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EYE-BALL Guru on – The WEEK that might define the future of the WORLD …

August 14, 2011
The WEEK that might define the future of the WORLD …
The past week in financial markets has been the roller-coaster ride that defines volatility – there has never been a market like it in three generations of history. 1929 had its own defining impact – and was superceded by the 2008 GFC – the 1987 crash was the awakening – the Asian crisis  in 1998 was the turning point – the 9/11 crash was shock and horror response – but the last week has increased the emotional attachment that the world population has invested in the market and where it goes from here.

I am appalled at the quality of financial markets commentary offered up during the week – media presenters who have no idea about financial markets and what is involved with what is happening across global markets – offer their opinions as if they think they are and authority – they shove a microphone in front of anybody wanting to sell their opinion for media coverage as if it had some relevance.

Both Free-to-air and pay for view channels are all guilty – and even the appearance of Mr Swan and Mr Hockey offered no intelligent contribution to the debate.

A spin-off from the week was the currency appreciation in the SWISS FRANC(CHF) – and quickly challenged by a chorus of claims by Swiss Central Bank officials and Government Members that they will do everything possible to weaken their currency – even a pegging was discussed – the result was a 6% freefall at week’s end.

A few weeks ago a similar threat was made by Japanese Officials over the then Yen strength – yet in all the time the A$ has been strengthening – since 2000 – where have successive Australian Treasurer‘s been – under ‘dunce hats’ – and where has the Opposition been in trying to make the Government pay for their stupid and senseless policies and inaction to allow the unchallenged A$ increase – nowhere.

Both sides of Government are equally inept of understanding Financial Markets and the cost of the damage the A$ appreciation has caused and will continue to cause.

Smart people in Switzerland and Japan knew immediately the impact to their economies of the cost of a strong currency – all connected with China pegging their currency to the US$ – and are prepared to do something about it – Mr Swan has paddled his duck feet for four years in the quagmire of the GFC and its fallout – claiming all along he knew what he was doing – yet Swiss and Japanese responded in days when their currency became overheated – where are you Mr Swan?

His inactions have left Australia marooned in Currency markets because the A$ is what every investor now wants to buy – a threat to reduce interest rates – and to introduce other measures to weaken the currency and the immediate selloff will ensure Australian business’s get a much-needed stimulation.

In comments made by Dr DoomNouriel Roubini – during the past week – and pasted below – there is much to ponder on what the future holds.

Read it on-line here:

Karl Marx was right: ‘capitalism can destroy itself’, says economist Nouriel Roubini

Andrew Johnson
From: Dow Jones Newswires
August 12, 2011 8:47AM

ECONOMIST Nouriel Roubini, in an interview with The Wall Street Journal today, reached back into history and paraphrased another well-known economist, to best explain what he thought of today’s roiled global economy.

“Karl Marx was right, at some point capitalism can destroy itself,” said Professor Roubini, who is best known for his dire outlook on economic developments which has earned him the nickname “Dr Doom”.

“Markets are not working,” currently, he said.

Prof Roubini, in the wide-ranging interview, said the global economy was at the precipice of falling into a collective recession, led by the US, the euro zone and Japan, and governments were doing exactly the wrong things to prevent that.

To that end, developed economies like the US and countries in the euro zone were implementing austerity programs in order to try to fix their debt-damaged economies when they should be enacting more monetary stimulus.

Because of that, he predicted the world had a 50 per cent chance of falling into a recession, and that the next 2-3 months would reveal which way the global economy would head.

“We are at stall speed right now, and we do not know if we are going to go up, or down,” he said. The world is also operating right now, “in the fog of uncertainty,” he said.

Many market analysts feel last week’s US credit downgrade unleashed this latest round of market volatility, but Prof Roubini said he didn’t disagree with Standard & Poor’s premise that the US was on an unsustainable fiscal path and that Washington gridlock made it hard to achieve fiscal improvements.

