunia, the UE commissionaire for the Economic and Monetary affairs completely swiped any Greece default posibility and denied any expulsion of Greece out of the Euro zone. It is understood that Papaconstantinou, Greek's Finance Minister, will present a deficit reduction plan to ECOFIN and he has declared that Greece will be able to find funds via the monetary market with its 10 yr bond now trading near 7%.

Strangely, Greece with 12.7% of GDP of deficit estimates to come back to Maastricht 3% criteria  in 2012 while Spain with 11.4% of GDP of deficit, estimates to be back to norms in 2013. Both countries will present a rigorous deficit reduction plan with the following principles:

- Freeze of Public spending. Notice it also implies reduction and less hiring of state employees.

- Tax increases.

- And finally, legal retirement age pushed from 65 to 67 for Spain.

Obviously all those plans are based on the perspective of a very high economic growth but with unemployment over 18% in Spain and 9.8% in Greece. We may question if the tax increases for the little active workers left would be enough, we also have to consider an  eventual social disappointment from tax payers.

Meanwhile, quoting Joaquin Almunia: "There is no way Greece default" which make many investors think there could be a EU support in case of default. We can suppose the first step would be an absorption of part of the Greek or Spanish debt by the Euro community and a European stimulus supported by the European Central Bank. In the worst case scenario the International Monetary Fund would intervene to avoid a systemic risk.

In fact, a depreciation of the currency is needed to lean the deficit.The question being who will depreciate its currency faster USA or EU. We see very clearly here a "competitive depreciation" we forecast, either on purpose or not, it is there.

That being said we must acknowledge that even if the euro convergence criteria ("stability and growth" in french) is not respected, at least there is such a "pact" in Europe. While USA has no control on their deficit and recently the senate approved a debt ceiling hike: pushing the deficit limit to 14 Trillion dollars of debt.

The Story is not over, today it's Greece, tomorrow it will be USA deficit and we probably will hear more about Spain after, the competitive depreciation ball bouncing between Europe and America.Until China reacts... to be continued...


Euro vs. Dollar Battle = Gold Wins

This last Correction in Gold could be an opportunity, here are some of the fundamental reasons:

1- As long as the Dow Jones index stays under 10,500 there will be Market uncertainty and investors could find refuge in gold..

2- New Government spending can lead to a 14.3 trillion deficit pushing USD down. This move could be consider as "a crime against the dollar" and a total loss of confidence in the currency which historically leads to a "fly to commodities". This would also support the thesis of a "Competitive depreciation" (under Forex).
REF : Democrats Propose $1.9T Increase in Debt Limit , abc News

3- Fears of inflation: If you open an economic book one definition of interest rates is "the cost of money". Interest rates at 0% just means money worth nothing. The rest is only details.
After the nomination of Bernanke as "Printer of the Year 2009" he will probably be reappointed and let Wall Street get cheap money a little bit longer.
Article: Ben Bernanke- Person of the Year 2009 - TIME

Meanwhile, the federal reserve disclose ambiguous reports about an eventual increase in interest rates, such announcement would definitely dive Gold prices down. The truth is that it is a typical manoeuvre to create the illusion of a controlled exit strategy and a slow increase in interest rates while they won't.

All those reasons leads me to the conclusion that the dollar will drop at term. As I explained in my 2010 forecast, USA and Europe will alternatively release currency depreciative news in the competitive depreciation race (described under FOREX in my previous post 2010-What's Next?). Thus, I consider there could be great swing trading opportunities in USD/EUR pair. However I consider Gold could develop a more sustainable growth.

What would make this analysis invalid would be:
- Better than expected job results
- Raise in interest rates (very unexpected)
- Default fears in Europe (Greece or Spain)

EUR/USD Technical Analysis:

(Click image)

Gold Technical Analysis:


Davos- Welcome to the Real Financial Paradises

Obama's Too Big to Fail plan limits proprietary funds to be invested in the market. This regulation (if voted) will not "de-leverage" the market as some analysts say but create a huge transfer of trading activities from the USA to Tax havens and have the inverse effect since there will be a massive creation of Hedge Funds (Alternative Investment funds) in the Asian and Middle East financial market drove by Star Traders and bankers avoiding hostile Regulations from Europe and USA. This Movement will be expanded with all the Financial regulation going on in France and the UK. (See: France joins UK to target traders in bonus tax move).


