First Restructure, Then Default…Later Inflation

–Before we get stuck into today’s Markets and Money, you should know Murray has posted a new free Slipstream Trader market update over at his YouTube Channel.  Murray’s theory on price action is unique in Australia. But we know some investors have never used technical analysis to trade or invest with. Murray began the free updates in order to show traders how the concepts he’s developed over the last 17 years as trader—the point of control, the widening distribution, and the false break out—can be used to understand what’s going on in the market.

Murray reckons the S&P 500 is in an “intermediate down trend.” That’s a shorter-term trading pattern which he derives from the indexes relationship to its 10-day and 35-day moving averages. “We haven’t yet turned into a long-term downtrend. I believe that’s where we’re headed; we’re just not there yet.”

— In yesterday’s update he analysed the S&P 500 and the ASX/200 prior to last night’s fall in the US markets. Murray said a close under support at 1294 increased the chances for a quick fall to 1250-1260. The index closed at 1286 today after losing one percent in New York trading. That, he said, was notable.

— As he just walked in the door this morning, we collared him and asked him if the market had further to fall?

–“It now depends on what Bernanke says tonight. If he reassures the market there’s more money coming from the Fed if things get really bad, we could see a false break. But if he’s silent on whether there’s going to be QE3, well then here we go.”

–We won’t dissect Murray’s analysis of the ASX/200. You can watch it yourself here. These videos do not contain the analysis of individual trades that Murray has recommended for his subscribers. But if you’re not familiar with his use of moving averages and his theories of price action and how he uses them to generate trading ideas, take 10 minutes and have a look.

–By the way, we always get snarky and sceptical e-mails when we make claims that our analysts can help you understand the market. There’s no pleasing some people. But we’re not cherry picking Murray’s arguments because he happened to be right this time.  In his free update from April 15th, Murray gave a pretty accurate forecast of everything that’s happened since. Check it out here.

–Murray isn’t the only one who will be watching to see what, if anything, Ben Bernanke has about the next iteration of Quantitative Easing. If the U.S. economic date remains displeasing, “Speculations of a generous third quantitative easing (QE3) package will grow” says Swiss precious metals firm MKS.

–MKS adds that, “Expectations in the market suggest that gold prices will benefit in the short term by the belief that slowing growth in the US will prompt the Federal Reserve to maintain favorable monetary conditions.” The spot price of an ounce of gold denominated in U.S. dollars traded as high as $1555 during the day before settling around $1544.

–The Australian gold price, by the way, is rock steady at $1438.76. A year from now, we will probably regret not buying more of it while it was cheap. Of course for the Aussie gold price to rise, the Aussie dollar has to fall…against gold. Normally, you’d say that the Aussie has to fall against the U.S. dollar for the local gold price to rise.

–But these are not normal times. The Aussie is popular as a high-yielding commodity currency. But it is a de-facto play on China, which makes it kind of a surrogate play on the rising Yuan as well. Weakness in China—and there are a lot of reasons to expect it—will be bearish for the Aussie. It’s not a question of if. It’s a question of when.

–You’d only really hold this view, of course, if you view fiat money as a fraud and the current global financial system as conglomeration of asset-logged banks appealing for help to hopelessly indebted governments. Check. And check.

–Speaking of which, the slow-motion default of Greece continues. The latest discussion in Europe, which has calmed the markets for a little bit, is the idea of a debt exchange. Under the plan, the maturity date of Greek debt would be rescheduled to a later point in time. This amounts to a restructuring of Greek sovereign debt, which is one of three options on offer in Europe that we discussed in January in the Australian Wealth Gameplan.

–The other two options are re-financing and default. Refinancing requires private creditors who are willing to pony up. And there don’t seem to be a lot those.  That leaves default, which is just a matter of time.

–The European Central Bank doesn’t want to restructure Greek debt because it believes it will lead to losses on Greek debt. Those losses will affect other banks in Europe that hold Greek debt. And thus the Greek crisis will become a European crisis, leaving the ECB with the job of inflating all the bad debts away through massive debt monetisation. The ECB, by the way, also owns a lot of Greek debt and could arguably be made insolvent by a Greek default.

–Eventually, the banks with the strongest balance sheets in Europe are going to have to recapitalise. What’s happening now is just a massive diversionary maneuver to give everyone time to prepare. If things go the way they normally do, elite creditors (those with connections or those too big to fail) will get out now or take small losses.

–The big losses will be saved for the public, who have no choice in the matter. And how will the public pay? The way they always do…through inflation.

Dan Denning
Markets and Money Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "First Restructure, Then Default…Later Inflation"

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Here is the nub of the argument that endorses caesar’s proclamation of extend and pretend in perpetuity … This is Geithner on swaps : “Capital requirements cannot bear the full burden of protecting the system against risk, and they should be considered in the context of the reinforcement provided by these other reforms,” Geithner said. The hundreds of trillions of swaps have bugger all colateral. Neither Geithner not anyone else can bring capital to the table on the bets already taken so they have to try to rig the game in favour of those without collateral by making all bets… Read more »

“The Australian gold price, by the way, is rock steady at $1438.76. A year from now, we will probably regret not buying more of it while it was cheap.”

I still prefer the leveraged play on Gold Miners as opposed to physical bullion.
Have 8 Gold Miners in my portfolio, Couple of South American, 3 African and 3 Australian based. Silver Miner in there as well. Have purchased silver bullion and have more on order.. Physical Silver Bullion is my preferred PM to hold.


From Bloomberg :

Bernanke said that while the recent increase in inflation is a “concern,” he doesn’t see “much evidence that inflation is becoming broad-based or ingrained in our economy.”


Does “much” sound like Greenspan’s patches of irrational exhuberence in “hotspots” on house pricing?

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