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The Markets or the Mattress: I Know Where My Money is Going
The next 1,000 points on the Dow Jones Industrial Average in either direction are going to be determined by what happens in two cities thousands of miles from our own shores…
Athens and Berlin.
What's more, the risks associated with Europe's redemption, or its failure, are more concentrated now than they were before the crisis began.
There are two reasons: a) Europe won't help itself and b) Wall Street may still have $1 trillion or more in exposure to European problems.
What makes me crazy right now is that European chatter is what's driving the markets.
Every sound bite from Europe is critical these days. Not because there is anything relevant in the political babbling from financial ministers tasked with fixing this mess, but rather that there is a cascade of events that could take us in either direction.
Fix this mess and the markets will take off for a 1,000 point gain that will leave anybody who is on the sidelines hopelessly behind.
Fail and the markets could tank.
It certainly fits the pattern established in recent months. News leaks suggesting solutions have brought on rallies, while negative leaks have caused a ripple effect that has quickly dumped stocks into the hopper.
Yet, it's not really the numbers that matter at the moment – even with the Fed rumored to be considering another $1 trillion stimulus and reports that the European Central Bank (ECB) and International Monetary Fund (IMF) may be seeking as much as $600 billion each.
No. The market swings we are seeing are all about confidence or, more specifically, the near complete lack thereof.
The Mattress vs. The Markets
A recent report from TrimTabs shows that checking and savings accounts attracted eight-times the money that stock, bond and mutual funds did from January to November 2011.
That is a whopping $889 billion that went under "the mattresses" versus only $109 billion that went into the markets.
In fact, CNBC is reporting that the pace of money headed for plain-Jane savings and checking accounts from September to November accelerated to nearly 13-times the average monthly flow rate of the preceding nine months from September to November.
What's significant about this is that the money has headed for the sidelines when the markets have rallied. Usually it's the other way around. Normally money floods into the markets when they move higher.
The other notable thing here is that, generally speaking, up days this year have had thinner volume than down days. This means that most investors just can't handle the swings. In other words, every time the markets dip, they're packing it in.
Pessimism is the Breeding Ground of Opportunity
Bottom line: Investors are making a gigantic mistake – especially those with a longer-term perspective.
The Dollar Is DONE: Four Ways To Profit As the U.S. Dollar Dies
As a young British banker in the inflation-ridden 1970s, I got used to carrying large amounts of German deutsche marks, Swiss francs and Japanese yen in my wallet – to have some security against the lousy performance of the British pound sterling.
While paying for a pizza in London with this foreign cash was difficult, having those "safe-haven" currencies in hand helped me sleep at night.
We've reached that point again. In light of the debt-ceiling debacle in Washington, the U.S. credit-rating downgrade by Standard & Poor's, and the likelihood that a long stretch of dollar-killing stagflation is headed our way, it's time to take refuge in today's safe-haven currencies.
And I'm going to show you the safest of those safe havens.
Global Investing Strategies: A "Lightning-Round" Look at U.S. Stocks, the Dollar, Inflation and China
If you're a regular Money Morning reader, then you know that, d uring my appearances on national television or when I'm doing media interviews around the world, I frequently participate in something called a "lightning round " – a rapid-fire interview technique in which the announcer (and sometimes even audience members) run through a list of questions in rapid-fire order.
It's a technique that really puts you on the proverbial "hot seat." But I actually enjoy it: It forces you to think on your feet – which appeals to the former trader in me – and allows you to run through a bunch of topics in a very short stretch. In one way or another, each of these topics deals with global investing strategies.
I thought you might enjoy – and perhaps even find useful – a "highlight reel" of some of the best lightning-round questions that I've received in recent weeks, both in front of the camera and during the informal discussions that follow the presentations and broadcasts.
And we'll start with the topic that seems to be one of the most popular global investing strategies topics right now – gold.
How the Dollar and Europe's Ireland Moves Will Steer Fate of U.S. Stocks
Stocks retreated over the past week following an earnings warning from tech giant Cisco Systems Inc. (Nasdaq: CSCO), renewed tensions in Europe over the ability of Ireland to pay its debts and a surge in the U.S. dollar.
Overlaying the action was word out of South Korea that the G-20 meeting of leaders of the world's largest economies was not going well, with European and Asian leaders expressing exasperation with U.S. monetary stimulus and a distaste for U.S. President Barack Obama's scolding tone on export targets.
In prior decades American trade policy makers did not have to pay much more than lip service to overseas financial leaders because we held an unparalleled position atop the global dog pile. But now we are deeply, deeply in debt to China, Japan and Germany, and these creditors feel increasingly entitled to look down their nose at us with a mixture of disbelief and distrust.
Is the U.S. Federal Reserve Setting the Stage for Hyperinflation?
The U.S. government wants to stimulate growth in the moribund economy by stoking the fires of inflation. But by leaving interest rates low and buying up bonds – a policy known as quantitative easing (QE) – the U.S. Federal Reserve risks debasing the dollar, which could lead to a prolonged period of hyperinflation that would send prices skyrocketing.
