Thursday, August 2, 2012

Markets still looking for a handout.

As long as I can remember in my trading life, (About 17 years) the stock markets have rallied on a promise of easy money from some government agency. Usually it was the Federal Reserve lowering interest rates. As the years went by the length of those rallies got shorter and shorter. At first they lasted for years. Then months to years. Then a few months. Now it is about THREE DAYS!

The markets were looking to Europe and the European Central Bank (ECB) today. The leader of that entity, Mario Draghi promised to look into developing a mechanism for buying bad debt from some of the countries afflicted over there. The stock markets around the world were disappointed. Whether the declines today were from the prospect of help not coming fast enough, or the prospect of another bailout coming, it is hard to tell.

One thing to keep in mind. Whenever a country prints money. ie, creates debt, the currency suffers. The currency in this case is the Euro. As the Euro continues to slide, the US Dollar continues to go up. That makes it cheaper to buy imports in the U.S. So our trade deficit worsens. A stronger dollar means that it will take less dollars to buy a share of stock as well.... A strong dollar means general deflationary conditions prevail. That can be a great thing when there is room to lower interest rates and stimulate borrowing and debt creation to counter act the currency strength. But interest rates in this country can't go any lower.  In fact, in Switzerland interest rates are actually negative. Meaning the bank charges you to keep your money in the bank. This is due to the Swissy's safe-haven status. The whole world is taking cover in the safer currencies, if there is such a thing, even gold and silver are showing the effects of deflation. Or the anticipation of deflation. The lesson is that as governments are unable to pay their bills their borrowing costs go up and that is felt throughout the world and in particular in the economy of the country in question.
In this country the anti-tax movement is counterproductive. The question is not about the level of debt. The question is about a governments willingness to pay interest on its debt. Will the country honor it's bonds....
Our turn is coming and the markets will anticipate that coming. The beast is slouching toward Wall Street.....So far the world trusts the U.S. Government debt.

Here is a long term look at the 10 yr US treasury bond. If the economy is picking up why does this chart look like this. This is a picture of deflation.  Period.


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