The first week of August, 2011, was certainly one of the wildest ever. The US markets are now in an official correction. The worst daily and weekly losses in some time come just weeks after some of the best daily and weekly gains ever. Oh, wait a minute. Those ‘best days and weeks ever’ came at the end of June. The con men that run the market now understand that monthly statements come out at the end of the month/quarter and it is easy to fool all the stupid people with a burst of buying just in time to goose the statements. Well done, gentlemen! Of course, the pronouncement of the ‘best ever’ and so on only occur in bear markets. So, those of us with any brain circuitry left can confirm that we have now entered the next phase of the bear market that never ended from 2001.
Sure, the manipulators of markets and politics have conspired with the thirsty for gains investors to drive the indices higher. But, that drive was in the front seat of the inflation bus. Now, there are so many things working to drown the markets it is hard to know where to start.
Readers can read all about the noise of the day but come Monday, we will find out how the markets respond to the credit downgrade of the US. There will no doubt be plethoric ‘experts’ babbling about this action but here is what I think is important.
The chart I have included for this week is a 7-year chart of the Euro ETF FXE (black line) and the US dollar (USD red/black line). Very simply, the stock indexes are now another commodity driven by federal reserve intervention. Commodities are generally driven by currency valuations. As seen in the chart, the dollar and the euro have been vacillating back and forth over time. Their lines spread apart and then eventually re-connect. The chart indicates that the two lines should soon begin moving back together. That means the dollar should strengthen over the coming months while the euro weakens. If so, stocks will decline into a bearish trend.
However, we don’t know how the currency market will react to the US credit downgrade. We also don’t know how many trillions the central banks of Europe and the US will throw at the shill banks in an effort to extend the mirage of a bull market. We don’t know what lengths these bankers are willing to implement to carry on the illusion of economic recovery so the stupid people don’t panic. No matter what, the ECB and the Fed will be very busy in the coming weeks so they could greatly disrupt reality and logic. Watch the currency charts closely going forward.
Least we all panic and buy into the notion that interest rates will be on the rise, consider this. Derivatives and swaps are the currency of the central banker. Swaps insure the payment of interest coupons. As interest coupons rise, it makes sense that the price of swaps would also rise. The buyers of sovereign debt buy this debt knowing they can insure their investments with such swaps. Much like adjustable mortgage rates worked great as long as interest rates fell, swaps work great as long as interest rates aren’t rising. Should a bond selloff accelerate and drive up yields and future debt coupons, swaps will get prohibitively more expensive and eventually curtail the profitability of this practice. It was only a few months ago that the ECB raised interest rates in the EU to 1.5% and signaled more of the same. Some pundits suggested the same trend would manifest itself in the US. Now it seems that the ECB is perhaps even stupider than the Federal Reserve and will have to embark on reversal of policy. Central banks will have to keep buying sovereign debt for which they will trade swaps to generate the money to pay the banks to park their money at the central banks. Otherwise, the house of cards collapses. Where do the central banks get their money for this? Readers should check their pockets and wallets. Etched on the inside it says, “The Fed was here”. Maybe the stock market already senses this?
7 years: USD in red/black, FXE in black
Chart courtesy StockCharts.com
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.