4 PRIOR WEEK’S MARKET MOVERS: LESSONS AND RAMIFICATIONS FOR THIS WEEK AND BEYOND

Here’s a summary of last week’s prime market movers, their lessons for the coming week, what to do about them, and why any savvy investor needs to watch forex markets

PRIOR WEEK’S MARKET MOVERS

  1. US Elections: Before the results were known, there was caution and speculation. Afterwards, there was concern that the Democrats, the more anti-business/investor party, had retained the Senate and Presidency. The end of the elections also allows markets to focus back on two bearish concerns, the fiscal cliff and the EU.
  1. Fiscal Cliff Anxiety: There were no specific updates about it but concerns regarding the potential growth hit from the sudden imposition of higher taxes and reduced spending were widely cited last week. Optimists hold a deal will get done because otherwise the consequences will be devastating for the US economy and so common sense will prevail. Pessimists point out that the same argument failed to apply to US debt ceiling negotiations in the summer of 2011. These demonstrated Washington’s inability to face hard choices due to political gridlock. Risk assets got smacked and the US lost its S&P AAA credit rating. So much for depending on Washington’s sense of responsibility.
  1. Greece: Both the parliament approved new austerity measures, there was concern that they might not and so invite a cash cutoff from the EU, insolvency, and contagion risk. Afterwards, the same contagion concerns remain because all know Greece can neither pay its debts nor meet austerity commitments, but at least the denial can continue.
  1. Poor EU Data and EU Official Comments: Markets fell following bleak forecasts from the European Commission and ECB President Draghi.

OBSERVATIONS, LESSONS, COPING TECHNIQUES

The odd thing regarding number 3 is that what they said was old news. In accordance with what we’ve warned for the past weeks, we suspect the real reason for the rise in EU angst is that with the US elections over, the Washington-imposed lid is now officially lifted on public discussion of:

  • Greece’s ultimate insolvency: Of course, the real risk from a Greece insolvency and EZ exit is that it would exacerbate fears about Spain, which in turn raises Spanish (and probably Italian) bond rates. That would lead to a hastily conceived plan for…
  • Spain’s coming bailout and insolvency risk

Investors understand that along with ongoing deterioration in Europe, these two putrefying corpses have been locked away in the closet for the past month. As we reopen it, they expect a stink.

Did you notice the uptick in news reports about Greece in after the elections? They didn’t mention anything new, just stuff that had “somehow” been left unmentioned for the past month. Hmmm.

Lessons

This would explain the late week strength in the USD and stock market weakness. In theory, the dollar should have weakened now that the way is clear for 4 more years of Washington’s dollar-dilutive policies.

The fact that it didn’t strongly suggests markets are in risk aversion mode – that the USD’s safe haven appeal outweighed its longer term risks of depreciation. Indeed the only currency against which the USD really fell was the even more safe-haven JPY, which further confirms how nervous markets are.

By the way, here we see another example of how useful forex markets can be for understanding the big picture, even for those that don’t directly deal with them. I discuss in depth how anyone can easily use and interpret forex trends to be a more effective investor or trader in my book.

Regardless of whether you believe these policies are right for the economy, there’s no question they’re terrible for anyone holding dollars.

Don’t believe me, just look at what the Chinese government has been doing in recent years. They’ve been striking a balance between doing all they can to diversify their forex reserves out of the USD and minimize further need for it, while not doing anything too drastic (or public) that would hurt their prime export customer and their trillions of US dollars that they still must continue to hold and renew with new US debt purchases.

Coping Techniques

For the rest of us US dollar based investors who lack the resources and expertise of a sovereign wealth fund, see here for the best guide to a variety of ways to hedge USD risk and protect your savings from the “Obamanable” US dollar.

It’s also useful for those based in Euros, Yen, or other currencies being mercilessly sacrificed on the altar of questionable policies by their central banks.

DISCLOSURE /DISCLAIMER: THE ABOVE IS FOR INFORMATIONAL PURPOSES ONLY, RESPONSIBILITY FOR ALL TRADING OR INVESTING DECISIONS LIES SOLELY WITH THE READER.

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