Seeking Alpha

Nadeem Walayat's  Instablog

Nadeem Walayat
Send Message
Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the... More
My company:
Market Oracle
My blog:
marketoracle.co.uk
View Nadeem Walayat's Instablogs on:
  • Britain's Inflationary Debt Spiral
    Over the coming years we will witness the systematic destruction of the British currency as witnessed through the inflation and commodity / asset price data as the Inflation Mega-trend starts to unfold following the asset price destruction induced Deflation of 2008 into early 2009.

     

    This is the next in a series of articles as part of my inflation mega-trend scenario that I am in the process of writing up to complete before the end of December and to finally publish as an ebook that I will make available for free. Ensure you are subscribed to my always free newsletter to get the latest analysis in your email box and check my most recent articles on the inflation mega-trend at walaytstreet.com

    UK Debt Crisis Deepens as Government Plans to Borrow Another £510 billion

    The Labour government announced in the recent Queens speech with much fanfare a LAW to halve the public sector net deficit over the next 4 years. Lets leave aside for the moment that the Labour party is confusing calling an objective a law for purely political electioneering purposes in an attempt to place a burden around the next Conservative governments neck. The objective of the Law is to halve the deficit and NOT to pay down the total accumulating debt. What this amounts to is that the annual budget deficit of approx £185 billion for 2009/10 being halved to an annual deficit of approx £93 billion by 2013/14 which suggests Britians National debt is expected to increase by a further £510 billion to an approximate total of £1,300 trillion or 100% of GDP by 2013/14.

    The below graph illustrates the updated Government projection for the annual Public Sector Net annual deficit against Alistair Darlings November 08 and April 09 targets, as well as my original estimate of November 2008 (Bankrupt Britain Trending Towards Hyper-Inflation? ) that remain unchanged.

    The target PSND of £1,300 trillion would approximately equate to 100% of GDP by 2013/14. This is against my original target as of November 2008 of £1.48 trillion by the end of 2003/14 at a projected 114% of GDP.

    Therefore there is nothing announced in the governments targets nor any change in economic circumstances that warrants amending the total liabilities target of £4.75 trillion by the end of 2013/14, which confirms that Britain remains firmly on the path of a probable decade of economic stagnation coupled with high inflation i.e. stagflation.

    However the problem for Britain is that whilst the British economy stagnates, many of the other world economies will not stagnate but grow thus forcing up the price of commodities, goods and services and hence result in higher inflationary pressures. Which therefore implies that the budget deficit will be widen further as public spending will need to be higher in an attempt to counter loss of purchasing power of the currency. A higher budget deficit would require higher interest rates and therefore more monetization of government debt which confirms the vicious inflationary debt spiral cycle. The only true answer to escape this viscous inflationary cycle is to get a firm grip on the budget deficit in the immediate future, the longer we leave the debt to grow the more difficult it will become to deal with.

    Setting a target of halving the budget deficit over the next 4 years is not going save the economy from stagflation as by the end of this period Britain will still owe far more than it does today so actually be in a far worse budgetary and probable economic state in real-terms.

    Quantitative Easing Necessary to Monetize Debt

    The Bank of England embarked upon a programme of printing money or Quantitative Easing during March 2009 with an initial print run of £75 billion of a total set at £150 billion in an attempt to wave the central bank magic wand to increase the supply of credit. However as I warned at the time (5th March 2009: Bank of England Ignites Quantitative Inflation) that once started the Bank of England would continue printing money right into the May 2010 General Election targeting an print run of as much as £450 billion and therefore igniting Quantitative Inflation during 2010.

    Virtually all of the mainstream press swallowed the Bank of England's hints and winks that Quantitative Easing had ended at £125 billion during the summer months, which at the time I stated was not possible (8th July 2009: Irrelevant UK Base Interest Rate on Hold as Real Rates have Already Begun to Rise)

    This confirms my view that the Bank of England will continue printing money into year end to beyond the current arrangement of £150 billion and probably as high as £250 billion.

    I projected a Quantitative Easing total towards £250 billion by the end of 2009 with the current tally now standing at £200 billion of money printed which is to mainly buy government bonds issued as a consequence of the huge budget deficit that the Labour government will rack up by the end of this year that projects to £175 according to Alistair Darling which is up from his earlier projection of £38 billion in November 2008 as a consequence of the Labour Government's objective of aiming to both aiming to maximise the number of seats retained at the next General Election as well as to deliver a scorched earth economy to the next Conservative Government. Quantitative Easing is critical for the purpose of monetizing government debt for without it UK long dated interest rates would have to be much higher as a consequence of lack of demand for the huge amount of new debt issued.

    The debt outlook for subsequent years remains bleak with budget deficits expected to continue for many years as Alistair Darling's own forecast for government net borrowing over the next 4 years has grown from a deficit of £120 billion in November 2008 to £608 billion as of the budget, which is still below my forecast total of £735 billion and therefore the expectation remains for further revisions to the upside over the coming years. This confirms my view that the Bank of England will just continue printing money regardless which on face value is both inflationary and supportive of the economic bounce in the immediate future, both coupled together i.e. economic bounce and money printing imply a surge in UK inflation is only just around the corner.

    Britain's Debt Spiral Ensures Quantitative Easing Will Continue

    Quantitative Easing now totals £200 billion which equates to about 15% of GDP which compares against U.S. Q.E. at approx 5% of GDP which illustrates that Britain is further on the path towards higher relative inflation than most major economies and therefore targeting a weaker exchange rate despite competitive devaluation.

