A Bear Market In Trust

— Move along, nothing to see here…just keep your eyes on the bourse please. It will tell you all you need to know…

— The Middle East in Revolution? Market not concerned. Japan facing biggest crisis since WWII? Wasn’t that last week? What about the Portuguese Prime Minister resigning, fuelling speculation that Portugal will need a bailout? Portugal’s tiny – it won’t make a difference…LOOK AT THE SCOREBOARD.

— That’s right, Markets and Money readers, the market is absorbing all the punishment thrown at it. Surely that must mean everything is right with the world. After all, a market rallying on bad news is generally a bullish sign.

— But can you take the price action at face value? There is so much intervention, tweaking and fine tuning in the markets these days, it’s hard to know what’s what.

— Consider this article from the FT:

The billions of dollars in yen sold by the world’s most powerful central banks have sent a strong message to speculative investors. Those daring to bet that the Japanese currency will again test Y76.25, the record high against the dollar it hit last week before the G7’s intervention, better have deep pockets.

Before the financial crisis, the low-yielding yen was widely used to fund investments in a wide range of risky assets such as equities, commodities, property and higher-yielding currencies such as the Australian dollar. This sent the yen down to multi-year lows against a raft of currencies.

But the wave of deleveraging that followed the credit crunch saw the yen rally sharply as asset prices tumbled. Investors abandoned carry trades funded in the Japanese currency. The yen has risen more than 30 per cent against the dollar since Lehman Brothers’ collapse in 2008.

All that, though, could be about to change if the belief that central banks have imposed a ceiling on the yen gains traction. And a return of the carry trade would have the potential to lift prices of risky assets – equities and commodities are already well into a bull run – even further, analysts say.

— Central banks to the rescue again? Just like they did after the Long Term Capital Management crisis in 1998, when the dot com bubble burst in 2000, after 9/11, and when the housing market and credit bubble burst?

— Excellent, this should work out well then.

— During the height of the Japanese crisis last week, the powers that be (in this instance, the G7) didn’t like the way the currency markets were heading. So they intervened, halting the yen’s abrupt rise in its tracks.

— Now for the unintended consequence. The intervention has sent a signal to the market that it’s ok to borrow and sell the yen to speculate on ‘risk’ assets. ‘They’ won’t let the yen appreciate too much so the speculative carry traders are protected to some extent.

— If you believe that man can hold back the tide, go ahead and speculate. If you believe man is vain and full of hubris, then be worried.

— Or just buy gold and silver. The precious metals made new highs overnight, something we can’t say about global equity markets. This is the mark of a true bull market.

— But we’re not fooled into thinking that gold and silver are not benefitting from speculative carry trades too. No doubt some easy money has made its way into these markets. More than likely though, these speculative funds are flowing into the paper gold market – gold futures and options, among other paper instruments.

— This is not the real thing, and in time these paper gold (and silver) speculators will get burnt too. That’s because there is not enough physical metal around. Smart investors, big and small, are hoarding precious metals, leaving less physical bullion to flow through the major trading markets in London and New York.

— A class-action lawsuit has just been filed in a New York Federal Court accusing UBS of charging clients for storage of silver metal that was never actually purchased.

— Financial services, money, credit. These things are all based on trust. Without trust they have no real value. This is why fiat currencies are all falling in value against gold and silver – two monetary metals that have gained the trust of mankind over centuries.

— If you want tangible evidence of this, look no further than the performance of the Sprott Silver Fund, a North American silver ETF run by the highly respected (and trusted) Eric Sprott.

— As of yesterday, it traded at a 20 per cent premium to its net asset value. That’s massive. In other words, investors are prepared to pay a 20 per cent premium to the quoted silver price (which is set in the paper markets) to gain ownership of silver that they know and trust is there.

— With central banks pulling the levers of the global economy everywhere, and trust in the system deteriorating, you should be buckling up for a wild ride in the coming months.

Greg Canavan
For Markets and Money Australia

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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4 Comments on "A Bear Market In Trust"

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The class-action lawsuit accusing UBS of charging clients for storage of silver metal that was never actually purchased is a sickening example of today’s bankers’ mentality. How can we protect ourselves against such incredible dishonesty?


You know things are bad in Portugal when their austerity includes a special tax on pensions. I’ve met Portuguese pensioners, they are everywhere, but they don’t live the highlife.

And the wisdom of Solomon from the RBA “The Reserve Bank of Australia has signalled that banks’ management and investors should not expect double-digit balance sheet growth in the years ahead. And it has warned that any quest for higher growth could lead to new financial instability.” Too bad it was written today instead of 1994.


What a day for admissions …

“RBA assistant governor Malcolm Edey asked yesterday whether global banking rules should do more to encourage large cross-border banks to set up subsidiaries.”

Yeah they and your mates Fraser, MacFarlane and Garnault should have done something about in the 80’s eh Malcolm? A certain Kiwi branch office problem in mind old son?


It must be dirty laundry day today …

“The Australian Government is likely to oppose any move by the G20 to apply nationally policies being developed to reduce the moral hazard posed by the world’s systemically important financial institutions.”

They’ve already tried and been told to sod off by both BIS and the OECD on this. Going a token “me too” every time they shoot up some resource rich country or corridor isn’t going to change that one iota.

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