January 25, 2015
Weekly Market Outlook
By Keith Schneider
Mario Draghi and Tom Brady have a lot in common. They are both fighting deflationary issues. Sports and fashion are often used as market indicators. The hemline indicator, one of my favorites, correlates rising hemlines and prices. It correctly forecasted the 1987 crash, resulting in one of my better trading days. It might be time to start a new indicator called the Deflate-Ocator. However collecting the data might be a bit difficult. If you use the current data set available ( just one at this point), Brady is having a tough time explaining what happened, therefore our new Deflate-Ocator is predicting that Draghi will have a difficult time fighting off deflation even with his 1 trillion dollar gambit.
One thing Draghi has been able to do is get the price of gold out of the doldrums. The price of gold has moved up 20% if priced in Euros over the past three weeks. This is indicating widespread concern about the EU itself with money looking for a safe haven. Also underscoring that issue is that the dollar keeps soaring along with US bonds. It’s a perfect storm brewing with waves of liquidity flowing into virtually all US assets no matter what the price. The Swiss National Bank unpegging the Swiss Franc to the Euro also highlights the multiple issues facing the EU and the threat to the global economy.
US equities, driven by Draghi‘s trillion dollar injection recovered nicely this week from early losses from the first couple weeks of 2015 but still down fractionally on the year. The money flowing out of Russia is pouring gas (why not, they have an excess of it right now) on the US asset fire as well. The current short term disparity between the US Equity Market performance versus the dollar, gold and bonds is often the case when money is seeking a safe haven. Under normal market conditions, money seeks the best return on capital. The question remains, can the US pull the rest of the global economy out of the doldrums in a deflationary environment?
So just how much longer for the flight to US assets and gold persist? When prices go parabolic and pure fear and greed rule, there is no limit. Currently, with the dollar the world’s reserve currency, there are not many choices of where to go. Of course this stampede can stop at any moment as well. As a member of COMEX in the late 1970’s, I had a front row seat and participated in one of the great parabolic moves of all times. Silver went from $5 dollars an ounce to $50 and then back down, all in just a few heat beats, causing the Hunt brothers and many others to go broke. If one waited for a fundamental explanation while all this was unfolding, you would not have had a happy outcome. Shoot first, ask questions later.
On a more positive note, The Russian stock market stabilized at lower levels along with junk debt, even while oil closed on new lows. Adding to the mix of oil variables is that the Saudi King passed away this week. This calls into question whether or not the new King will keep his brother’s relatively forward looking polices intact including his stance on oil production. Once again, old fashioned chart reading is key especially when markets are unhinged and fear and greed rule.
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