The proponents of the 'efficient markets' and 'value at risk'; the so-called 'double-dip' and countless other fads seem to have been silenced by the last two years' turn in the markets and the fact that the charts still point towards inflationary pressures building globally. With the advent of another news story is born another convenient escape route for the economic 'expert'.
From my perspective, a little dose of the art of contrarian thinking has proven itself time and time again to be what gives exceptional traders the greatest edge. I'll test this in the months to come.
While there have been significant events that warrant a lot of media attention, there is the looming issue of spending and debt in the United States that has not been resolved at all. A fun way of looking at this is on US debtclock.org where the national debt stacks itself by about $1mil every few seconds. If the US wishes to continue on the path to spending and spending and spending without defaulting on their debt then the dollar has to be devalued to a great degree.
Defaulting on such a debt at this point could have disastrous effects for the whole nation, something that at this point the Fed is not willing to entertain. Runaway inflation at this juncture is not as bad as the alternatives.
Consider these ideas with regards to US treasuries (even without the inclusion of PIMCO's latest move) :
- Every month, the US government requires a certain amount of debt to be sold to facilitate and fund sky-high spending commitments. At the rate of spending, is that now possible?
- The Fed is basically the last significant player still buying up US debt. Who buys when they don't?
- China has already started dumping US debt for gold and other higher yielding currencies; and Japan is going to follow suit as they can't lower interest rates and still own $886 billion worth of low yielding US treasuries. What happens when they have to spend more to fund the latest disasters? Is it possible they will dump their share of bonds?
- The CPI and Money supply charts that I have seen greatly skew the reality of inflation and as traders we look at pre-emptive indicators. Take a look at more Shadow stats. Is it even worth considering a reactive late measure of inflation?
- Consequently, could we be poised for a rate hike sooner than a lot of economists of late have been predicting if the US government needs to sell debt by making bonds more attractive? (ie, push yields up= treasury prices fall)
- Lastly, does the US dollar look like a safe haven investment anymore with all that's been going on in the world in terms of violent events?
These ideas are simply staring many in the face. It will be interesting to see how a few charts perform over the coming weeks. I'm going to be watching CEW - emerging currencies in relation to the US dollar ready to make a decided break higher, and the $TYX - yield of 30 year bonds.
It is my current belief that real inflation has yet to kick off and with a rate hike we are likely to see inflation hedges outperform all fixed income. The dollar is clearly no longer a safe haven investment, and perhaps in the coming months we will see just how dramatic the effects of rate hikes are, potentially resulting in the death of another US safe haven - 30 year bonds.
Watch for a decided break higher in yields above 47-48:
With the yen being poised to depreciate, and touted as a fundamentally flawed economy, one should be thinking of the great value in Japanese equities as a result. EWJ is one way to go, however the exporters in Japan are bound to have a field day as well. Look for the markets with the greatest potential. Don't be surprised if Canon (CAJ) and Honda (HMC) make great strides behind the scenes as they offer great potential. Don't be swayed by the media too much; crisis also implies opportunity.