The Most Important Chart in the Investing World

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In a minute, I’ll show you the most important chart in the investing world right now. It’s affecting the price of just about everything else.

But first, isn’t it good to see Australia still a part of the coalition of the eternally willing? On the weekend, Prime Minister Tony Abbott announced that military personnel and aircraft are off to the Middle East in a ‘humanitarian’ mission.

Abbott said, ‘I stress that this is essentially a humanitarian operation to protect millions of people in Iraq from the murderous rage of the ISIL movement.’

The Financial Review says that this is the fourth deployment to the region in the last 13 years. We were willing back in 2001, 2003, 2005, and now again in 2014.

The country should ask why its willingness is not getting any results. In fact, the region seems to be going from bad to worse. Do you think this latest effort is going to make any difference?

The US’ Middle East strategy, if you could call it one, is a debacle. They spent years and hundreds of billions of dollars in Iraq for what? They replaced Saddam Hussein with a fragile government at constant risk of civil war.

Not content with leaving Iraq — a decade after ‘mission accomplished’ — the US couldn’t help themselves. Unhappy with developments in Syria, they wanted to boot out Assad’s government too.

But they couldn’t do so with their own troops. Instead, they were content to fund and arm (via their best mate in the region, the suppliers of the 9/11 bombers, Saudi Arabia) ‘rebels’, who ended up in large part being radical members of the Islamic State (IS), who they’ve now declared war on.

Have you got all that?

So here we go again. Sending troops to a region where we have no business being, still backing US foreign policy that lost its way many years ago.

Oh for a leader who would take a call from Obama and say ‘no’ to his request for help. One who would have the gumption to ask what the strategy is beyond next month…to ask why all this cost of materials and life over the years for a situation that only gets worse.

But that’s just too much wishful thinking to start off the week. We’re in an age of a deteriorating superpower and deteriorating global politics. We don’t have leaders anymore, only puppets. The military industrial complex is alive and well.

But if the US’ superpower status is on the decline, you wouldn’t know it by looking at the chart below. It’s the US dollar index. As you can see, it’s moved sharply higher over the past few months.

The momentum indicators at the top and bottom of the chart are severely ‘overbought’, and the index itself is well above the moving averages. This suggests a correction is imminent, but for now, everything that is NOT denominated in US dollars is weak.



The Aussie dollar, gold, copper, oil and most other commodities have all been under pressure lately. And it’s why share markets around the world are struggling to push mindlessly higher…as they’ve been doing ever since late 2012 when Ben Bernanke and Co got jiggy with it on the QE front.

But next month, it all changes. For a short time at least, global share markets will experience life without Federal Reserve QE for the first time since 2011.

In short, the market is having another ‘taper tantrum’ as the end of QE draws closer. The last such episode was back in June 2013. As you can see in the chart above, that was when the US dollar last spiked to its current level.

Being the world’s reserve currency, US monetary policy is essentially global monetary policy. As the US Federal Reserve winds down QE, you can see the knock on effects starting to emerge.

US dollar strength is just the most notable. Its strength since bottoming in May this year indicates tightening global liquidity. But until recently, the effects of this haven’t been all that obvious.

Emerging markets are usually most vulnerable to a strengthening dollar. But that vulnerability only began to show in the past week or so, as you can see in the emerging markets index chart below…



Emerging markets rallied to new highs this year despite the strengthening dollar. Until recently that is — when sharp falls took place, especially in markets like Turkey and Brazil.

The Bank for International Settlements warned in its just-released quarterly report that these markets are particularly vulnerable because of increased US dollar borrowing over the past few years.

As you know, borrowing in a strong currency while revenues and earnings are in a weaker currency doesn’t usually work out well. It places greater pressure on a company to service its debts, leaving less left over for shareholders.

You’ll have to wait and see whether emerging market resilience can continue, or whether the end of QE will finally have a more definitive impact on these peripheral economies.

I don’t know what the outcome will be. But I can say that markets often ignore issues for months on end and then all of a sudden worry about them acutely. Maybe this is just the start of an intense worry phase.

Whatever it is, Australia is a part of it. Our stock market and currency are under the pump, thanks to weaker commodities and a weaker iron ore price in particular. That, in turn, is because of a slowing Chinese economy, which, as it turns out, imports US monetary policy through a partially pegged exchange rate.

The US dollar’s tentacles have a wide reach. And it touched China on the weekend with the Middle Kingdom announcing weaker than expected industrial production, fixed asset investment and retail sales growth.

The slowdown comes amid a deteriorating property market in China, which for years was the engine of growth for the country.

But that engine is sputtering as China’s leaders grapple with trying to rebalance the economy without crashing it. It’s a tough task…

Which is why you can expect to hear calls for ‘more stimulus’ from China grow louder this week, because ‘more stimulus’ always works. If only we had done ‘more stimulus’ sooner rather than later, we’d not be in the position of needing ‘more stimulus’ now.

Economics really is that simple. Money may not grow on trees but it does lay dormant and abundant inside the computers of our heroic central bankers. (In case you need me to say it, yes…I’m being sarcastic.)

For that reason, all eyes will be on the Federal Reserve this week. They gather for a two-day meeting on the 16th and 17th, and boss Janet Yellen gets a chance to move markets with an accompanying press conference at the conclusion of the meeting.

Usually, the Federal Reserve provides soothing words about how interest rates won’t go up for ages and everyone can keep punting without any need to worry. That’s worked well for the past few years.

But the time is approaching where the Fed will actually start having to do something on the interest rate front. Or at least they’ll have to stop pretending they’ll keep interest rates low forever.

In other words, there are less rabbits in the bag. Or maybe there are no rabbits left at all?

Regards,

Greg Canavan+
For The Daily Reckoning Australia

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning 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 The Daily Reckoning for free here. If you’re already a Daily Reckoning 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 Daily Reckoning emails. For more on Greg go here.
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