OECD and G20 Unco-operative Tax Heaven meeting was a political joke. Nothing was done, I studied the case when it was still fresh but to make the long story short here is a simplified chronology:

2nd of April 2009: At the London G20 summit "Tax Heavens" were listed in 3 categories: Black, Grey and White: From the beginning we notice that Hong Kong and Macau are not listed at all, thus they are not concerned. Notice United Arab Emirates are directly in the White list. We can also notice the special treatment of Singapore, Switzerland and Luxembourg in the "Others Section". Here the Official Report from the OECD.

7th of April 2009: Less than a week after , tax heavens do not exist any more: Except Costa Rica, Malaysia (Labuan), Philippines & Uruguay(still on the black list), there is no other country in the black list, they all have been listed now as “jurisdictions that have committed to the internationally agreed tax standard, but have not yet substantially implemented”(Grey list).

For the record:

A week later, having found its name on the grey list, Switzerland reportedly announced sanctions against the OECD, namely, blocking some €136,000 it was due to pay the organization. The Swiss also threatened not to pay their annual €6.5 million fee to the OECD and even to block any progress on further cooperation with China, India and other emerging economies....Here is the Source

20th January: You can check it yourself where we are with the PROGRESS REPORT by the OECD. Notice yourself from an official report that only few and insignificant countries are under the label "Tax Heaven".

How could this happen?
Without going too much into the details, countries originally in the "grey list" made Tax Information Exchange Agreements (TIEAs) with each other so they are out of problem.
I though the purpose was to eliminate tax heavens. Now Tax Heavens are a united conglomerate since the banking secrecy is not abolished and now they have to take care of each other's frontiers to ensure their information is not released meaning tightening relations. Here you can find the updated reports and progress.

From the very official Tax Information Exchange Agreements, we do not find any agreement made by Switzerland or Luxembourg while they were suppose to do so. Switzerland, United Arab Emirates, Luxembourg and Singapore are just not there.

- Hong Kong , Singapore, Luxembourg, Switzerland and United Arab Emirates are the Legal Tax Heavens of the G20. To know if a country is a legal tax Heaven, just type it's name on the search bar of this Report. If it's not there, then it is a good place to hide!

- Money has no country, religion or religion whatsoever.

- Any Financial Regulation will make investors, bankers, traders and hedge funds go find a more friendly place: Hong Kong, Singapore, Switzerland, United Arab Emirates and Luxembourg.

*All OCDE official information about Harmful Tax Practices is public and can be found here.



"Ceteris Paribus"
This is the formula all economists use and they are right to do so... The question is: What would happen if all things were not equal? or what if there is another parameter we did not consider comes into place?.
In the financial markets, random parameters (news...) is the rule and not the exception that's why when making an assumption, good economists and all analysts should end up by saying "Ceteris Paribus" which can be simply be translated by: "Unless I am wrong".
One of the best investor's qualities in the financial markets is the ability to recognize quickly when they are wrong. This is why, every time I do an analysis or a scenario I will try to input a failing scenario particularly in technical analysis.


Too Big to Fail is Too Big to Exist?

With this new action from Barack Obama trying to scalp "Too Big To Fail Banks" into several smaller entities, he is touching a very sensitive area. Overall this would be a segmentation in several years converting Universal Banks (entities that include Investment risky business with Retail banking) back to separate entities.

For a little bit of story, since the Financial crisis, major Investment banks disappeared due to substantial losses, therefore they got bailed out by the government and/or merged with other banking institutions. Such as the case of Merill Lynch "inserted" into Bank of America. I said inserted because it was a government/bank deal since BOA bought it with government help/TARP.

Only Goldman Sachs and JP Morgan are still almost purely Investment Banks (in the US), therefore they should be less touched by this Obama project. That being said, Goldman Sachs could be a gold mine the 2 things that prevent me to invest in GS: 1- The stock price too expensive (and it's all abut price) 2- Can be brought down pulled by the Financial sector (SKF) since it has been lagging in this rally.

Back to the Banking reform, by doing this separation Obama's idea is to protect the "population money" from Retail banks so they are not being at risk in case of a substantial loss from the Investment section.
The market sell off was due to several fears:
1- Government intervention is almost never welcome by Wall Street
2- Banks will have to cover their positions invested in Hedge funds, themselves heavily invested in the Markets.
3- As I said in my previous post The Economy is Not improving that much, it was more a Stock Market Inflation effect
4- The market rose substantially since March leading to very important technical levels, investors took the news as an excuse to take profits.

