The Swiss franc is counted among the top-5 reserve currencies in the world, alongside the US-dollar, the Euro, the British pound, and the Japanese yen. The Swiss franc holds this top distinction, even though the Swiss economy does not find its place among the top five economies of the world. Instead, its annual output of $488-billion of goods and services ranks as the world’s 22^nd largest.

Operating under the elixir of ultra-low interest rates, and flush with trillions of fiat currency at their disposal, courtesy of the world’s top-20 central banks, hedge funds and banking Oligarchs are once again making risky and daring bets in commodities, emerging markets, junk bonds, and blue-chip stocks, defying gravity with trades that would have been un-thinkable just six-months ago.

Who says central bankers can’t inflate an economy to prosperity? To head-off the worst economic downturn since the Great Depression, the “Group-of-20” central banks have slashed interest rates to record lows, while politicians have funneled trillions into the coffers of the most powerful Oligarchic banks. So far, the cost of mopping up after the world financial crisis is a staggering $12-trillion, or equivalent to around a fifth of the world’s annual economic output.

The hefty price tag includes capital injections pumped into banks in order to prevent them from collapse, the cost of soaking up toxic assets, guarantees over debt, and liquidity support from central banks. Most of the cash, about $10.2-trillion, was spent by the so-called developed countries, while the emerging countries spent only $1.8-trillion, mostly in the form of liquidity injections into banks.

Bullish investors betting on a V-shaped recovery for the global stock markets are convinced the worst of the global economic crisis is over, and furthermore, expect the emerging economic giants - Brazil, China, India, Russia, and Korea (BRICK) to become the locomotives of global growth. With China and India leading the way, the notion of decoupling - emerging markets advancing faster than developed markets - and even pulling the G-7 economies out of recession, is making a comeback.

Global speculators plowed a record $35.5-billion into emerging-market stock funds in the first half of this year, faster than at any other comparable time on record. By contrast, traders withdrew $61-billion from developed stock market funds over the same period. After all, its simple logic to invest in a stock market index with a faster expanding economy, such as China and India, rather than invest in a contracting economy, such as Japan, experiencing its worst downturn since WWII.

The S&P-500 Index, a global bellwether for the world stock markets, extended its best five-month winning streak since 1938, by advancing through the psychological 1,000-level, and is up nearly 50% from its 12-year low set on March 10th. The S&P-500 gained 7.4% in July, its best monthly performance since 1997, even as average earnings per-share tumbled -32% and sales slid -16% from a year ago.

Industrial commodities, often viewed as barometers for global economic trends, have also moved sharply higher. So far this year, copper has soared by +96%, nickel is up 62%, and zinc is +50% higher. China, which buys two-thirds of the world’s seaborne iron ore shipments, boosted imports 30% in the first seven-months of this year to 353-million tons, lifting its spot price to $91 /ton, up from $60 per ton in February. Crude oil rose above $71 /barrel this week, doubling in value since December.

Viewed from the outside, trading in the arcane world of foreign exchange might appear to be quite glamorous. However, attempting to anticipate the next major move in the Euro, yen, or British pound, can be injurious to one’s mental health or pocketbook, especially when schizophrenia often rules the day. Yet despite the enigma that surrounds the $4-trillion per day FX market, when staring at the weekly price charts, the outside observer will notice established and methodical price trends in the currency markets that can last for weeks, months, or even years.

The Australian dollar is increasingly popular with currency speculators, because of its volatile price swings, a relative lack of central bank intervention, and lends exposure to Asian tiger economies and the “Commodity Super Cycle.” The “Aussie” dollar is currently the sixth-most-actively traded currency in the world, behind the US-dollar, the Euro, Japanese yen, British pound, and the Swiss franc, and changes hands in roughly 6% of worldwide foreign-exchange transactions.

In the midst of the longest and deepest, post World War II recession, America’s financial position with the rest of the world has deteriorated sharply. Three decades of massive trade deficits have turned the United States from the world’s top lender to the world’s largest debtor, and dependent upon the whims of the so called emerging nations, laden with huge foreign currency reserves, to finance the bailout of Wall Street Oligarchs, and President Barack Obama’s social programs.

