What Do the Markets Think of the War?

by: Greg Silberman

I was going to open this piece by telling you that the US will be joining the front lines in the Middle East [ME] imminently.

I was going to back up my sensational claim with charts showing the US economy on the brink of failure. My argument was going to be that financial problems at home would prompt the US Government to play the Patriot Ticket.
To divert the public’s attention away from their perilous financial situation the Government would become MUCH more active in the Middle East and the MUST WIN War against Terror.

Alas, those unforgiving and unemotional charts just won’t comply!

Some markets are definitely oversold. Most are up against support or resistance. But there is no evidence of a BIG break (up or down) just Yet.

One of my favorite forms of analysis is called Intermarket analysis made popular by the Technical Master John Murphy. Intermarket analysis is a methodology used to form an overall market opinion by looking at multiple markets and their inter-dependencies.

That said, let’s take a quick tour of the financial world as at 7/28/06 - which could quite possibly be the eve of World War 3.


Excessive liquidity has been driving commodities, emerging markets, housing and almost every other asset on the planet higher since 2003. Let’s begin by taking a look at 2 major sources of liquidity.


The ratio 3 month T-Bills to 10 Year Treasury Notes can be used to determine monetary conditions.

When the chart is rising (3 month yields are rising against 10 year yields) the yield curve is flattening. Liquidity is falling and monetary conditions are becoming tighter. People are less inclined to borrow short and invest long as the margin for profit lessens. The term used is a flattening of the yield curve.

When the chart is falling monetary conditions are becoming easier as the spread between 3 month and 10 year yields widen. The term used is a widening of the yield curve.

Current Interpretation: The chart is up against major resistance. The RSI (green line, bottom of chart) did not confirm the new high. It looks as if resistance at .99 may hold and the price should retreat making monetary conditions easier.

How much easier?

Nobody can say for certain but a logical move would be to resistance at around .90 to .92 (green rectangle).


The 10 Year Yield looks as if it put in a short term top at 5.245%. Both MACD and RSI did not confirm the new high in price (red circles).

10-year yields are now up against strong support (at around 5% - green line). If support is breached, the next MAJOR support will be at 4.6% (green lines).

In order for the yield spread in Chart 1 to fall, 3 month T-Bill Yields must fall FASTER than 10 Year yields. This almost certainly indicates that the Fed has finished raising interest rates.

I expect a moderate amount of monetary easing over the next 2-3 months as an Economic slowdown is priced into the market.

Another MAJOR source of liquidity has been the Yen Carry Trade [YCT] which I discussed at length in a prior article. An institution will borrow money at near Zero interest rates in Japan and purchase assets that will hopefully return more than the interest rate on the loan and the fluctuation in the Japanese Yen exchange rate.

A rising Yen makes the YCT less profitable and therefore contracts liquidity.

Note on Chart 3: If the price is rising, the Yen is getting stronger vs. the US$.

The Yen looks as if it has or is very near a bottom. The Yen has rebounded off good support (green rectangle). The recent price low was accompanied by MACD and RSI non-confirmations (red lines).

I think probabilities now favor a higher Yen. By the way, the monthly Yen chart looks extremely Bullish to me.

Remember, a rising Yen means the YCT is less profitable and contracts liquidity.

Overall Liquidity Picture

Based on the above, I would say the combination of a widening yield curve (increased liquidity) and a rising Yen (decreased liquidity) is a WASH. I don’t see a flood of money entering the markets for the next 3 months.

I think most markets are sensing the absence of significant FRESH money and will be Range Bound for the next 2 to 3 months.





In the absence of any news I think probabilities favor most markets to trade to the upper end of their ranges over the next 2-3 months. One thing is for sure, ranges don’t exist forever.

The Middle East

I personally believe the situation in the Middle East will escalate into a wider conflict. It seems to me that none of the parties are in a rush to end hostilities. To my mind, if things don’t become better they invariably become worse (God forbid).
For what it’s worth, I read the Debka site for more insight into the Middle East. I don’t know whether their information is accurate but if it is, they aren’t exactly painting a rosy picture. The key to any escalation will be signaled beforehand by the price of crude.

The point: Watch Oil!

I wanted to show you something surprising in this article. Something unique. But it’s just not there. I RESPECTFULLY YIELD TO THE MARKET which is clearly saying, “We’re Not there, Not Yet!”

Author's Note: This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.