    The Bank of England will not stop printing money whilst huge budget deficits persist that will not be borne but he open market which would demand much higher interest rates. As the total national debt grows then so will the interest payments demanded to service this debt which means that the deficits will expand further which means even more money printing. Back in 2007 public sector net debt was about £534 billion which demanded interest payments of about £24 billion, now it is over £1 trillion demanding about £36 billion in annual interest payments. However as the government is eventually forced to raise interest rates by the market then so will the debt burden grow both as a consequence of the higher rates and higher next public debt that in 4 years time could demand annual interest payments as high as £100 billion per annum. Therefore Britain HAS entered into a vicious money printing cycle towards much higher inflation than we have experienced during the past 10 years where even if the economy grows increasing tax receipts will not be able to bridge the ever growing gap between income and expenditure including ever higher interest payments hence the perpetual debt spiral.

    The implications of the debt spiral should be seen in the currency markets which does not bode well for a stable exchange rate, off course as mentioned earlier competitive devaluations as a consequence of other countries also to varying degrees immersed in their own debt spirals suggests that the real impact will be seen in inflation data and fiat currency alternatives such as GOLD.

    Money Printing to Monetize Debt.

    The Bank of England recently week announced that it would conjure another £25 billion out of thin air bringing the print run to a total of £200 billion that has a money supply multiplier effect through fractional reserve banking of approx £600 billion, normally this would be X20 to X40 but the Taxpayer bailed out bankrupt banks are just sitting on the cash hence the multiplier is much lower at this point in time, that and the fact that the bulk of the money is being used to monetize Government debt. In response to this Mervyn King has threatened negative short-term interest rates to force the banks to lend.

    Money Printing Only Solution to Debt Financing

    Without Quantitative Easing the Gilt auctions would fail as there is no way the market can swallow near £200 billion of new debt per annum or 15% of GDP, add to this maturing debt that needs to be rolled over which means that there is no end in sight to Bank of England money printing in ever escalating amounts to keep monetizing the debt. So again no matter what the Bank of England states about bringing Q.E. to an end, it is just not possible given the debt fundamentals to do so as we will see today's £200 billion extended to £250 billion then £300 billion onwards and upwards to eventually £500 billion or more than 40% of GDP.

    Bankrupt Governments Following Bankrupt Banks into Debt Defaults and Bailouts

    Last weeks major market event came late in the week whilst American's took the day off on Thursday for Thanksgiving, Dubai declared that it will be freezing repayments for at least 6 months on part of its approx $90 billion or so of visible debt at the state run Dubai World company ($20 billion). The ratings agencies responded by cutting the ratings on Dubai bonds to junk status.

    Whilst the consequences of Dubai's debt fuelled real-estate boom and subsequent bust should not come as any surprise, however oil rich Abu Dhabi coming to its own inevitable shock realisation that it just cannot afford to keep footing bailout bill after bailout bill for their buddies just a few sand dunes away which triggered the market reaction as the consensus expectation had been that they would. However this is not September 2008 and Dubai Worlds debt freeze / default is not on anywhere near the scale to that of Lehman's bankruptcy so the perma-crash is coming NOW crowd were AGAIN disappointed, just as they have been on EVERY stocks correction during the past 9 months!

    Analysts for the more mainstream agencies such as Routers called the news out of Dubai a black swan event (A black swan in the desert), well to the mainstream press these days virtually everything is now a black swan! I assume Nassim Taleb never meant for events such as Dubai's debt freeze to be termed as a Black Swan? After all the whole point of the black swan theory is to suggest that black swan's are rare and totally unexpected events, i.e. along the likes of Arch Duke Ferdinand's assassination triggering World War 1, and not one of the the dozen or so in-debted teetering on the brink economies eventually going pop !

    I mean there is a long trail of suspect economies dating back to September 2008 when Iceland first went pop, with a dozen or so contenders other than Dubai including Ireland, Venezuela, Argentina, Greece, Portugal, Spain, the whole eastern block and not forgetting Britain! Its only a matter of time before another country goes pop, which one could be next ? Well going by the credit default swap risk prices on sovereign debt, Venezuela tops the list, though closer to home I would definitely be wary of Greek stocks and bonds! the safest in terms of default risk are France and Germany which by and large missed out in the debt fuelled boom.

    I specifically warned about Dubai back in March 2009 that the 22% drop in property values at the time where not even half way there, that projected to something along the lines of an average drop of 50%. Where are we today ? You guessed it average property prices in Dubai are now 50% lower than the peak! Which says a lot for the so called Dubai property experts back in March who were calling a bottom for Dubai property prices, though if one took an look under the bonnet one would see that these 'experts' had a vested interest in rising prices! Much as we saw with our very own soon to be bailed out mortgage banks in the UK such as HBOS which pumped out soft landing propaganda during 2007 and first half of 2008, which I repeatedly ridiculed as utter gobbledygook.

    March 2008 - UK House Prices Tumbling- Interest Rate Conundrum

    Britains biggest mortgage bank also gave a positive spin on UK House prices in March 08, the Halifax's Chief Economist continued to suggest that there will be no fall in UK house prices this year. - "strong underlying fundamentals will continue to support the market throughout 2008". "Over the past year, the average price of a home in the UK has increased by £4,390 to £196,649," he commented. "Whilst the housing market has slowed over the past six months, it is supported by sound economic fundamentals. Interest rate cuts by the Bank of England are also helping to underpin house prices,".