Also, “we have destroyed our sovereign sustainability,” in the US by moving from the healthy surplus of the beginning Bush years to the $US1.3 trillion ($1.25 trillion) deficit reality of 2011, with entitlements being expanded, two wars being fought, financial institutions being bailed out, and low taxes being kept, he said.

In some ways, he said, financial institutions had also become even too big to fail in the last few years, which threatened the US economy which no longer has the financial backstop to deal with such potential failures.

“There is a risk that this is the second leg of what happened during the Great Depression,” he said.

Prof Roubini also predicted that “there could be QE3, QE4, QE5,” in the US over the next few years.

“Now is not the time for risky assets,” and that included the euro, he said.

Over a five-year horizon, it is possible that Italy or Spain could choose to leave the euro zone, if they think it would benefit them and they feel they are losing access to markets by being part of the euro zone.

“It’s better to be safe than sorry and I’m putting most of my money in cash,” with US Treasuries a smart bet, he said.

The CHART Perspective:

The Major Equity Indices of the World appear below in long-term monthly charts – [all charts courtesy of Incredible Charts.]

The DJ Wilshere 5000 is an Index covering the US Stock Market as opposed to the DJIA which covers 30 bellwether stocks.  The above chart shows a breakdown – the 38.2% retracement of the move up from the Mar 09 lows is an indicator that the market may work sideways before establishing the new trend …

The DJIA chart above has similar characteristics – the high made in Aug 2009  was not replicated in the Wiltshire Chart – indicating a flight to quality stocks since the GFC – this indicates US investors have remained nervous since the worst of the early 2009 sell-down and cautious in their approach to new investments.  The 61.8% retracement in the GFC crash gave the market some confidence in finding a bottom – the falls in the last 2 weeks have broken down through up-trends and points to further falls.

The AOI chart looks very vulnerable when compared with the US charts – the recovery post 2009 GFC never had the momentum the US markets had – yet this was against a currency that reached a low of A$.60c during the crash and now sits above parity having been as high as A$1.10 – the money has come for the A$ yet it is not in equities – is has mainly been for infrastructure projects in Gas and Iron Ore and Interest related investment as part of the ‘cash and carry’ trade in A$ based on higher interest rates and the resource/risk trade boom.  There is tremendous downside in this market given our reliance on the continuing resources demand.  This is at risk given the slow downs forecast in Europe and Nth AMerica – China will not have the markets to sell their wares thus lessening the demand for our resources – also Brazil have a number of mining  projects coming on-line in the near term in competition with Australian exports.

The Japanese Nikkei Index chart is reflective of their 20+ year stagnant economy.  This chart does not show the 37000 level reach post the ’87 crash and into the early 90’s – this chart is headed lower – the 8200 lows during the earthquake aftermath earlier this year is the first target – a breach of the 7000 levels during the GFC is highly likely – all Japanese investors have invested off-shore and continue to do so basis the stagnant domestic economy – interest rates have been stuck at between 0%-1% for a decade and with those types of returns and the lack of real recovery in the equity market – the Central Banks keeps throwing money to try and stimulate their economy to no avail.

The Chinese Shanghai index is also similar to the Japanese market – China is dependent on foreign exports to sustain its domestic output.  For 20+ years and since their currency has been pegged to the US$ – China has taken full advantage of their position – their cost of production is the cheapest in the World – mainly due to labour oversupply – and they are selling into the premium markets – demand in these markets is about to fall sharply and this will place pressure on China to boost internal consumption to maintain its growth – any slowdown in China will hurt the forecast growths for all other Nations – China holds all the Aces in this trade war basis the large advantage it has over competing Nations – all engineered and played for … they have just simply outplayed and taken advantage of their third world rating to their own advantage.

The Hang Seng is very much the same as the AOI – its filled the 61.8 retracement from the GFC lows and is now headed back down to re-test new lows – this market is a speculators dream – more so than the Shanghai Index –

The French CAC market is in trouble also – the rumours over French Banks and the downgrading of their sovereign debt is the overhang – talk of Germany and France leaving the EURO and leaving all the others to a sinking ship is a macro discussion – why did both France and Germany allow all the other weak economies join the EURO Zone on equal footing is a better discussion?The chart above looks awful  and lore pain is around the corner.

