Liquidity Rules

'TARP', 'QE1', 'QE2', "Dollar Swap Line", 'LTRO' - 

These are acronyms and financial jargon for liquidity injections into the financial market place since 2009.  Liquidity to the down and wavering financial markets is like VIAGRA to a similar category of down and outs.  And I am not trying to make fun of those who (think they) need that pill.

It is uncanny though that people use it under similar emotional stress as financial markets do, gasping for more 'injections from Dr. FED'.  The first round it worked, the second was a flop, the third one? A 50/50 chance it will work again? And create what exactly? The right environment for lasting economic resurgence? Or just another splash of Asset Inflation? Hot air? Just like Viagra does for manhood, liquidity does for artificialy inflated expectations for stock markets.

SINCE WE ARE TALKING 'MEDICINES'...
If I may say so, the real medicine would need to ensure that wealth is transferred to those who manage it properly; debts transferred to those who know how to utilise and service them to the benefit of all. But the battle rages on: none of those who have and control wealth are easily convinced that they should pass it over without at least a good fight to those who proclaim they can do better.

Before I forget, here is a brief insight into short term momentum in the markets. 

DAX -  left - lags DJIA - right- , but exhibits the stronger monetum!

A particular overdose of LTRO seems to have worked up the German DAX (left half)most recently: Comparing the index with the DJIA (right half), we note that in recent days, the DAX is certainly exploding upward, - but has yet to reach the highs of May 2011 and is now clearly oversold (RSI yellow dot). The DJIA however, had a much tougher, more volatile path up, but - is now touching on the 12870 of May 2011).  Both are therefore extended to the maximum, with a bearish undertone, as the DAX is lagging significantly.  A short term change is on the cards.

Back to the cause: Liquidity

liquidity rules - source ContraryInvestors.com

My friend, Flo, sent me an article by www.contraryinvestor.com, dated February, 2012., titled "It don't mean a thing, if it ain't got that swing".  And no, it's not talking it about Tiger Woods' time out (too much Viagra?).  It is taking a hard look at financial markets since the crisis in 2008.  To give you a flavour, here is a chart they produced.

It's worth a good, contemplative read.  Indeed, contemplation, reflection, moderation in fair doses could be helpful, natural medicines the market really could do with at the moment.  Yet, the 'patient' rejects all natural products and goes for 'adrenalin' instead.

"No More Free Markets, Just Interventions"
That's another quote from the said article.  I have observed and commented from time to time about cycles projecting one direction and markets taking a different turn, - and each time it was due to some interventionist activity.  The distortion created often lead to a much higher volatility and - when turning down, a huge velocity breaking through the strongest support levels. 

But cycle analysts are learning fast.  That is how we ended up with two totally opposing views of what 2012 has to offer:
REALISTS WITH AN EYE FOR CONSENSUS
One party, the ones considering themselves - the realists, the down to earth, look at the longer term bear trend since 2000,and - using imaginative tools like inflation, the gold standard, global currency adjustment, etc  - are eager to show graphically just how bad things are, and how much worse it might get before it gets better.  They have plenty of ammunition and support from the fundamental analyst camp. We do face the toughest of tasks of any economic cycle: DELEVERAGING. 

Misery of bear market trend - S&P 500 below 000 by 2016?

There is DANIEL FERRERA, a renowned Cycle Expert, producing charts, which show 2012 as an extension of the bear market trend, a repeat of 2008 or worse, and a large destruction of the capitalist system as we know it. According to some of these researchers you should not be investing in anything riskier than cash, though they aren't specific as to which currency we should use.

HANDS-ON REALISTS
The other party work on the assumption that consensus opinions, straight line trajectories and chaos theories are illusory in that they are almost always proved wrong.  An associate of mine thinks that mankind can only stand 6-9 months of bad news, before they see themselves compelled to face the battles of life - with renewed vigour.  That is when then stocks take a sudden turn for the better, often not needing an extra NEWS trigger.  Hands-on realists need to be contrarian in outlook, unfettered by norm and consensus.  They view the need of rising and falling values from a different perspective and  perceive the signals in the markets with an intuitive sense of what does or does not make sense in the global context.

True Money Supply in the US

In his annual forecast for 2012, Henning Schaefer, of Cosmos-Trend in Germany,  is telling us that none of the doom-mongering makes any 'sense', because it brings no positive aspect into the picture.  As much as some people would rub their hands with glee in seeing bankers - or Greeks or any other obvious scapegoat - scalped for their misdeeds, it does not carry any positive weight in repairing the damage done by the 2008 crisis. That is why I think that - as far as its leadership is concerned - the world is best served with an extra dose of ASSET INFLATION.

produced with the ChartNexus software

This appears to be the least painful option in dealing with the enormous debt issues, recapitalising our banks, shoring up the financial system - and avoid upsetting more already high strung, high taxed, rioting voters.  Leaders want to be re-elected, after all.



The HANDS-ON REALISTS advise us to start taking risks as risk asset prices will continue to rise, at least in line with the exponential curve of the money supply chart, (Source: www.goldmoney.com) denoting the tremendous loss in the dollar's buying power.

gold price rise to infinity in 26 months?

Of course, such discussions also require a healthy dose of pragmatism, when assessing the gold price chart here. If prices were to continue along the red trend line, we would see gold prices rise infinitely within 26 months, so reckons Armand Koolen, a Dutch physicist.  He also reminds us, that between 1919 and 1935 - and also after the decoupling of the USD from the gold standard in the 70's - gold prices experienced similar percentage increase as we see today.

Staying with the topic - but assessing the short term outlook: GOLD...

Price Shock At Dawn

gold prices in USD - short term correction likely!

Lest we forget with all the theories, - we are trying to make money here.  The shock hit me this morning opening my computer seeing gold prices in the US fall of the cliff overnight.  Not because I was invested! I exited on January 19/20, 2012.   Since then gold prices rose from a lumpy 1660 - to yesterday's peak of about 1770, and some of my concerned investors - gritted teeth - may have looked on in exasperation. And then, 'while you were sleeping', gold prices quite suddenly fell by 4% to $1720s prices.

During the same period, our Singapore dollar rose from US$1.29 to US$1.24, or about the same 4% in the opposite direction. I am not justifying my trade decision here, I am just pointing to a mirror move as they so often happen in the markets. 

Turns in price trends for gold tend to be reciprocated by similar price swings in stocks in the same direction rather promptly thereafter.  Prick your ears it must; this could be the precursor to the corrective turn we have been waiting for patiently.  Therefore, rather than a punch in the groin, the gold surprise is a gentle, exhilarating jolt for me and my investors!

Enough for today, - enjoy the rest of the weekend.