    My earlier analysis of February 2008 illustrated why it was impossible for UK house prices to avoid going negative in April 08, not only that but even if house prices stabilised and no longer fell, that the property market would still be heading for a sharp year on year fall for the quarter April to June 2008, which the media would eventually term as a mini-crash for the UK property market as the below table from the February article illustrates.

    8th March 2009 - Dubai Property Market Crash

    A warning to those investors being swayed, the Dubai property crash has only just begun which seeks to correct a 6 year property boom. The Dubai construction boom is expected to come to an imminent halt with many partially finished projects littering the landscape as investors walk away from the off plan deposits in the wake of the ongoing crash in property values. It remains to be seen how much of this excess supply will eventually be reclaimed by the desert as many foreign investors in off plan Spanish properties are painfully experiencing. My expectations are for an average 50% retracement in Dubai property prices from the peak, with many of the more over-leveraged high end properties possibly crashing by as much as 75%.

    So where next for the Dubai property market? Well the crash is NOT over, we are in free fall territory towards a 75% drop! Maybe the worst case scenario may yet come true i.e of the desert reclaiming large chunks of abandoned developments?

    The Dubai debt crisis gave plenty of skin deep copy text for deflationists to continue betting on another imminent Market Collapse, that FAILED to materialise Friday! However to interpret what is probably likely to follow one needs to peel away several layers than opt for the obvious i.e. debt deleveraging deflation, as I continue to develop the inflationary mega-trend over the coming weeks as a consequence of ever greater money printing in the face of escalating debt burdens that ensure INFLATION. Your money will be worth significantly LESS as a consequence of Money Printing! The Deflationists Advocate the WORST solution of cash being King. Stocks are Up more than 50% since March, Gold is up more than 25% over the past year, does this sound like cash is king to you?

    My good Deflationist buddy, Mike Shedlock questioned my inflationary logic earlier in the week to which I replied here - Mike Shedlock, a Deflationist Lashing Out at Nouveau Inflationists?

    Don't get me wrong, to be of a deflationary mind set from mid 2008 and into March 2009 was correct, but being stuck there for the past 9 months is tantamount to giving up Most of not ALL of any gains for being right during the DEFLATIONARY downdraft, which my analysis has concluded was a temporary corrective wave in a ocean of inflation. Will we have more deflationary corrections ? Off course we will (great buying opportunities!), Will they be as severe as 2008/09? No Chance! How will one protect ones wealth and make money ? By gearing towards accumulating towards higher overall inflation and its consequences which I will continue to elaborate upon during the coming weeks.

    Britain at the Core of the Dubai Property Bubble

    Out of the $80 billion or so of Dubai debt at risk of default, some $50 billion of that is with UK banks or near 66%! Why ? Because it is symptom of the spread do the British disease of blowing property bubbles that eventually burst. As UK house prices reached to the stratosphere during 2005 to 2007, British speculators of all sizes spread their wings further a field across Europe (East and West), across the Atlantic (Florida) and Across the Middle east into Dubai, where the smaller the local market and less regulated the greater the subsequent boom and hence the greater the subsequent bust. What does this mean ? It means as property induced bubbles continue to explode right across the world, the impact of them will be even greater on Britain than the local economies, as UK government will once more have to step forward to bailout bankrupting UK banks, failing that to provide teetering on the brink banks with ever greater amounts of liquidity in an attempt to kick start lending.

    Higher UK Interest Rates Are Inevitable

    Regardless of the objective of the Bank of England to KEEP UK interest rates at ZERO for the foreseeable future, the fact is that the growing government debt issuance and despite monetization of the debt via money printing which has the effect of driving sterling lower is that the market will eventually FORCE the Bank of England to RAISE interest rates, i.e. gradually we will see the Government losing control over the levers of power as the market will not stand to watch losses mount on government bonds as inflation statistics respond to the real world increase in commodity prices. My interest rate forecast for 2010 will expand on this, ensure you are subscribed to my newsletter to get this in your email box.

    Declaration of War on Savers

    The people of Britain are being hoodwinked by the politicians and inept mainstream media into thinking that money printing is a free lunch, there is no such thing as a free lunch, printing hundreds of billions out of thin air is akin to running a fiat currency ponzi scheme, the price of which is paid by the holders of existing currency i.e. investors, bond holders and savers who are hit by the double whammy of -

    a. Artificially low interest rates of 0.5% which results in NEGATIVE REAL INTEREST Rates, increasingly so as I expect inflation to rise considerably as part of the inflation mega-trend.

    b. The devaluing currency as the money supply increases well beyond that of the average of the past 10 years. Again don't be fooled by the British Pound holding steady against other fiat currencies as all of the worlds central banks are engaged in their own ponzi schemes aimed at defrauding exiting currency holders of their real value.

    Ever escalating money printing is a silent declaration of war on the value of every British citizens hard earned current wage and accumulated savings. All prudent savers are suffering in terms of the loss of quality of life as interest rates have been slashed in many cases to less than 0.5%, making life time accrued savings of more than £100,000 worthless in terms of income generation with worse to come as money printing seeks to stealthily destroy the capital value as well.