Foreigners own roughly half of the US government’s publicly traded debt, or $3.47 trillion, representing nearly 25% of the size of the US economy, the highest level in history. If foreign lenders were to significantly reduce their purchases of US Treasury notes, without even dumping their current holdings, US long term interest rates could zoom higher, and the US dollar could crumble.

A three-month-long upturn in global stock markets since March 10^th has sparked a wave of optimism that the worst bear-market since the 1930’s has finally come to a merciful end and the rocky road to economic recovery lie ahead. The S&P-500’s stunning +42% rebound from the March lows, has been dubbed the“Green Shoots” Rally, - by Federal Reserve chief Ben “Bubbles” Bernanke, who on March 15^th, predicted that America’s worst recession since the 1930’s, would likely end this year before a recovery gathers steam in 2010.

“The green shoots of economic revival are already evident,” Bernanke told CBS’s program "60-Minutes". “Much depends on fixing the banking system. We’re working on it. I think we’ll get it stabilized, and see the recession coming to an end this year. We’ll see recovery beginning next year, and it will pick-up steam over time,” Bernanke predicted. Since then, the combined market capitalization of the NYSE and Nasdaq has rebounded by roughly $1.6-trillion, while stock markets worldwide have recovered $8.7-trillion of their losses from the eighteen-month bear market.

Everything depends upon proper judgment. Of ten people who examine the same chart, or listen to the same speech, each person may well understand it differently - perhaps only one of them will understand it correctly. How then should traders interpret the shape of the US Treasury yield curve, which has gone parabolic in recent weeks, steepening to its highest level since 2004? Similarly, in Australia, the Treasury yield curve is at its steepest in history.

Not surprisingly, Federal Reserve officials were quick to provide a few explanations. “In recent weeks, yields on longer-term Treasury securities and fixed-rate mortgages have risen,” said Fed chief Ben “Bubbles” Bernanke on June 3rd. “These increases reflect concerns about large federal deficits, but also greater optimism about the economic outlook, a reversal of flight-to-quality flows, and technical factors related to the hedging of mortgage holdings,” he explained.

News that North Korea’s mercurial leader Kim Jong Il authorized the detonation of a nuclear bomb on May 25^th, comparable to those that obliterated Hiroshima and Nagasaki, barely caused a ripple in the global financial markets. Japanese and South Korean stocks initially fell in a knee-jerk reaction, but soon recouped most of their losses, as traders shrugged off the nuclear fallout, - figuring it was just a harmless display of Kim Jong Il’s temper tantrums that erupts once every few years.

When foreign markets failed to take Pyongyang seriously, Kim Jong Il upped the ante by firing the Musudan-Ri missile, on which N-Korea could ultimately place a nuclear warhead, with a range of 2,500-miles. Pyongyang then fired three shorter-range missiles into the Sea of Japan. But global stock markets are so intoxicated with super-cheap money injected by the G-20 central banks each day, that even nuclear bomb blasts didn’t rattle the post March 10^th “green-shoots” rally.

<<Return to Part I

Already, the "green shoots" of future inflation are sprouting forth in the commodities market. Base metals, energy, grains, and fertilizer are charging higher, spurred along by China’s great sucking sound, as Beijing pursues a major effort to stockpile raw materials, with prices hovering near multi-year lows. Beijing is spending 4-trillion yuan on infrastructure, to bring its roads, ports, airports, power-generation capacity and other infrastructure systems up to speed.

Each month, the US Treasury publishes its International Capital account (TIC) which foreign currency traders and bond dealers use to gauge the flows of money from around the world, into and out of the US capital markets. The demand for a nation’s bonds and stocks, combined with international trade flows for goods and services, plus behind the scenes intervention by central banks, all act in concert to influence the foreign exchange market which handles $4 trillion per day.

The release of the TIC report often sparks a flurry of trading activity in the foreign exchange market, due to speculators seeking to earn a fast profit. However, the initial knee-jerk reaction to the news headlines, can be very misleading, and often isn’t long-lasting. For instance, the US Dollar Index, measured against a basket of six currencies, defied conventional logic in February, by climbing +2.7% higher, even in the face of a net outflow of $91 billion in the TIC account.

