Weekly Wrap
ANNOUNCEMENT
I am now writing articles for Interactive Investor and every Monday I cover a major UK share in Chart of the Week. Here is my latest article on Anglo American.
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Market Commentary
ECB unleashes big bazooka – now stocks will fall hard
OK, Mario surprisingly pulled few punches on Thursday and rewarded the Southern states sovereign debt gamblers by promising to pay top dollar for their bonds. I wonder if a dickey bird whispered in their ears months ago what the plan was? Either the prior objections of Germany to QE was just a smoke-screen, or that old smoothie Mario has a sterling silver tongue.
Nevertheless, the news is now in the public domain – and stocks can now resume the Big Bear market. There is no way the real EZ economies can be upped by any amount of money printing. Will Juan or Maria suddenly find any of those shiny new euros in their bank accounts next month? Of course not – they will be tucked away and stuck there with the hedge funds/banks with no productive home to go to.
Who in the EZ wants to borrow to splurge or actually invest in the real world economy with its many onerous and enterprise-sapping EU-imposed rules and regulations an arm long? Will the French, Spanish and Italians (or the debt-averse Germans) suddenly be in a position or want to get into hock for another new car/boat/second home/new furniture?
The basic real-world fact that very few discuss is this – final demand is weakening because social mood is turning negative starting in the EZ. That is showing up in spades by falling consumer prices (remember the very first lesson in Econ 101? The one that central bankers have forgotten?).
Greece is the first of many to experience this deeply negative mood – and with the pivotal elections this weekend, next week promises to be tumultuous in the markets – perhaps even out-doing last week’s ECB catalyst.
There is just too much stuff chasing too little cash – and too little desire of consumers to add to their debt load.
When consumers are feeling perky and confident (positive social mood), they buy more stuff – and vice versa. Since modern economies’ GDP is made up mostly of consumption (except China, of course), weak demand means weak GDP growth – and we shall see this play out in the next few quarters.
The ECB has shot its wad and is out of ammo
So now, the ECB is out of ammo to influence EZ economies and the inflation/deflation rate. Before Thursday, they strung the markets along teasing them higher. But now, it’s sell the news time.
And the other take-away is this: everyone expects this QE action will boost share prices. The media is full of such bullish stories. I totally disagree. Markets have priced in this expectation fully and are poised to decline very hard.
Over time, this move will be seen by the market as the last desperate policy act of an impotent central bank – and react accordingly by taking risk off and selling down shares.
Bullish sentiment towards stocks has been in the stratosphere for months. I read of one survey of money managers where not one of them forecast a down year for the S&P. How’s that for group-think? I will take the other side of that bet, thank you very much.
US stocks are especially vulnerable with the soaring dollar, cessation of QE, and over-stretched valuations especially in tech. Not to mention record low cash reserves in mutual funds, record high margin borrowing on NYSE, and so on. The scene is set for an almighty collapse in shares. The oil market is showing the way.
Here is the hourly S&P chart showing a very accurate hit on the Fibonacci 78% level:
The scene is set for another massive decline starting next week.
So the battle between the forces of inflation (QE) and deflation (supply/demand imbalance) is joined. Guess who will win?
There is so much rubbish written about good/bad deflation and many even aver that falling consumer prices is a disaster! It is only a disaster for those highly leveraged and over-borrowed (i.e. most nations and large corporations qualify here). For we peasants, it is a small blessing to be able to expect a little price stability after decades of rampant government-forced inflation that has eroded savings – and pushed more into the next higher tax band while doing nothing for standards of living.
We are truly in an Alice in Wonderland world of finance when stable prices is considered a mortal sin.
The artificial central bank engineered low interest rate environment is not encouraging bodies to de-leverage (pay down debt). No – in fact, debt is increasing especially in large US corporations who are using cheap money to fund buy-backs and pay dividends.
But with US money supply growth weakening (stronger dollar is testament), a liquidity crunch is approaching – and the house of debt cards will begin to topple over. Keep an eye on the junk bond index, HYG! The scramble for dollars has only just begun which I forecast many months ago.
Likewise, governments are increasing debt as they kick the can even further along the road in an effort to keep the public voting for them. Ominously, UK tax receipts are weak compared with the ballyhooed ‘jobs growth’. Many are turning to self-employment in desperation and wages/salaries remain under pressure. Most small businesses fail within 1-2 years.
Governments are always fighting the last war – and the ECB is no exception. Japan is a telling example of how gargantuan Keynsian money printing and ZIRP simply does not work to stimulate the economy. Despite massive interventions, Japan’s GDP is no higher than it was twenty years ago!
If this quack snake oil remedy did actually work, governments all over the world since time immemorial would have discovered this was the magic solution to perpetual wealth creation and we would not have seen a single pesky business cycle ever, such as materialised in 2007/2008 in the credit crunch, or in the Great Depression of the 1930s.
No, a day of reckoning will arrive to re-establish the founding principle of economic life that has been forgotten in the great casino that is finance today. It is that productive work creates savings (that pay a real interest rate) that can be directed into even more productive endeavours – all directed by the operation of the free market, not by incompetent and self-serving bureaucrats/politicians/central bankers who are the true enemy of the public.
A very recent example of their incompetence lies at the door of the Swiss central bank who removed the euro peg because it was afraid the coming QE blitz would weaken the euro even further and make their peg undefendable. Only at the end of a massive multi-year euro downtrend can a central bank finally recognise the euro’s weakness that finally take action! When the Swiss did this a week ago, I felt then that the euro was due a massive rally. I do not think I will be disappointed.
The dollar is poised for a huge pull-back
The euro plunged to a low around 1.11 on Thursday. That level happens to be the 62% Fibonacci retrace of the entire move off the 2000 low (0.82) to the 2008 high (1.60). This low has a very high chance of standing for a long time (weeks/months). All of the ‘bad’ news is now out and the stage is set for a mammoth short squeeze. This could take EUR/USD up by many handles.
I am looking for a long entry. Similar in GBP/USD, which should see an even bigger rally. Here is the daily chart of GBP/USD showing a superb tramline pair – and which will guide my trading:
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Gold in third wave
Gold has hit an important target at the $1300 area. I had a heavily-edited Trader email on it yesterday, which did not accurately reflect my thoughts. Let me explain my position.
We may see a pull-back from here – although it will gain support from a risk-off falling stock market in the near term. But my longer-term view remains bullish.
But as a swing trader, I must take the present opportunity to take some profits off the table at the $1300 area.
There is no doubt that its recent near-vertical rise in the face of a rising dollar is a signal to all markets that there is trouble brewing and that risk is being taken off the table. Whether it can maintain its rapid ascent when the dollar pulls back is an open question.
Have a great weekend!