    Inflationary Consequences of Escalating Debt and Money Printing

    The consequences are INFLATIONARY, inflation means RISING CONSUMER PRICES which in the UK means rising RPI and CPI indices. Inflation rises as more fiat currency chases a limited supply of commodities, goods and services, more so in a stagnating economy which over time sees diminishing output, it is only that in the present that the consequences of debt deleveraging is MASKING the building inflationary forces that will let rip with a vengeance which we are already witnessing in the commodities markets as many markets such as gold and crude oil have doubled from the Post September 2008 lows.

    Recent articles on my inflationary MEGA-TREND outlook include :

    For more on my inflationary mega-trend ensure your subscribed to my always free newsletter, especially as I converge towards including major forecasts for all key markets for 2010. I.e. what will become of the stocks stealth bull market that has soared during 2009 ? What about the debt fuelled UK housing market and economic bounce.

    Your mega-trends investing analyst

    By Nadeem Walayat
    http://www.marketoracle.co.uk

    Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

    Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

    Nadeem Walayat Archive


    Disclosure: none
    Tags: uk, economy, debt
    Dec 04 3:02 PM | Link | Comment!
  • Natural Gas Screaming Long-term Inflation Mega-trend Buy, But UNG...
    This is the second in a series of analysis on the Inflationary Mega-trend that is anticipated to unfold over the next decade. The last article (Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend) concluded that ever escalating debt fuelled stimulus coupled with never ending Quantitative Easing sows the seeds for a building inflationary outlook far beyond the deflationary impact of debt deleveraging as the DEFLATION of 2008 becomes increasingly old news which is evident in the reaction of near across the board asset and commodity prices during 2009 which WILL translate into higher consumer price inflation during 2010.

     

    Whist most commodities have soared during the year, however Natural Gas has been one of the few commodities lagging behind and therefore may present an opportunity to scale in at rock bottom prices for the Long-run as have mentioned several times during the divergence between Crude Oil and Natural Gas over the summer months.

    Do You Wish You Had Bought Crude Oil at $35 ? Stocks at Dow 6600 ? Gold at $700 ?

    Much as past great market opportunities, at the low no one wants to buy for a multitude of reasons. However taking a look at the long-term charts, you do not have to be a genius to arrive at the conclusion that Natural Gas is cheap, the only way a future Natural Gas spike to the upper ranges of many multiples of the current price is not possible is if Natural Gas suddenly became an redundant energy resource, which given that it is a far cleaner form of energy than other fossil fuels seems extremely improbable!

    Remember Natural gas is not a stock therefore its not going to go out of business to ZERO, nor is it likely to be displaced from the market place by new technology during the next decade at least.

    Natural Gas Fundamentals

    High prices bring on stream new supply, low prices bring about reduction in supply and investment, the longer Natural Gas trades at higher prices the greater will be the eventual new supply and subsequent crash in prices. The longer Natural gas trades at ultra low prices the less the forward supply investment and thus the greater will be the eventual spike higher in Natural Gas prices. What this suggests is the best type of price action for commodities is that of highly volatile highs and lows where sustained trends tend to resolve to extraordinary spikes in the opposite direction. The current Natural Gas price trend has been that of a sustained downtrend, which is primed to resolve to much higher prices to eventually more than the normal range. Off course this would also require Natural Gas position holders to ensure they are ready to distribute INTO such a spike else like many novice investors they may end up giving back most of the gains on the way down!

    Natural Gas is CLEAN ENERGY

    Natural gas is the dream fossil fuel of global warming proponents, as it is by far the cleanest of the three major fossil fuels of gas, oil and coal. Developed countries could cut their electricity generation green house gasses by at least 33%by making he switch to natural gas, whilst at the same time saving money.

    Natural Gas in Dollars

    Natural Gas price range is typically between $9 and $6. Last close was at $4.66. Natural Gas is in short-term downtrend therefore suggesting lower immediate term natural gas prices. The price collapse form $13.7 to a low of $2.62 in September resulted in a powerful bounce to 5.83 that now brings Natural gas to its present day downtrend at a much shallower velocity than the preceding uptrend, Natural Gas. However Natural Gas HAS given a Buy Signal and therefore now targets a higher low (than the Sept low). Once the higher low is in then that will mark a strong stepping board for a sharp rally higher to significantly above the September peak taking Natural Gas into the Normal range, in the meantime my opinion is that of a great long-term accumulation opportunity with Natural Gas trading below the normal range.

    Natural Gas in Sterling

    Sterling (GBP) Natural Gas is exhibiting a similar trend suggesting that sterling's trend is not an important factor given the magnitude of natural gas price movements i.e. the near doubling of price from 0.016 to 0.035 during September and the fallback now to 0.028.

    Natural Gas - Crude Oil Relationship

    The Natural price collapse is most evident when compared against crude oil which saw the relationship drop to levels not seen in over 10 years, even after the recent September bounce the Natural Gas is still trading at near 10 year lows. Natural Gas has the potential to play catchup to Crude Oil in the order of 300%. I.e. even if Crude oil does rally any further, Natural Gas could triple in price.

    UNG ETF Performance Relative to the Natural Gas Price

    Now we come to the crunch point, having identified Natural Gas as being at an opportune level to accumulate into are the Natural Gas ETF's of which UNG is the most widely followed actually going to make us any money or not ? After all many an investor has dived blindly into ETF's on the suggestion of mainstream media hacks that rarely invest their own money on their commentaries to only find that they have lost money rather than made money which is especially true with regards Leveraged ETF's that should be ALWAYS AVOIDED AT ALL COSTS !

