September has come and, with it, many important events are expected to happen. Many traders, investors and analysts are, more than expecting, actually praying for the Fed to launch QE3, while the ECB is also expected by many to engage in some more quantitative easing, be it LTRO3, a bond buying program for Spain and Italy, or undertaking some other form of monetary stimulus to avert the Eurozone crisis.
This political and financial soap opera will certainly, once again, come back in full force, after the August vacation break that left Europe a bit more calmer. The second Greek default - and definitive - will probably unfold in September, and Spain and Italy will probably again see their bond yields spike.
The situation in Syria will keep on pressuring an already unstable Middle East, with Egypt in a very undefined situation, and, last but not least, with a possible Israeli / American conflict with Iran, which will certainly continue over the table.
The drought in the US will probably begin to generate its economic and financial effects more strongly from September onwards. The US elections will be very close to taking place - and with the US fiscal cliff right around the corner. Oh, and China will probably be showing more signs of its 'landing'.
In this scenario, it is my view that investors should continue to hold an investment outlook that focuses on the trends and on the fundamentals, basing their views primarily on what is likely to happen in the medium to long-term. I usually believe that the short-term events are less relevant in the overall picture. However, the next weeks / months can bring such dramatic events, that I consider it is certainly important to keep a close eye on the short-term happenings as well.
The fact is that, in the short-term as in the long run, we are looking at pretty horrific times. The world economy is quickly sinking and becoming closer to staging the Second Great Depression. Plus, the debt overload of Europe, the US and Japan, along with the diversified inflationary ticking time bombs out there, which only tick more and more loudly, will do anything but help.
This messy situation does not come, however, without great opportunities. And, for those investors who are looking for yield in the financial markets and who understand the world of trading, I would recommend the following short-term investment outlook and strategy, which I believe can bring excellent chances of expanding your wealth - if you understand, accept and manage the risks.
When will the Fed and the ECB print and why this matters
This is a decisive issue that needs to be properly understood and interpreted, in order to establish a successful investment and trading strategy.
First of all, I should start by saying that it is true that, through several ways, the world's central banks - especially the Fed, the ECB, the Bank of England, the Bank of Japan and the Swiss National Bank - have already been pretty much undertaking permanent monetary easing policies. However, when it comes to larger and open actual quantitative easing programs, such as the Fed's QE1 or QE2, or the ECB's LTRO1 and LTRO2, it is also true that both the Fed and the ECB have been refraining from putting into practice their third hugely expected large programs, which have yet not followed their two first programs of this kind.
Now, while almost everyone is expecting these big monetary easing programs to come soon, I believe that they will indeed come, but not just yet. My estimate is that the world's main central banks will ultimately resort to more or less endless quantitative easing to try to deal with the brutal crisis that will come (what we have seen so far is actually soft, if one considers the true depression shock that I believe is coming). However, if I am correct, they will wait until they see serious pain in the markets before they actually engage in these large easing programs.
Firstly, because they cannot just print more currency into existence without facing its consequences - and inflation is already being a serious problem. The price of oil and commodities in general, and especially food prices, are already far too high, which means that, if central banks print more currency in such large programs, they would send prices even higher. This would have very bitter social, economic and political costs - and would hardly help Obama or Merkel to get re-elected. However, if the depression shock indeed comes before their election, they will get their printing presses working on full speed, to try to make things look like they're under control.
Secondly, the initial large programs of the Fed (QE1 and QE2) and of the ECB (LTRO1 and LTRO2) have generated no economic growth, have not helped the economy to get funding (the banks have kept the cash and they have only bought short-term government bonds with the money), and have also gotten European banks using the ECB funding in trouble, as they got the stigma of resorting to the emergency liquidity that the Eurozone central bank has provided. So, the usefulness of these measures has disappointed many, to say the least.
Thirdly, while the first and second programs by the Fed and the ECB have stayed in the hundreds of billions to one trillion area, it is now widely believed that further easing from both banks, in order to have some sort of effect, would have to be in the area of several trillions. And, again, the consequences of it would certainly be worse than better for the economy - and central banks know that, so they will not do it lightly.