The German DAX chart is the strongest of all the European charts – the double top structure with a rising wedge from the lows gives upside potential in technical terms… but there are many other factors at play and if Germany is the only solvent Nation across Europe – how long can it survive as the pillar …

The UK FTSE is also in trouble – the recent civil riots has placed them on a par with Nth African Nations when it comes to civil unrest – it is a shock to the UK population but their reaction as announced by the UK Prime Minister is to make the guilty pay – such hipocracy from someone who only a month ago was in the witness-box being grilled over connections with News of The World Editors and faced accusations of political favours – who is the worst perpetrator – does PM Cameron feel no shame in his statements about the looting and riots that took over his Nation whilst he was on holidays …  Germany, Switzerland and the UK were the only Nations to stay independent and out of the EURO Zone – it would appear that they are now better placed than those within the Euro Zone.

The FTSE Chart is not the worst – but still looks dreadful – it is also headed lower …


Market Appraisal:

The up-down up-down of last week has markets exhausted on the emotional barometer. Markets cannot sustain the level of angst and heartache they endured last week without taking a breather to recharge – of course if the news continues to feed the frenzy – then markets will keep responding.

This week will be a recovery week unless more bad news drops in – when I say recovery a much less volatile market where the 700 odd point ranges of the equity markets will be more subdued – the DJIA averaged 400 million shares a day last week – up from the 160 million in the weeks and months previously – this obviously added to the volatility and price action. This week will be slower and more respectful – less panicked.

The debt markets will be in focus and the 30 year US Long Bond auction late last week did not go off so good – some 40% at the high-end and 10 pips above the previous days close at 3.75%.

The US downgrading does not mean a great deal in the bigger picture – look around the world and tell me if any other Nation is a better credit risk – or has the capacity to provide the debt securities the globe is looking for in troubled times – expect the debt market to be bid this week as the cash that flowed from equities last week finds a short-term home.

The European debt crisis will be more dominant and this will allow American markets to breath for the first time since the debt-ceiling – and in that light expect a subdued rally early in the week.

The enormity of what happened last week and the long-term direction of the markets as a result all point to a realignment of investor confidence in equity markets – the GFC is not over – it never has been – the markets are responding to the Political void in Global Leadership – Obama’s need to step-up is required more now than it ever has – his weakness in this debt-ceiling will never be forgotten and expecting him to have the Democratic nomination unchallenged at the 2012 elections is not a given.

PM Cameron is also under threat – and PM Gillard is similarly challenged – there is weakness in all Global Leadership in response to this crisis –



  1. Ghost of yoda
    August 15, 2011 at 12:09 pm

    US Treasuries a smart bet says Dr Doom? Where does that leave us?
    Yes I do not disagree with you in what you have written, the economic comments at all levels leave much to be desired, not the least with the CBA CEO Ralph Norris (who is paid 16million a year and is retiring before the Storm trial takes place, so he does not have to purger himself again) saying that the economy should be Ok and there is no need to drop rates! Well Mr Norris and the RBA for that matter the reference to a 2 speed economy is beautiful rhetoric, but the real peoples’ economy of small business has been in recession for the past 12 months and is hiiden by the “other speed” and let me tell you the building industry is also in recesssion. Our politicians are so reliant on the numbers that the research supposedly provides that they are blind to the real issues. Australia can still be saved if the powers that be were smart enough to recognise and understand that these things are and have happened, and will only get worse with the current “blindness” being dealt with using “myopic” vision. To quote a well know philosopher “in the land of the blind, he with one eye is King until someone comes along with two eyes”.
    Let me tell you, there “aint anyone around with 20/20 vision in the current kingdom”.

  2. Warwick
    August 15, 2011 at 11:02 pm

    Well said Yoda. Is there any answers? Will Ralph Norris be held to account? Is the 2 speeds one for those still preying, and the other for those praying?

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