    Back to UNG - The following charts UNG and the UNG / Natural GAS relationship.

    I have highlighted two areas that are suggestive of caution on the first chart. One in mid 2007 and second following the September spike. What we are witnessing is serious divergence between the Natural gas price and UNG, that is NOT subsequently resolved. Natural Gas gave a solid buy trigger in September, there was NO SUCH buy trigger on UNG, Natural Gas is making a significantly higher low, UNG is trading at fresh lows ! Those that bought Natural Gas Futures in early September would be sitting on a profit of 76%. Those that bought UNG are sitting on a LOSS! Is this like a SCAM or what ? Make your own minds up!

    The second chart illustrates that there exists a perpetual tendency for the ETF to under perform the futures over time, which deploys a similar trick to the Leveraged ETF's in utilising % of daily movements. What this means is that UNG IS NOT A GOOD LONG-TERM INVESTMENT ! If you invest in UNG, you have to get your timing right, else TIME will erode the value of your investment even if Natural Gas DOUBLES in price! However on top of this we have PROFITS which are SKIMMED from investors as indicated by UNG that FAILS to rise when the Natural Gas price goes up!

    The UNG website states -

    The investment objective of UNG is for the changes in percentage terms of the units’ net asset value to reflect the changes in percentage terms of the price of natural gas delivered at the Henry Hub, Louisiana, as measured by the changes in the price of the futures contract on natural gas traded on the New York Mercantile Exchange that is the near month contract to expire, except when the near month contract is within two weeks of expiration, in which case it will be measured by the futures contract that is the next month contract to expire, less UNG's expenses.

    What a Load of B. S.! As always, the chart tells the REAL truth of what REALLY HAPPENS!

    Okay don't get all disheartened after having been built up towards a Natural Gas position. What this means is that you can expect between 40% and 70% of any Gain in the Natural Gas price to be skimmed off of ETF investors. Would Natural Gas rising to $13 result in UNG trading anywhere near 63.89 ? I doubt it. More likely Natural gas of $13 would equate to UNG price level of anywhere between 25 and 47. Though more probably in the region of 37 i.e. the expectation is to enjoy approx 50% of the gain in your ETF than that of Natural Gas futures.

    Therefore whilst investing in ETF's can yield a profit (of sorts), however unlike much of the hype surrounding them, they are NOT the one stop shop for investors, so there is no excuse for not doing your own home work in identifying individual stocks that could benefit hugely from a rise in the Natural Gas price, and again DO NOT EVEN THINK ABOUT Investing in LEVERAGED ETF's.

    INVESTING LESSON - Before you invest a single penny in any ETF, make sure you check its performance against the underlying market, better to find out the truth now then wake up one morning to find that you have not made any money whilst the underlying security soared in price! Unfortunately many and I truly mean many analysts FAIL to perform this exercise after having performed analysis of the underlying market then jump straight into recommend an ETF. I don't want excuses or explanations of why the expected return never materialised. I want an investment to do what it implies it is going to do rather than draw on small print to explain why investors have been hoodwinked into generating profits only for the fund managers!

    ETF's increasingly remind me of the Guaranteed Equity Bonds of 10 years ago that were designed only to make the issuers money and nothing for the investors But sold as sure thing big profit investments!

    Natural Gas Conclusion

    Yes you missed the September low, but the recent correction gives you another bite at the cherry AFTER the initial trend change buy trigger has already occurred. I.e. the risk of a loss is far lower now than accumulating before the September buy trigger occurred. Now I am NOT saying that Natural Gas is going to rocket higher in the coming days or weeks, but what i am saying is that it is not unreasonable to assume that Natural Gas will spike higher at some point during the next 1-2 years that would lift Natural Gas to at least $13 from the present $4.66. Especially as many commodities are busting OUT of their upper ranges which could conclude in an eventual spike significantly higher than $13. As for the UNG ETF? Khoick Phuhh.

    This is part of a New series on the INFLATIONARY outlook, ensure your subscribed to my always free newsletter to get access to full the scenario on completion as well as the many implications in your in box it will be one of my seminal pieces much as The Stocks Stealth Bull Market Scenario of March 09 and Crude Oil Top of July 08, or the UK Housing Market August 07 Top and Bear Market were before it amongst many others.

    Financial Market Forecasts Quick Update

    November 1st's in depth analysis (Stocks, Dollar and Gold Bull Markets Inter-market Analysis) gave updated projections for key markets into the end of 2009 and early 2010 as summarised below:

    Gold Targeting $1200 by March 2010, $1350 2010.: $1,150 ($1,046) + 10%

    Gold soared and silver played catchup. The target for March is $1200 the current price of $1,150 is well ahead of schedule, on face value this either signals some sort of impending currency crisis, or more probably Gold is short-term overbought and due a correction back through $1,100.

    Dow Targeting 10,350 to 10,500 During December 2009 :10,437 (9,712) + 7.5% target achieved.

    The Dow hit the mid target range of 10,425 and started a 'normal' correction that continues to target 9950 to 9900 (as per last weekends newsletter).

    USD Targeting 84 during December 2009 : 75.61 (76.36) - 1%

    The U.S. Dollar eeked out a small gain for the week as it continues to attempt to build a base at 75, with the nearest buy trigger remaining at 77.00.