Finally, central bankers have been talking up the markets again and again, always speaking about what they may do and about the several tools that they have at their disposal, but the truth is that they have not actually done more than talking about it. Still, the fact is that, so far, they have not needed to do more than talking about what they may do, as the markets have been reacting very strongly and positively to these vague statements, pricing in both Fed and ECB interventions (which, I repeat, have not yet occurred and will not occur while a serious crash does not take place or is not dramatically imminent). These market reactions have been so strong that stock markets have been near their highs and bond markets have been relatively cooled down - just based on expectations and on the spoken words of central bankers. This, I should say, only makes everything even more dangerous, as, once people realize that the American or the European QE3 are not coming so quickly and that easily, we will probably see the markets selling off in a desperate and aggressive way that will make, retrospectively, the Lehman moment look soft.
To conclude, it is my view that the Fed and the ECB will indeed print Dollars and Euros, and by the trillions, but not until things get seriously ugly, so that they have a very strong excuse to do so. Having this outlook in consideration, I believe there is a way to make money in the financial markets in the short-term, which is based on reading the messages that central bankers have been sending to us, and by trying to anticipate what they will do in the next few months - as much as when and how they will do it.
Firstly, you should have in consideration that, whenever I speak of trading ETFs, I avoid leveraged or too leveraged ETFs, and I only think it is a good plan to use ETFs for short-term trading - never for actual investments. ETFs, as all other financial investment vehicles, are nothing but paper assets and offer no safety at all in case a financial, banking and or monetary crisis does occur. So, trade ETFs - or stocks or futures - but please do not base your investments primarily on these financial instruments. They can fail you and leave with you nothing.
Secondly, in my view, if you are at all going to trade, you should only use a not too big part of your investable assets in trading. You should also not use leverage. Still, even if you do choose to use leverage because you understand it and you know how to manage it and use it, you should limit it as much as possible, so to not compromise your other assets of your true crisis-proof portfolio. This, I repeat, is an investment portfolio that, aside from your trading budget and operations, should be set up outside of the financial markets and should not be in any way endangered by your trading activity.
Finally, while it is my belief that it is obviously important to have a strategy to trade having the best technical entry points in mind, the fact is that, as I see it, fundamentals are what really matter when it comes to investing. That is why all my recommendations are almost entirely based on fundamentals - and extremely solid fundamentals, I should stress -, so, if you do consider my suggestions, do make these trades based firstly on fundamentals and only secondly looking at them from a technical point of view.
1. Short the Euro
In order to try control and solve the Eurozone crisis, the ECB may engage in new forms of monetary easing as it has done so far. If that happens, the Euro will eventually go down a lot more. If no extraordinary measures are taken to control the Euro-crisis, the Euro will just keep on losing the confidence of investors. So, it will go down even more. If one or more of its members leaves the Eurozone - Greece, Germany, Spain or Finland -, the Euro will fall sharply. And, if this happens, it will probably end as a currency due to a breakup of the Eurozone, in which case no one knows how low it can get before it officially ceases to exist. My point is that there is no realistic way for the Euro to go significantly up, on the medium to long-run. Even if only the wealthy Eurozone members would stay in this league, the shocks that would occur before this would be established would probably make this an impossible project. Also, these wealthy countries are not that wealthy anymore, especially if you think about how deeply exposed they are to their peripheral partners. Anyway, in this context, again, the Euro would stay low or go very low. I must say, however, that, as the markets have been behaving so irrationally, it is actually possible that something completely abnormal happens, such as the Euro going a little bit up, until 1.30 - 1.35, perhaps, if the ECB announces a massive bond-buying program or an actual money printing program, which would be an irrational relief rally (we have already seen reactions in the markets such as this, which pumped the Euro higher instead of sending it lower). Such a rally would not be supported by the fundamentals, so the Euro could move up but only to come down possibly in a more dramatic way. That means that, if such a rally would happen, it would make an even better opportunity to open a short position on the Euro or to add up to an already open short on the Euro. My view is that, as it is today, with the EUR/USD at the 1.25 level, this is already an excellent position to short the Eurozone currency. However, I would short it as it is and would be looking out for ECB announcements - if a strong action by the ECB seems probable, I would close my short position and see what happens. If the ECB does announce any measure that brings the Euro up in another absurd relief rally, as long as the poor fundamentals of the common currency remain as bad as they are (and which do not look like they will improve in any way, at least any time soon), I would just look at it as an even better opportunity to again open a short position on the Euro. That rally would not last long and, the more the Euro would go up, the best it would be for those who would short it. You can of course short the Euro in many ways, but one of the simplest is to go long on the EUO, which is an ETF that acts as a short on the Euro.
