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Preparing for the "Devalue-to-deter-deflation" Conflagration

Today's (Friday's) NFP data was just about as awful as one could have feared.  There's plenty already written and plastered all over the media on the overall data, slicing and dicing it, but even the most optimistic among the bunch would have to conclude that the data confirm an absolutely dismal situation on the US labor front.

With all the talk that will, and should, follow on what measures must be taken within the US in order to promote job growth, the more immediate concern for investors is something that I've been trumpeting all week, but that was drowned out by the focus on what was the upcoming NFP data, namely: "political will"!

Now, more than ever, investors should take note of the issues mentioned in the article below that I wrote several days ago.  With the IMF meetings in DC this weekend, world leaders are coming together and could deal markets an interesting hand to play...certainly if they surprise markets with a unified, multi-lateral plan of attack within the currency devaluation war that seems to be going on, and even if they do nothing and leave markets to navigate what could continue to evolve into a chaotic, global "devalue-to-deter-deflation" conflagration!

Read on.....and prepare..... 


(From October 6, 2010):  Yesterday I wrote an article entitled: "The 'Scarlet Pimpernel' of Markets: Political Will"

For readers who have seen the movie of the quoted name, you'd recall that the 'masked man' who shows up just in the knick of time to save the day was quite elusive, hard to find, and it was difficult to fathom his ways. 

So my reference to "political will" as being just such a force for today's markets seems fitting.  Politicians (and by that I include central bankers and all public financial officials) make comments, sometimes forward looking, but of late, seem to swoop in just as the markets or economies are nearing the abyss and then scramble to save the day.

Now, if I thought the phrase fit yesterday when the world was 'ga ga', just to use a colloquialism, with the BOJ's move and the hopes for similar moves by the US Fed, then how much more so is it fitting today when the headlines are chock full of "political will" broadcasting from all corners of the globe.  Witness just some of today's headlines:

  • Wen warns against renmindbi pressure (Financial Times)
  • Dollar and bond yields fall on QE hopes (Financial Times)
  • Lawmakers demand probe into foreclosures (Financial Times)
  • Geithner Sees Damaging Dynamic in Currency Policies (Bloomberg.com)
Whether we're looking domestically in the US on the Congressional probe into banks on their mortgage practices, or globally on the currency comments that are being blasted around, one has to take note and measure the risks embedded in one's portfolio, should any of these headlines turn into something much greater than mere 'moral suasion'.

For example.....if you have bank assets in your portfolio, you might want to dig more deeply into just how far Nancy Pelosi & Co plan on going in 'probing' Bank of America and JPM. 
  • Willl they be saddled with stale credits for years while courts iron things out? 
  • Will they be inclined to continue lending for mortgages or other types of credits knowing that the foreclosure rules can change midstream? 
  • What effect will that have on earnings? 
  • What effect will that have on the economy?

How about stocks overall.....so many market commentators have attributed the run up in US stocks to the continued fall of the USD.  Is that right? 
  • Will the USD keep falling? 
  • And what about all the pressure on China....will that work? 
  • Will China announce a Yuan revaluation? 
  • And if they do, is the export component of the US economy so meaningful that our GDP would soar? 
  • Or is it likely that China will give the US the 'ol Heisman stiff arm and do nothing with their currency, in which case will our Congress continue to threaten and then unleash punitive trade measures? 
  • If so, which companies stand to benefit, and which stand to get hurt?

Something is definitely going on globally at the 'political will' level, and so far, at least based on how Japan acted unilaterally in their first bout of currency intervention a couple of weeks ago, it doesn't appear to be much of a coordinated, unified global 'political will' approach. 

That's market unfriendly.  

That raises the overall risk of sudden and unexpected policy moves.

For me, I'm asking all the questions above, plus some, everyday, all day.  And I'm monitoring my portfolios and their embedded risks based on how I view the odds of policymakers not just "talking the talk", but "walking the walk".

Will they 'walk' what they've 'talked'?  It's a question of "political will".

Ed Leventhal
Soos Global Capital Advisors, LLC

This article is meant to contain thought provoking views and is NOT investment advice. As always, please read IMPORTANT DISCLOSURE INFORMATION by hitting the following link to the "Soos Global Capital's Company" section of the Profile page  seekingalpha.com/user/686137/profile .


Disclosure: LONG SPX and many stocks in it. LONG C. LONG FXI.