    Source:http://www.marketoracle.co.uk/Article15238.html

    Your Natural Gas Investing Inflation Mega-trend Analyst.

    By Nadeem Walayat
    http://www.marketoracle.co.uk

    Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

    Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

    Nadeem Walayat Archive
    Tags: UNG
    Nov 23 9:17 AM | Link | Comment!
  • Stocks, Dollar and Gold Bull Markets Inter-market Analysis
    This analysis seeks to update the trend prospects for all three major markets into at least the end of this year by taking into account their inter-market relationships which should resolve in a more accurate projection for each individual market.

     

    Gold Bull Market Forecast 2009, 2010 Update

    Gold has had a stellar run of late, which recently saw Gold pushing to new all time highs on a near daily basis which has galvanised wider mainstream press attention to the precious metal with many gold bugs revising targets ever higher into loftier goals such as $2000 and even $4000+. Gold is one of the most popular asset classes both sought after by readers and written about by market commentators, and one of the most emailed query as to when will I update my original gold analysis of 22nd January 2009 which concluded during mid 2009, therefore this analysis seeks to project the Gold Price trend well into 2010.

    Gold Price Forecast 2009 Evaluation.

    My original analysis for Gold as of 22nd January concluded with a gold price trend higher into March 2009 towards a target of $960 to be followed by a subsequent decline into mid 2009 as illustrated by the original forecast graph below.

    Gold Price Forecast 2009

    The Gold price forecast proved to be accurate in terms of the projected impulse waves. This analysis seeks to project Gold forward several months into 2010.

    Fundamentals - Inflation Driving Gold?

    The problem with this scenario is that the inflation of the 1980's and 1990's did NOT drive Gold higher, so clearly the mantra of Inflation driving gold higher is not correct, especially as we are presently emerged in debt deleveraging deflation, and neither does discounting future inflation expectations hold up, as the Gold bull market is now into its 10th year with a gain of 400% to date.

    Gold Secular Bull Market

    From 1980 to 1999 Gold fell for 20 years, eventually it would bottom and embark on a bull market, eventually, the signs for this would be not in fundamental data, but contained within the price chart as Gold breaks the pattern of corrective rallies followed by the downtrend resuming to new bear market lows. Now some 9 years later gold has corrected the preceding secular bear market by 50% in time and 100% in price. Therefore gold is not in a new bull market which has already contained many vicious bear markets within it as we witnessed last October, so just bare in mind that this is not a fresh young bull market, therefore much of the talk of waiting for public participation to join in can be discounted.

    U.S. Dollar / Credit Crisis

    My analysis of a positive trend for the USD clearly implies given the inter market relationship between a two for a weaker trend for Gold. However the risk is that amidst the next phase of the global financial crisis as the bankrupt banks have far from recovered, the next stage of the banking crisis accompanied by recognised inflationary panic measures of money printing which devalues all fiat currencies could give a lift to gold.

    Quantitative Easing aka Money Printing Hedging

    We are in a new world (for the west anyway) and that is a world of Quantitative Easing, the more the governments of the world print money and monetize debt the easier it is for governments to keep printing and monetizing ever escalating amounts of government debt to cover the government budget deficit gap. What this means is collective currency devaluation where relatively speaking there appears to be little change but in real terms the flood of money has to be seen in rising commodity prices and other scarce resources, after all the supply of resources is mostly known and the population of the world is not decreasing so the demand is known to be on an upward curve. Therefore as long as the central bankers are embarked on the experiment of quantitative easing that should give a lift to gold and other commodities as it increases inflation expectations and therefore inflation hedging using gold and more liquid commodities such as crude oil.

    Gold Technical Analysis

    ELLIOTT WAVE THEORY - The elliott wave pattern implies we are a strong bull market that has much further to run, i.e. in Wave 4 of a larger Wave 2 advance. This also suggests that the immediate future should see further weakness in gold towards $1,000. However, this is just a correction in the trend that projects to a price of more than $1,100 by the end of this year, with the trend continuing into March 2010 toward $1,200 before a more serious correction takes place.

    TREND ANALYSIS - Gold's breakout to a new all time high is a clear signal of further strong advances. The support trendline is at $1,000 and therefore fits in nicely with the elliott wave correction projection target. After the uptrend resumes this trendline is unlikely to be revisited until the second quarter of 2010.

    SUPPORT / RESISTANCE - Resistance lies at the last high of $1071, Immediate support lies across the string of previous highs of $1033 and $1007, therefore there is very heavy support whilst very light resistance overhead, which again is suggestive of a mild correction in the current phase of the trend.

    PRICE TARGETS - The measuring move off of the $681 2008 low projects all the way to $1,350, which looks set to be an achievable price during 2010. Nearer term immediate targets extend to $1,100 then $1,200.

    MACD - The MACD indicator signaled a Gold breakout at $960, with a firm established uptrend. The current correction is inline with that of a mild correction within a strong uptrend.

    SEASONAL TREND - There is a strong seasonal tendency for gold to rally from November through January i.e. for the next 3 months. This is suggestive that the current correction is living on borrowed time and may not last much longer.

    Gold Conclusion

    I started off this analysis skeptical of the prospects for gold given the 10 year bull run to date, but the price that is talking off the charts is pretty bullish! enough for me to consider accumulating a position. In the immediate future Gold appears to be targeting a continuing correction towards $1,000, after which it targets $1,200 by March 2010 and a price of $1,350 later during 2010.