<< Return to Part 1

“Green Shoots” Sprouting in Indian Economy

An eight-week-long upturn in European, Japanese, US and emerging stock markets since March 10^th has sparked a wave of optimistic commentaries in the financial media, that the worst bear-market since the 1930’s has finally come to a merciful end, and the rocky road to recovery lies ahead. Since hitting a 12-year low on March 6th, the key global benchmark – the S&P-500 Index has rebounded by +34%%, while the KBW Index, measuring 24 US banks, doubled off its lows.

Since the historic 1987 stock market crash, the Federal Reserve has responded to every recession in the US economy by slashing interest rates, and funneling massive amounts of money into the hands of Wall Street’s aristocracy, - the ruling class that dominates the two political parties in Washington. The Fed’s cash injections have usually found their way into assets, including commodities, stocks, and mortgage-backed securities, and often fueling speculative binges into stratospheric heights.

But on March 12^th, US President Barack Obama warned a group of chief executive officers of the Business Roundtable, that the Fed “can’t continue with its policies of endless cycles of bubble and bust, and instead, must build a new foundation for future economic growth.” Obama blamed the lingering banking crisis on “reckless speculation and spending beyond our means, on bad credit, inflated home prices, and over-leveraged banks. Such activity isn’t the creation of lasting wealth. It’s the illusion of prosperity, and it hurts us all in the end,” Obama warned.

There are times when it pays to be a contrarian, to think outside-the-box, to bet against the conventional wisdom of the crowd, and ignore the chatter of the media. Usually at key turning points, and the beginning of important new market trends, the fundamentals do not explain the behavior of the market. It is at these critical junctures, where sudden shifts in price trends can occur, big percentage gains or losses are registered.

Sometimes, traders begin to notice that price swings in the marketplace are reacting contrary to what the news headlines are conveying. For instance, on April 1^st, the Dow Jones Industrials futures surged 550-points higher from their lowest level of the day, following news from ADP, that 742,000 American workers had lost their jobs in March, a staggering decline, with 5.7-million workers collecting jobless benefits. April Fools!

Desperate times call for desperate measures. As the global “credit crunch” has grown increasingly severe, central bankers are examining the Great Depression of the 1930s for possible parallels that are relevant to today’s situation. Most worrisome, is the synchronized meltdown of the global stock markets, which had wiped-out $32-trillion of wealth, on top of another $10-trillion in losses in real estate.

Many of the world’s largest banks have become “zombie banks,” and are no longer able to survive on their own without artificial life support from the federal government and the taxpayers. Banks are holding hundreds of billions of dollars of toxic assets in their vaults, with no idea how much they are worth, and this uncertainty has stopped banks from lending to businesses and individuals, resulting in the most severe credit crunch since the 1930s Great Depression.

“De-leveraging” and “Risk Aversion” are the buzzwords cited by many currency analysts, to explain the puzzling strength of the US dollar, which has climbed by more than 20% since last July, despite the widely held view, that top Wall Street banks are insolvent and only surviving on artificial life support, and with the flow of credit badly constrained, the US economy is spiraling towards a “Great Depression.”

Sir Josiah Stamp, former chief of the Bank of England in 1927, warned:

If you want to continue to be the slaves of bankers, and pay the cost of your own slavery, then let bankers continue to create money and control credit.

“Accepting losses is the single most important investment device to insure safety of capital. It is also the action that most people know the least about, and are least likely to execute. The most important single thing I learned is that accepting losses promptly is the first key to success. It’s a great mistake to think that what goes down must come back up,” warned Gerald Loeb, the "Dean of Wall Street", in his epic book The Battle for Investment Survival, last copyrighted in 1965.

“In all cases, where actual losses are involved, I’m inclined to say that when a new investment has shrunk by 10%, it’s time to stop, look, and listen. I think it usually ought to be sold out, and the loss taken. I’m almost inclined to say, dogmatically, sell it out before trying again,” Loeb advised his readers, concerning wagers in the stock market that turn sour, due to unexpected and unforeseen events.