After their most recent meeting on Sept. 21, Fed policymakers said low inflation warranted looser monetary policy. Minutes from the meeting said central bankers were prepared to ease policy to boost inflation expectations "before long."
The Fed is seeking ways to boost the U.S. economy after keeping interest rates at record lows and buying in $1.7 trillion of U.S. securities. The next move may be another round of quantitative easing that would expand the Fed's balance sheet even further.
But as it feeds more and more money into the financial system, the central bank may very well be sowing the seeds of hyperinflation.
Currency War Carries On as G-20 Meeting Fails to Secure Specific Trade Targets
Despite securing an agreement from Group of 20 (G-20) officials to avoid weakening their currencies any further, the Obama administration failed to convince member countries to implement specific guidelines to measure compliance and monitor trade imbalances.
At a meeting last weekend in Gyeongju, South Korea, finance ministers from both developed and emerging economies agreed to try to maintain trade balances at "sustainable levels," which they left to be negotiated at a future date. They were unable to reach consensus on precise targets, as the United States proposed. G-20 members will meet again in Seoul on Nov. 11 and 12.
The G-20 was able to hammer out a deal to get China and the United States – as well as the other G-20 nations – to agree to "refrain from competitive devaluation of currencies," and to let markets set foreign-exchange values. China is widely seen as keeping its currency undervalued to boost its exports, while the United States has been accused of pursuing a weak dollar policy, also to increase its overseas shipments.
Money Morning Mailbag: China Needs to Boost Domestic Demand to Continue Economic Recovery
[Editor's Note: We want to hear from you! Do you have a comment, suggestion, story idea or a question? Let us know at mailbag@moneymappress.com. (**) And be sure to check back for responses to reader questions and comments.]
China released data this week showing its economy grew 9.6% in the third quarter from a year earlier, slower than years past but still significantly ahead of other countries that are struggling to stabilize their economies.
A slight dip in growth is what China wanted. Its gross domestic product (GDP) has grown on average more than 10% annually since 2006. The country's central bank lifted rates this week by 0.25 percentage points for the first time since 2007 to further cool the risk of overheating.
While working to maintain a healthy level of growth, China now has to contend with other countries devaluing their currencies to compete against a cheap yuan that is fueling an export-driven recovery. However, the whole world can't depend on exports – somewhere along the line there must be growth in demand.
Look to Emerging Markets as the Federal Reserve Diminishes the Dollar
The main thrust of the past two months has been the renewed collapse of the U.S. dollar.
The dollar has been on a one-way elevator ride to the ground floor since August, when U.S. Federal Reserve Chairman Ben S. Bernanke first warned that quantitative easing was on the horizon.
Most recently, the minutes of the Federal Open Market Committee's (FOMC) last meeting telegraphed further monetary stimulus.
"In light of the considerable uncertainty about the current trajectory for the economy, some members saw merit in accumulating further information before reaching a decision about providing additional monetary stimulus," the minutes read. "In addition, members wanted to consider further the most effective framework for calibrating and communicating any additional steps to provide such stimulus. Several members noted that unless the pace of economic recovery strengthened or underlying inflation moved back toward a level consistent with the Committee's mandate, they would consider it appropriate to take action soon."
Concerns about inflation being too low almost guarantees additional quantitative easing unless the recovery gets a big shot in the arm before the next meeting in early November.
Federal Reserve Policy Pushes the Dollar Ever Closer to Collapse
Much of the content of the latest U.S. Federal Reserve statement, released on Sept. 21, echoes the central bank's previous post-credit-crunch pronouncements: There is still too much slack in the economy, interest rates are still going to be near-zero for an "extended period," and the Fed will continue to use payments from its Treasury purchases to buy yet more Treasuries.
But this recent statement uses a new turn of phrase that should have Americans very upset. The Fed says "measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate." Though the wording treads lightly, it should not be taken lightly. It may signal the final push toward dollar collapse.
The Fed's dual mandate, since an amendment in 1977, has been to promote "price stability" and "maximum employment." While often discussed as if both goals are complementary facets of one mandate, they tend to have been at odds during every recession since the Great Depression.
Currency War: China Stands Firm on Yuan as Global Criticism Escalates
Germany and Japan are joining the U.S. in pressuring Beijing to let the yuan appreciate to prevent an international currency war from spiraling out of control. Still, China remains firm that a gradual rate change is all it will allow.
German Economy Minister Rainer Bruederle warned yesterday (Wednesday) that a trade war could erupt if China didn't float its currency for a more fair value. As the China-U.S. currency tensions have heated up, other countries are saying China's unfair trade advantage is threatening export-driven recoveries around the globe.
"We have to take care that the currency war doesn't become a trade war," Bruederle told German business paper Handelsblatt. "China bears a lot of responsibility for ensuring that it doesn't come to an escalation."
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