    Gold Long-term - Gold has broken out to a new high and it does look as though it is going much higher in the long run, there are multiple measuring moves that one can consider, such as 133%, 150%, 1.618% etc. However given the gap in time between the all time peaks, Gold of $2000 plus would now not surprise me.

    Gold Bull Market Inter market Implication - Bearish on the U.S. Dollar.

    Stocks Bull Market Forecast Update Into Year End

    The update on the stocks bull market of early September called for a continuing trend towards a target range of 9,750 to 10,000 by late September / Early October to be followed by a correction in the region of 10% towards a target zone of 8,900 to 9,100, as illustrated below.

    The market subsequently peaked in the middle of the target zone and began a correction which took the Dow down to 9,430.

    This was soon followed by surprisingly quick and powerful reversal to the upside that that lifted the Dow to above 10,000, peaking at 10,120. Readers of my weekly newsletters will know that I was skeptical of this phase of the bull market because it had not allowed both enough time and price to correct the preceding advance and therefore was not seen as being sustainable.

    Bull market Re-cap - The stocks bull market that began in early March has so far from trough to peak advanced by 56% on the Dow against the preceding peak to trough decline of 54%. Those that refer to this as a bear market rally do not know what they are talking about as the rules have ALWASY remained the same in that a bull market is recognised by a 20% rally from a bear market low and a bear market is recognised by a 20% drop from a bull market peak. It is only that many analysts don't follow the rules! Instead much rather prefer to re-write history. THIS IS a STOCKS BULL MARKET, and when it will resolve into a bear market depends on when we next get a 20% confirming trigger ! (allowing for short-term whipsaws), so until I see such a definitive trigger the market will be treated as a bull market.

    Stock Market Crash Again?

    Forget swine flu, the pandemic doing the rounds is that of another Crash with the 1930's chart dusted down and presented as near fact of what is to transpire on every correction. However the markets response has so far always been to push to a new high for the move.

    What happens to the crash calls ? They again get rolled out again on the NEXT correction! However the damage has been done as short stops are hit and losses accrued, that no broker will refund for the next crash call.

    Stock Market Crash Calls

    1. You CANNOT know with any reliability that the stock market is going to crash until AFTER it has actually peaked and entered a downtrend. Anyone that tells you a bull market pushing to new highs is going to crash is going to lose you all your money, as the market rallying significantly from the crash call NEGATES THAT CALL where trading is concerned, because any short positions enacted upon the call are stopped out!

    2. You can only enter a Crash TRADE barely a day or hours before the crash event. Crash calls made weeks, months or years in advance are WORTHLESS where trading is concerned, and where investing is concerned, all investors should have stops on their positions based on technical considerations of where they would admit their analysis is wrong on a particular stock.

    Crash calls are dangerous in that bring emotions into play which instead of staying focused on reacting to price action, adrenaline gets traders to commit to positions that will soon most probably bust their accounts where EVEN if the market eventually does CRASH, they will have been wiped out by the intervening rally SINCE the crash call! It is this fact that that is always forgotten.

    Don't believe me ? Go check ALL of the hyped stock and other market crash calls that in actual fact WERE FOLLOWED by moves that would have wiped out REAL trades had those calls been acted up on.

    In recent weeks I have been sharing a some of my trading ideas that I do not have the time to turn into a book -

    Depression, What Depression ? - US GDP soared in the third quarter to 3.5%, yes, the rate of accent is probably NOT sustainable, but the debt fuelled bounce will continue a while before it peter's out into. The key point is as I pointed out in the analysis of October 2008. That we are NOT heading for another 1930's GREAT DEPRESSION, and therefore scrub the notion of following the 1930's chart pattern towards anything like a 90% stocks crash. So far the analysis is proving correct.

    Good News Turns Bad - Stocks fell following strong US GDP data, which tells you that the market wants to head lower in the immediate future regardless of whether the news is good or bad, this supports the view that the market wants to break below the 9430 low.

    Corporate Earnings - Corporate earnings have FOLLOWED the stock market higher, so what happened to the doomsayers of 6 months ago that repeatedly stated that corporate earnings forecasts implied stocks could NOT rally ?

    ELLIOTT WAVE THEORY - The elliott wave pattern is not clear, at best it resolves towards an ABC correction that sees an assault on 9430 and probable break.

    TREND ANALYSIS - The Dow has now fallen to the major support trendline, which implies immediate term support, i.e. stocks 'should' rally here early next week. The question is will the trendline break or not ? Its a tough call but I would go with yes, which would target 9430. As you can also see the stock market is losing momentum as the last rally failed to reach the second trendline which is suggestive of a tougher trend into year end, though also implying that the market is not as overbought in terms of trend.

    SUPPORT / RESISTANCE - Immediate minor support is at 9654, then the last low of 9430, 9250, then 9,100. Resistance over head is at 99,17, 9980 and 10120.

    PRICE TARGETS - Downside price targets resolve into the 9100 to 9430 zone. Upside trendline projection implies 10,500 into December.

    MACD - The MACD continues to show negative divergence to the price, though this has been ongoing since late August which implies an unraveling of the overbought state.

    VOLUME - Volume has been WEAK during the rally, which contrary to much bearish commentary implies that this rally has NOT been bought into. So all of the talk of hyper bullishness is basically rubbish as there is no sign of such irrational exuberance in the volume, which remains heavier on the declines than the rallies and thus suggestive of selling rather than buying into the rally. Which is good behaviour for a stealth bull market.