Finally, the concept is a good thing overall, Too big to fail is definitely a big problem and this is what they should have done before the crisis. By being too big, corporations can exercise pressure upon government and thus force them to bail out. Being sure of this eventuality, those corporations would tend to take risky positions and show a lack of responsibility other words: "Too Big to Fail is too Big To Exist".But isn't it a inevitable effect of our Capitalist system?
Never-mind, even if the entities are "legally" separate, it won't change the fact that Important Bankers will have contact with each other and still be integrated in some way. There will still be ghost inter-connexions between Investment and Retail banks, just like there is ghost connexions between Investment banks and Hedge Funds.
The question is will it pass?
As I say, It doesn't matter they still will be doing the same thing and if a new financial crisis comes, "too big to fail or not" everybody will plunge since all interconnected.
It is another fancy regulation that will probably pass but with a foggy content just like the fake Tax even measure by the OCDE Since nobody is in the Black list any more (See: Davos- Welcome to th Real Financial Paradise).


2010- What's Next?

2010 Forecast
Well what's important it's what's next. In 2008-2009 We have transferred the problem from banks to Governments. Now we have to know if Governments can pay, every payment in gov debt is based on expected growth or revenues.  As an example the US debt is close to 12 us trillion. Which is 40,000 per American, more than 110,000$ per tax payer (http://www.usdebtclock.org/) and US citizens should pay it today since it's growing with interest; this is a big issue.Consequently, governments will have to raise taxes.

US and European countries sponsored by China (Hold most of the US Debt) can simply not pay their debt at this level. They either restructure it in some way so they don't have to pay a part of it and find new resources to be able to pay it. Here are the several possibilities to do so:

1.a/ Default:
Unlikely  at a Federal level this would be a catastrophe that would afraid investors, this option is then not the most appropriate for obvious reasons besides a peaceful relationship between China and USA and their relatives alliances ,practically the whole world.

1.b/ Not paying part of it
By allowing few but not all the Municipal bonds to default, the Federal government can lease it's debt as long as the headlines do not make people panic so much, so this method can be used in a silent manner. For Europe it's more difficult to hide a country such as Greece or Spain eventual default so we can imagine the European Central bank in coordination with the IMF to bail out. That makes me think that EUR/USD will play yo-yo during a little bit more time following the headline, one day the US bonds the next week a EU country eventual default. For swing traders it can be a playground.

2/ Rise Taxes
This is the inevitable law of budget deficit and Keynesian stimulus packages, a political bluff to raise government popularity.The bad news is that usually those packages have a short term perspective and when it's time to pay, raising taxes is then inevitable leading to a lower consumption and a counter economic situation. May they invent new "eco-taxes" or whatever, the money will be used for government to pay back their debt.

3/ Depreciation
The monetary system is in danger, with China not respecting the free flow rate of exchanges and Central banks inventing funny words like "Quantitative easing" (stands for printing money like idiots) the problem is that there will be a point when inflation will show it's nose and there will be no other choice but to substantially raise interest rates that's when this cumulative bubble explodes. We have seen that over and over again but the Fed still don't understand , adding a crisis to the previous one until the whole system collapse is that the exit strategy? Should we experience Darwinian or Schumpeter's creative destruction instead by not bailing out? I don't know, we never tried. In both cases it will be a "bloody mess".
Today, money is nothing more than paper with the rest of confidence you still want to give it since it is no more backed by gold. Back in the Bretton Woods system gold was 35$/ounce. Today it's 1100$, we either needed a lot of gold lately or that's inflation (actually both).

If somebody tells me "Cash is King" I would reply "King has no clothes".The bottom line is that hyperinflation is knocking at the door and a depreciation is a fancy way to pay China with toilet paper, unfortunately robbing all citizens from their purchasing power in the process.

4/ Pay with a Mix of Assets and Cash
This may sound ridiculous but China played dumb but they are not. They are aware of this situation so what's the solution for them? Well asking for assets. In a way they already did by robbing patents from western companies, they are paying themselves with technology and now they even start to take over companies instead of paying for the useless government debt. The method: hold government debt to have a position of power and then manipulate government so they can buy everything, if you don't trust me take a look at what's happening in Africa.

