Tuesday, January 1, 2013

Looking forward

I make no predictions. As a trader my mindset is that anything can happen and I will manage accordingly.

With that in mind I will admit that there are things that I expect may happen. These are the things I will be looking for. I will not be making bets on these things until they get underway, and even then will be alert for signs that I may be wrong on the strength or durability of any trends that may seem to be developing.

One of the continuing themes of world affairs will be the efforts by the major central banks to weaken their currencies. These include the U.S., Japan and China. The European experiment hopes to hold the Euro together as a viable entity and the Germans will continue to insist on high interest rates, so the Euro will remain strong vs. the US dollar. China will gradually allow the Yuan to appreciate vs. the USD as they move to create a stronger domestic consumer. The Chinese will continue to diversify their foreign exchange holdings, as many others will do, away from the U.S. dollar which will continue to undermine the status of the USD as the reserve currency of the world. The US Fed will continue to keep interest rates low until well after the economy improves, undermining confidence in the dollar. Japan seems to be attempting to run the Yen off a cliff, probably an attempt to gain market share from China as they recognize the Chinese' need to fight inflation and stimulate domestic demand. China also will be reaping the harvest of a three generation "one child" policy that leaves a demographic bulge of an elderly population, with the inherent need to use more Chinese savings for the support of the elderly. Over the longer term China will need to cash in some of the U.S. Treasurys it owns, putting pressure on interest rates in the U.S. and putting more US Dollars into the world economy. I expect those dollars to make their way back to the U.S. in exchange for U.S. products. Food may become an increasingly important export of the U.S. in the coming years, which would support the dollar, but in the shorter term I would expect a weakening of the U.S. dollar against the major world currencies. Although most currencies will tend to depreciate against assets. Precious metals may be volatile as they sort out the conflicting signals of currency depreciation vs. rising interest rates and rising asset prices. I do expect gold and silver to go to new highs, probably later in the year.
Equity markets have been strong even with all of the angst of the "fiscal cliff". I do not think that the U.S. population has any stomach for the effects of fiscal austerity and the deflationary aspects of those policies. Whatever solution there is for the deficit spending of the U.S. government will most likely be a paper solution that will put off till tomorrow a real solution. Having said that I think that we are entering a period of inflation that will surprise us and at first will entice us into thinking we have solved our problems. If inflation comes to pass we may have a chance to erase a large part of our debts, but only if we collect taxes. I think this is why there is the strong effort against raising taxes by the corporate lobby. They see an improvement in the velocity of money and do not want to pay taxes on their coming windfall. If we as a country want to be successful in debasing our currency to erase our debt the benefits of the operation must go to erasing or debasing the consumer and private debt. In this way we will put those dollars in the hands of the larger population and they will circulate many more times than they would in the hands of a few billionaires or corporate vaults. They will get them in the end, but in the meantime we need the "debt holiday" of the inflation. Whether by tax and spend, social security, wage growth, health care spending on a single payer system, the dollars must make their way to the general population in order to resolve our problem.

So I will be looking for the dollar to go down, the stock markets to go up for a year or so, interest rates to go up as bonds go down, and asset prices in general to rise. Inflation will be mistaken for prosperity again and we will reset to another level.

Here are some annotated charts of these general themes....

And if none of these things happens I will take note and live and trade accordingly!

Happy New Year!


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