2. Go Long the US Dollar
While I do not like the US Dollar (NYSEARCA:USD) and while I certainly believe it has many fundamental problems and continues to be under serious threat due to the tremendous debt load that the US Government keeps piling up and to the Fed's expansionist monetary policies, the fact is that, with Europe being as it is, and with the Euro being under a far more serious threat than the American Dollar, the latter is still seen as a safe haven - and, in the short-term, although in a very unsafe way, I accept that it is. As I see it and have already explained, the Euro does not have the grounds to go up substantially - and to stay up, even if another absurd relief rally happens for nothing, like many have, since the Eurozone crisis started. The USD, however, in the short-term, will stay strong and will get as stronger as the Euro gets weaker. There may even be a panic reaction by the markets to jump into the USD, fearing a Eurozone breakup, which I do not think it is unlikely or far from happening. So, I believe it is a good move to - again, only in the short-term and being prepared to dump the Dollar once it benefits from the panic caused by the Euro - go long the US Dollar. One of the ways to do that is to buy the UUP ETF, which is an ETF that keeps track of a futures contract betting that the USD will strengthen against the Canadian Dollar (NYSEARCA:CAD), the Yen (JPY), the Swedish Krona (SEK), the British Pound (GBP), Swiss Franc (CHF) and the Euro (EUR). I would stay vigilant, though, and prepared to short the USD as soon as the bullish sentiment on the USD and the panic about the Euro would get too high. Remember, the Fed does not want a strong USD and it would not stand there and let the USD stay too strong while the largest financial and economic crisis of ever would take place. Also, America has many problems of its own and it has a tremendous exposure to Europe and the toxic Eurozone assets (public debt and bank related assets), so the American Dollar is almost as unhealthy as the Euro. So, I would go long on the UUP in the short-term and, as soon as I would see that it would be time to move along, I would short the USD by buying the UDN, which is an ETF which is bearish on the American Dollar, performing inversely to the UUP. One final important point: if Israel and or the US attack Iran, short the USD as quickly as you can, as it will go down a lot and fast.
3. Go Long Oil
With China landing more hardly than softly and with the European and American economies experiencing true agony, it is true that Oil can come down to absurdly low levels, more because of a depression scare than due to an actual decrease in demand for this commodity. I believe we can see Oil trading for $70 or even $40. I am not saying that it will happen, but it is possible. However, due to the weakening of the US Dollar resulting from the Fed's easing policies, to the tensions in the Middle East, which I believe will only get worse, especially with Iran, and also due to Peak Oil and the fact that demand for Oil is just not going to go away, I would go long Oil. Right now. Furthermore, with Iran selling Oil to China in exchange for Gold, and with Saudi Arabia, the world's largest Oil producer, partnering directly with China and other countries, the days of the Petrodollar seem just closer and closer to ending. That is also very bullish for Oil traded in USD, as, if the Petrodollar does come to an end, there is no telling how expensive Oil can get in USD - so, each contract of Oil that you now purchase at $90, for example, can come to turn into a $180 contract, so you can double your money, preserving your wealth and protecting yourself from the increase of the Oil price.