We can deduce a fall in the USD that we have already seen, so maybe EUR is going to continue climbing but we may assist to what we can call "Competitive devaluation", you heard it right. After the USA, everybody launch stimulus packages and bail outs to devalue their currency. A strong Euro is no good for exportation for Europe so we will probably see a second wave of stimulus package and a bail out of nations like Greece and Spain so there will be news about random spendings or fears of default, the whole purpose is to not allow the Euro to climb too high, too fast. The question is "Where is Maastricht criteria?". For me the best currency is the Swiss franc CHF but they possibly launch stimulus packages to compete in devaluation as I said. That being said, Switzerland is maybe the only country in which the stimulus would really work because of based in Structural and not conjectural projects, competitive areas like Research and Development, biotech etc. So CHF is for me a stable currency, maybe not a rising one but at least a stable one.

Stock Market
Hyperinflation is the next issue. It will stop the economy so growth expectations won't match. Meanwhile we have seen the stock market rising pushed by cheap money (near 0% interest rates) but the companies (assets) are not really improving that much as far as their tangible value. This is the definition of what I call it  "Stock Market Inflation".
The Stock market as an indicator of the future of the economy confirms my fears of hyperinflation.
So what is going on?
The stock market rise not because of the prospective economic growth, it rises because currencies worth nothing, and when you need more currency to buy an asset (inflation) you see the asset price rise artificially. So yes the stock market may continue it's ascendancy but I would be more interested in seeing the Stock Market / inflation performance. And since I don't believe the biased inflation numbers released I would like to see the Stock Market/ Gold performance.
How much the stock market has really since March?
-here is the answer, FLAT! if not underperform..(click the image)

Old Supremacies are Dead
Power is moving, Old supremacy continents are dead and big investors play by the rule "Money has no nationality" when the orange is pressed they move on to the next place following this criteria: Growth, no taxes, security.

I would opt for a spot where all Big fortunes will want to go to hide. Somewhere with tax protection, non revolutionary environment, neutral and safe. Maybe Switzerland considering the double potential, Currency+ Stock Market but it maybe a too old trick.
Switzerland: EWL (MSCI Switzerland Index)

Everything converge to a decrease in confidence about currencies and a "false bullish market". Why false? Because in the developed world, as long as we see quantitative easing, high unemployment rates and low growth (PIB inflation adjusted). There will be nothing but stock market inflation and possible inflation that would actually not make you money, just in the best case scenario, preserve it.
In the near term Gold is the real protection, untill we see real growth. We can meanwhile see some corrections when fears of raising interest rates.
To invest in Gold:  GLD (SPDR Gold Shares), DGP (Gold Double Long).

Oil: We are probably experience what we have seen in 2007-2008. Oil prices go higher. Once again, headlines will say that this is a good sign and that this is because of the confidence in the economic growth is back BUT NOT. Oil will go higher because money worth nothing and investors will look for commodities to protect themselves. So maybe the economy will support oil, but most of it will be speculation just like in 2007-2008 in the early days of the financial crisis. If bought at a good price, oil could be a good alternative if the economy do recover it will push higher and the other way, it may be used as a protective asset commodity. Again oil sometimes moves dramatically because of professional speculators so always remember to put the stop losses.
To invest in Oil: USO (United States Oil), UCO (Ultra Crude OIL),

Emirates: I know they were having trouble lately but I think this is an opportunity not something to be scared about. Actually, I think the biggest investors use to let market crash before buying things a lot cheaper and for me the Dubai crisis is the perfect example of what big investors would buy. Large Banks are under attack from the perspective of increasing taxes from governments, and as I said Money has no country or religion so the one move you could do is to buy Emirates cheap. I will probably write more on this subject in the next days but Emirates are definitely a good investment.
To invest in Emirates: EEM (Emerging Markets)

For those who like Risk
As I said China is not going to let the fake payment happen, they are already getting their money back with technology when implanted in China and they will buy more western companies. The problem is the systemic risk of political revolution so play china can pay but it's risky. Following few ETFs:
- FXI (China 25), XPP(China 25 Ultra), EWH (Hong Kong index), FCHI (China Hong Kong listed)

You may want to have a diversification with India: EPI (Wisdom Tree India Earnings)
or a mix: FNI (Chindia) --> for this one research must be made first but it seems to be a good performer.

Please comment I would be happy to be contradicted and find arguments to make me think.

By the way I am currently looking for a job in the financial arena if someone knows a position please feel free to contact me at: JoeThierryArys@hotmail.com


TTACO - Traders & Analysts Club Online Opens!

This is the inauguration post for Traders & Analyst CO
We hope this will be the beginning of a great adventure in the Investment World.
Sincerely yours,

TTaco: Joé Thierry Arys Ruiz