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Nenner On Euro “Debtonation”, Deflation Crisis, And How To Profit - Abridged Version




Wachtel On 8 Fundamental Reasons To Believe Him

 

See Nenner On Euro “Debtonation”, Deflation Crisis, And How To Profit for full details

 

 

The latest EU and Euro travails got me thinking about  my April interview with the prominent market technician Charles Nenner( see Charles Nenner's Trends and Trades: Investor's Roadmap for 2010-2011). I had asked about his thoughts on the deteriorating EU debt crisis. As noted in this article, while the former Goldman Sachs technical analyst is well known among the smart money and large institutions as one of the most important market researchers, many retail investors are not familiar with him. See this article for his background information.

 

Nenner’s Forecasts On Target

 

He had called the euro’s high around 1.5100 months beforehand, even though at the time the ECB’s more disciplined hard currency views versus that of the US Federal Reserve, made the Euro a candidate to share or usurp the USD’s reserve currency status.

 

The Euro of course had been in fairly steady decline since that forecast, as the Dubai debt crisis reminded markets that the EU’s PIIGS block was essentially a package of 5 larger versions of Dubai that threatened to blow out the façade of EU and Euro stability.

 

When we spoke in early April, the latest March 25th EU/IMF plan was already proving to be a failure, as Greece was only able to sell bonds at much higher rates than desired.  Ditto the rest of the PIIGS, if they could sell them at all. There were plenty of signs that the EU debt crisis was deteriorating. Yields demanded on new Greek bonds continued to climb, and there were plenty of signs of political and popular opposition to the plan in both Germany and Greece.

 

When asked how low the Euro could go, he said that if the EUR/USD held below 1.3100, that would signal a real crisis in the euro.

 

EU “Debtonation “

 

The EU debt crisis deteriorated in April and truly unraveled over the past weeks, as borrowing costs for Greece soared beyond its means and forced it to beg EU assistance to avoid default. Borrowing costs on other PIIGS nations’ bonds soared on guilt by association, threatening to suck them down the same whirlpool of default from unaffordable borrowing costs.

 

We spoke again May 5th about the unraveling crisis, and I asked Charles about his thoughts on the EU, Euro, and what individual investors could do for both protection and profit.

 

I’d hoped to get the interview written before the weekend, but events intervened. The climax (thus far) came the very next days,  May 6th  and 7th, and brought global financial markets to yet another near collapse last week as vital interbank lending ceased on uncertainties about which banks were exposed to an increasingly likely wave of EU sovereign and banking failures.

 

Even after the Sunday May 9th announcement of the latest €750 billion rescue plan, aimed at convincing markets that the EU/IMF would prevent all PIIGS nations’ bond defaults, markets remain justifiably skeptical that this improved plan is anything more than a more expensive deferral of an ultimate, even larger EU and global financial meltdown because it does not address the root causes of the crisis.

 

Equity markets have stopped panicking and may be recovering, but remain unstable. The Euro itself has continued falling to yet new annual lows. The safe haven Japanese Yen and US Dollar have been among the strongest currencies Monday and Tuesday, and demand for US Treasury instruments has been brisk and sent yields from a recent high of 4% down to about 3.5%.

 

So finally, in the relative calm, here are some key forecasts and a high conviction pick from Charles Nenner.

 

Key Forecasts For The Coming 7-9 MonthsThe Euro

His cycles and price target algorithms show near term downside for the EUR is around 1.1800.

 

Deflation Coming

 

He continues to warn, as he did in April, that his system shows that deflation remains the prime threat for the next 7-9 months, to the extent that a real deflationary crisis is possible. He warned that a strengthening dollar would feed that possibility.  After the deflation scare, he sees inflation. Charles called for deflation when crude peaked above 140, so he is no stranger to inflation and deflation cycles.  He just sees them earlier than most others.

 

8 Reasons To Fear Deflation For The Coming 7-9 Months

 

While I’m not privy to the inner workings of Nenner’s cycle and algorithm based system, a look at the fundamental evidence supports Nenner’s deflation hypothesis for the coming 7-9 months:

 

1.       A declining Euro provides major support for the US Dollar, as the EUR/USD comprises about 33% of all forex trade, thus a move down in the EUR forces the USD higher and vice versa, as seen during most of 2009.

  1. “Shock and Awe” Rescue Becomes “Shock and Awwww” (hat tip to Michael Ashton): While the latest € 750 bln ‘shock and awe’ EU/IMF default insurance for all PIIGS block bonds may have halted the immediate risk of sovereign default and financial system collapse, it has been a disappointment for the Euro –which is still struggling as markets recognize that important questions about the feasibility and enforcement of the plan remain. See 6 Unanswered Questions That Could Kill The Latest EU/IMF Plan . The austerity spending cuts in the PIIGS block will hurt jobs and spending in these economies. Ditto to a lesser extent (?) the countries for which these nations are major export markets or credit suppliers, especially in the EU and CEE region.

3.       Commodities are priced in dollars, so commodity prices would come under pressure

4.       A rising dollar means the imports to the US cost less, meaning the world’s largest economy risks importing deflation

5.       Most of the EU, especially the PIIGS block and peripheral CEE nations are already experiencing deflationary pressures under austerity fed double dip recessions

6.       China is actively attempting to cool off its own growth.

7.       Japan is also primarily concerned with deflationary pressures, to the point that it remains committed to a dovish easy money policy.

8.       Inflationary Lending & Spending Not Yet Present: While central banks in the EU, UK, and Japan (and to a lesser extent the US) remain dovish, lending and spending are still far from robust.  No matter how much money is printed, it should not spark inflation until it starts chasing a relatively limited supply of goods and services via lending or spending. Want proof? Inflation remains muted in most of the developed world despite years of low rates and stimulus spending

 

Nenner’s system does not show inflation until some point in 2011, though when it hits the risk of hyperinflation is very real.

 

So, with deflation threatening to undermine earnings, spending, wages, and asset prices, how does one protect oneself and profit?

 

China And Other Emerging Markets: Avoid long positions

 

Charles believes China’s current attempts to cool its growth are excessive and will reduce growth more than desired.

 

Other emerging markets are also likely to see serious deflation for the coming 7-9 months

 

Charles’ Nenner’s High Conviction Deflation Pick

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