    SEASONAL TREND - There is a strong seasonal tendency for stocks to rally strongly during the months of November and December, following a weak September and October. The trend to date suggests right translation in the seasonal data i.e. pushed forward a month or so which implies that the trend into Mid November may be contrary to the seasonal tendency.

    Stock Market Conclusion

    There is nothing to suggest at this point in time that the stocks bull market is over which means that that corrections are for accumulating into, the overall trend is for stocks is to continue climbing a wall of worry whilst investors are scared by the vocal crash is coming crowd that will continue to re-write history to always be right in hindsight to again come out with more crash calls over the next few months as the Dow chart of the 1930's gets it's start / end date manipulated again so as to fit fresh crash calls.

    The stocks bull market that has raged since the March low has fulfilled the original objective for a 50% advance, therefore upside for the next two months looks limited with greater risk of downside in the coming weeks though pending a break of the major support trendline which implies a rally in the immediate future. All in all this is suggestive of a downtrend towards 9,400 into Mid November with a year end rally to back above 10,000 targeting a rally high in the region of 10,350 to 10,500 during December.

    Inter market Implications - Suggestive of a mild dollar rally, and a mild uptrend for commodities.

    U.S. Dollar Bull Market Scenario Update

    The most recent price action has seen the U.S. Dollar manage to hold onto USD 75 support that has propelled the dollar back through 76, however the trend over the past 2 months has been weak. The last update of the US Dollar bull market scenario of mid August 2009 called for a rally that targets USD 90 by the end of this year as long as 75 holds, as indicated by the original chart below :

    More analysts joining the Dollar bullish scenario- The bullish dollar scenario is increasingly being joined by more 'big named' analysts including Robert Prechter and then Mike Shedlock, though the U.S. Dollar in actually bottomed in March 2008 with the subsequent trend having deviated little from projections as the January 2009 update illustrated which a forecast sideways ABCDE trend into a late July low.

    DEVIATION FROM THE FORECAST - The USD has under performed during the past 2 months which is a sign of weakness and therefore suggests upside action over the coming months will be limited with a far greater risk of downside breakdown then before, so signaling caution.

    ELLIOTT WAVE THEORY - The elliott wave pattern nicely resolves to a ABC decline, with C wave comprised of 5 waves down to the recent low. With the USD at 76.36 it is therefore make or break time for this pattern which suggests that the low is in and therefore the trend should now be higher in terms of the wave pattern.

    TREND ANALYSIS - USD has marginally breached the down trendline from the 89 high which is a positive, however it has yet to make a higher high which would require the USD to rally and close above 76.60, which is not too distant from the last close. However the trend of the past 3 months has generated much price action in the 76 to 81 range which means its going to be tough for the USD to overcome this and is suggestion of volatile price action.

    SUPPORT / RESISTANCE - Immediate support is 75 a decided break of which would target 71. Near term key resistance is as 77.50. As mentioned above there is heavy overhead resistance which implies a volatile trend through it.

    PRICE TARGETS - The USD has yet to give any confirming price triggers for the uptrend, the nearest of which is at 77.50. Therefore the USD is still in its downtrend until it manages to break above 77.50 that would target a push towards the 80-81 resistance area. A longer range target for the USD is now 84.

    MACD - The MACD indicator is signaling a breakout to the upside for the USD, and is just about ready to give a higher high trigger on a further bounce from the up-trendline, so suggesting the current bounce is more significant than the preceding one from 76 to 77.50.

    CYCLES - The recent price action puts the USD into the 2.5 cycle low time window, the question is, is the low a technical bounce or the start of a larger trend ?, but what it does suggest that the current trend has more upside the time, which it can spend either drifting sideways or push the USD through resistance.

    SEASONAL TREND - The recent trend was inline with the seasonal tendency for the USD to weaken between August and October 2009, a continuation of which would suggest a strong November and a weak December.

    USD Conclusion

    The dollar trend has been much weaker than expected therefore this has to factor into the conclusion which now resolves to a much shallower uptrend than previously anticipated, however I do still expect an uptrend to materialise that now projects to a more conservative 84 to be hit during the remainder of this year, probably by early December.

    Inter market Implications of a Stronger Dollar - Downward pressure on stocks and commodities priced in dollars such as gold. However as I have stated above competitive devaluation may not lead to any significant downward pressure, so we could yet see all three bull markets exhibit an upward bias over the coming few months.

    Overall Inter market Conclusion

    It looks like all three markets will manage to trend higher over the coming months, however given the technical pictures some are expected to perform stronger than others. I would put gold on the strongest footing then the dollar followed by stocks, of the three stocks present the biggest question mark at this point as the immediate future appears bearish. But given the last closing prices of Gold $1046, USD 76.36 and the Dow at 9,712, I would expect all three to be significantly higher by year end, which is contrary to the consensus view of the inter-market relationship between these markets.

    Your analyst focused on commodities for out performance.

    Source : http://www.marketoracle.co.uk/Article14697.html

    By Nadeem Walayat
    http://www.marketoracle.co.uk

    Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

    Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 400 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

    Nadeem Walayat Archive
    Tags: DOW, GOLD, USD
    Nov 02 10:47 AM | Link | Comment!
Full index of posts »
Latest Followers

Latest Comments


Most Commented
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.