The Fear

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And just like that “the fear” is back. “The fear” is that the lazy month of August in the Northern Hemisphere might be good for your tan, but it’s not going to do anything for you have a lot of money to repay and no way to repay. That goes for sovereign debtors in Europe and homeowners in America alike.

Dawes called it. Dawes, as some of his readers refer to Slipstream Trader Murray Dawes(in the way that rock aficionados refer to “Prince” as “Prince” and pop aficionados refer to “Gaga” as “Gaga”) sent out two alerts yesterday that amounted to single-stock plays on a falling market. He did the same thing, amazingly, on April 15th – the very day the ASX made its intra-day and closing high for the year.

Dawes, like all traders, is a bit weird. We have to confess the traders are a different breed. It’s like they speak the same language but use an entirely different vocabulary. Part of that vocabulary is technical. In the case of Dawes, it’s understanding the concept of the widening distribution and the point of control – the formations which explained and, to a less clear extend, predict future price action.

But as for present price action, it isn’t good. The S&P 500 lost nearly three percent overnight. The Dow Jones Industrials shed 2.5%. Even oil was down 2.8% to $78.02 on the futures market. The yield on two-year U.S. notes fell to a new record low of 0.4892 (safety?!), and good old gold held the line at $1,200.

What about the dollar index? Earlier in the week we had a technical look at it and wondered where it was headed and what impact that would have on commodity prices. Dawes chimed in and wrote, “It is far too dangerous to try and short the US Dollar index here while it is so oversold and so close to very major support. The smarter play is to be patient and wait for a reversal signal in this 78-81 area and then ride the short squeeze.”

Squeeze, anyone?

The Euro fell 2.3% against the U.S. dollar overnight. Dawes wrote in again this morning with this: “The US Dollar index had a massive rally last night and looks like it has put in the intermediate low I was calling for between 78-81. It also closed above the 200 day moving average. The equity market also fell over as expected and looks to have made an intermediate top. The squeeze is on in the US Dollar.”

Dollar higher and stocks lower is roughly the trade you’d expect as investors crowd into-short term bonds and get out of stocks. But why are investors just know deciding that earnings prospects for stocks are not good? It could have a lot to do with Federal Reserve’s bearish announcement and its intention to start buying Treasuries again to “support growth.”

We suspect that many investors are starting to realise what we’ve been saying all along: these guys at the Fed have no freakin’ clue what they’re doing. And they’re only making it worse. Mind you they have plenty of help from the U.S. government. It ran a $165 billion deficit in the month of July. Despite that, the Obama administration managed to find $3 billion lying around to distribute to people who can’t pay their mortgage.

America. Is it going to be a failed State sooner than most imagine?

Disappointing profits from Telstra and Qantas probably didn’t help Aussie stocks at the open. Nor did the news that China’s industrial production expanded at the weakest pace 11 months last month. Chinese retail sales grew 17.9% in July, which was slightly lower than the previous month’s rate.

All in all it was quite a bit of synchronised wretchedness in an interconnected financial world. But what would you expect? The global reflation beginning in 2003 was transnational and crossed all asset classes. With slower credit growth, and with people on the front lines of the economy dialling back debt and spending, the tide is going out.

This creates a highly volatile political situation. Politicians insist on growth at all costs, whether they are broke or not. Unemployed voters are not happy voters. But this political element to monetary and fiscal policy – indeed to social cohesiveness – is dangerous. More on this tomorrow.

Dan Denning
for The Daily Reckoning 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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Comments

  1. It seems the UK is lucky that it is at the start of the political cycle.
    Then again, it is a coalition government.
    If the sh.t really hits the fan and the people start getting restless, can this partnership withstand the pressures?
    As for the U.S. Well 2 years into his 4 year Presidential term and with mid term elections around the corner you can bet your bottom (last) dollar that political economic leadership is going to be in short supply over the next 2 years.

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  2. Just finished watching the Dick Smith inspired population debate on Q&A on ABC. Singo, summed up one issue pretty well: Prices of asset (which we can presume he has bucket loads of) will fall if growth aint kept up, and that won’t keep up if population growth doesn’t keep up. Therefore Dick’s wrong. He didn’t use the word Ponzi but you could sense the urgency (perhaps even fear) in the manner of some with a lot to lose. One bloke in the audience even implied Australia’s population influx was keeping a great asset Ponzi scheme alive; his half baked point/question was pretty well brushed off.

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  3. Dick Smith wants to pay a million bucks for good ideas on how to decrease the world’s population – Silly old bugger – We’ve known them for years. Just depends who you want to kill – If it’s the oldies then leave ’em outside the igloo in winter like the Eskimos; If it’s the new borns then drop them on the trash heap like the Romans; And if it’s those in between then send them off to war.

    Wouldn’t a smart man with a spare mill being asking for bright ideas on how we can increase the world’s population?

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  4. Loreena Bobbitt as Minister for World Population Control? But hey, even if Dick gives me the mill I’m NOT voting for my suggestion! :)

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  5. Dick Smith might as well give his million bucks to Obama.

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  6. If we can figure out what gene determines asexuality we could selectively breed for it? Sounds messy – How about just cloning the asexuals we’ve already got? Hey, I could be onto something here! Wonder if future generations really will thank me for voting for it – Probably should stash a few pairs of breeders in a zoo somewhere just in case we ever want to change our minds. Hey Dick, where do I pick up me money mate? :)

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  7. Population control is a fascinating topic though. Historically genocide has often been seen as just great – Moreso amongst the genicidors than the genecidees I gather! Then yep, the age old staple of infanticide was frequently seen as the eminently sensible choice. Geronticide has been tried occasionally – But it hasn’t ever really seemed to catch on yet? Yep, there’s no shortage of arguably lesser evils for the chap who lays awake at night worrying about omnicide Dick.

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  8. I was musing about the possibility of cloning people who don’t enjoy doing ‘it’ – But the comment got moderated – Presumably because it involves a big word containing the little ‘it’ word – Ah, don’tcha just love lazy Sunday arvos … :)

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