In practical terms, I would prefer to own Oil with futures contracts, but, for those who prefer to trade in the stock market, I would recommend buying the USO, USL and or BNO - ETFs which keep track of the Oil market. It is my view that, with Oil (NYSE:WTI) now trading at around $96, it is still very cheap, taking in consideration the spikes in its price we may come to see in the near future. So, I would go long Oil and, if in the meanwhile it went down, I would just buy more, as it would very likely come up again. Remember, if there is a very strong deflationary shock, the prices of commodities, along with the stock markets, will go down, possibly in a dramatic way. And I believe that the central banks are not going to just stand there and do nothing about it - they will print money to again try to make it all look like it is under control, to raise asset prices and to try to maintain the illusions they have been so dedicatedly building. And, even if central banks do not print trillions in the face of a huge deflationary shock - which is highly unlikely, to say the least - , what else would you want to own but hard assets such as Oil? Financial stocks? Apple? Facebook?
4. Go Long Wheat, Soy, Rice and Corn
As the world population just keeps growing and putting pressure on the demand for food, and with Wheat, Soy, Rice and Corn being extremely important ingredients of so much of the food that people eat (along with other uses they have, namely for Energy), these make strategic investments that can be a hedge against the food crisis, as much as an outstanding opportunity to make the most of your investable Dollars, Euros, Pounds or whatever fiat currency you have. Remember: the inflationary pressure has also its effects on food and helps to bring the prices of these commodities up, along with the increase in demand for these goods and the foreseeable food crisis that is nearer and nearer, and that the very UN is loudly speaking of. Moreover, with the abrupt climate changes which have been putting, and will certainly continue to put, even more pressure on the prices of these commodities, as was the case with the drought in the US and how it affected the corn crops, all indicators point to higher agricultural commodities prices. So, I would go long Wheat, Soy, Rice and Corn through the futures market ideally. I would nevertheless certainly see it as a good option to buy ETFs that keep track of these commodities, such as JJG, CORN and SOYB, for those who do not want to trade futures.
5. Short German Bonds
With the Debt to GDP ratio of Germany quickly getting to the worrying 90% level, and with the extreme exposure that Germany has to its insolvent Eurozone partners, such as Greece, Spain, Portugal and Italy, namely due to the consecutive and heavy bailouts - a very expensive bill that Germany has had, and still has, to pay - and to the exposure it has to the ECB's toxic balance sheet (again, toxic due to the PIIGS and to the way the ECB has been expanding its exposure to these countries' worthless debt), Germany is one the most perfect shorts that one can find out there. Its bond market is in a clear bubble, with absurdly low rates (Germany 10-Year currently at 1.35) which will, in my view, soon be corrected. Also, while the German economy is doing better than the other Eurozone economies, the truth is that it is not doing all that well. It is certainly not growing as much as it would need to in order to be able to foot the bailout bill, and also to face the current economic and financial risks that are hanging over the country due to its dangerous exposure. Also, when the markets start to realize that Germany is not after all in such a good shape and that its debt and financial obligations are already far from sustainable, the yields of the German Bunds will go a lot higher, and the weak German economic growth will not be proportional to how much it will have to pay to its creditors. Also, Germany's economy greatly relies on its exports - and the markets to which these exports are sent are shrinking into depression by the day. So, I believe that we will be seeing bad days for Germany soon, just as we are now seeing bad days for Spain which were unthinkable two or three years ago. Although I believe that it is as likely for Germany to leave the Euro as it is for Greece to drop its Eurozone membership, as a short-term trade I firmly believe it is one of the most tempting shorts, presently. I would short the BUNL, which is an ETF that keeps track of the German bond market.
While you trade, please do not overlook your need to build your true fortress-portfolio out of the financial markets. Keep hoarding physical gold and silver, secure your own piece of fertile farmland with plenty of water and develop its agricultural potential, preserve some liquidity and diversify your exposure to different currencies and to different countries, economies and political factors, and do make sure you have a good Plan B for you and your family that you can use if things start to fall apart. Sadly, it is very likely that they will, with the world as it is today and headed where it is going.
If you would like to discuss any details about these thoughts and recommendations or to get in touch with me to find out how you can better develop your trading strategy and build a true fortress-portfolio for the turbulent times that are heading our way, please write to firstname.lastname@example.org.
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