The Looming Sovereign Debt Crisis

Below is a chart courtesy of a very interesting article from Forbes.com by Daniel Fisher. For those who wish to read the full article can do so here.


For those calling for the death of the US Dollar and resultant rush to commodities priced in US Dollars might wish to review this chart. Now Iceland is a snapshot pre crisis and let's be honest it isn't really one of the big players anyway.

Third and fourth on the list however, UK & Switzerland might cause a few more headaches, not to mention the Euro Zone.

The next major crisis in my opinion will come from Europe, the problems currently occurring in Greece are a small but not insignificant component of what I envisage will be heading our way in the near future.

I continue to remain bullish on the USD having looked like it bottomed late 2009 although a short term pullback cannot be ruled out.

Bob Prechter of Elliot Wave and his view on the Invincibility of the Fed

Interesting article today by Bob Prechter on how the market's interpretation of the US Fed's actions may be another great contrarian indicator of future market performance.

In it he discusses US Long Bonds performance over the course of 2009. At the beginning of the year with the Fed Reserve's announcement of its intention to buy $300B of long term US Government debt (on top of $1 Trillion of mortgage backed securities) one would have suspected US Long Bond prices to rally however as Bob shows the performance for the year was -26%. At the time there was an extreme 99% bullish trading sentiment, classically set up for the correction that followed.

Those who wish to read the original article by Bob Prechter can simply click on the Elliot Wave International logo to the right of this blog or follow this link.

Now with the profligate spending being announced by the Obama Administration leading all the inflationists to call the death of the dollar being imminent perhaps something else in in store. A US Dollar rally would be the equivalent direction to that which we saw in US long Bonds discussed above.

Perhaps the dollar's death is some way away yet?

Reconciling the Inflationist & Deflationist Camps

In Mish Shedlock's latest update (see here) he attempts to reconcile his deflationary bias towards global asset markets with Marc Faber's focus on inflation. He highlights the possibility of a sovereign debt default of one of the PIIGS (Portugal, Italy, Ireland, Greece & Spain) along with other troubled areas such as Mexico along with the housing bubbles in Australia & Canada in particular. Mish's blog goes into more detail than I do here.

The interview on Yahoo's Tech Ticker with Marc Faber can be found here.

Essentially it becomes a meaningless argument as both inflation & deflation in my opinion will happen but at different times in different places. What is important however is how to profit from it.

I am bullish on the US Dollar purely from the perspective that I am an Australian Dollar based investor. It is all relative. A rising US Dollar will merely be the result of a collapse of the Euro and/or the Yen first (which will bring the Aussie Dollar down with it as it has rallied strongly on the back of a recovery in equity & commodity markets), NOT the result in my opinion of an improving US economy. That is an important point.

I am not looking forward to seeing how this plays out.

Mainstream Media jumps back on the Depression bandwagon

A very well written piece from Saturday's Sydney Morning Herald on the economic perils that we face this year. Article can be found here.

It is not often you see such bearish pieces in the mainstream media being the cheerleaders for the bull market that they usually are so I was quite pleased when I saw such an honest article. I was very interested in their argument on the US Dollar, that being that given the parlous state of EU, Japanese, China et al finances, worse even than those of the US that in their opinion the rally in the USD will gather momentum this year.

Forgive me for being the boy who cried wolf on this, just keep hoping I am wrong:)

Mainstream Media jumps back on the Depression bandwagon

Births/Deaths Model Adjustments and the distortion of Payrolls data

Attached is a link to Mish Shedlock's latest blog  that discusses the 38% rise in business bankruptcies in 2009. The below table is attached from Mish's blog.

For those that aren't aware the Births/Deaths Adjustment is an estimate of the net jobs created/lost as a result of the forming of new businesses and closing of others. The bottom numbers on a month by month basis are most critical. In January 09 there was a large negative adjustment (-356K) for the previous years overly rosy projections of job gains as the recession was going through its early stages.

With a 39% increase in bankruptcies for 2009 versus a Births/Deaths model adjustment of a net 1.179M job GAINS between February and December what do you think the chances are of another adjustment to the January 10 data that will come out in February? (N.B we will still have to probably endure another positive print for the December numbers first which come out tomorrow)

Either the BLS is outright manipulating the data or they have learnt nothing from the mistakes they made in 2008.

I will leave it to the reader to decide.....

One final thing the reader may like to be aware of is that following the release of the January 2009 payrolls data on February 4 2009 the Dow declined a shade under 20% over the course of the next month to its March 9  low.

The two may not be related but one should be at least aware.