By Addison Wiggin

11/04/10 Baltimore, Maryland – So… This is what life after “QE2” looks like:

• Record gold prices
• Stocks back at pre-Lehman levels
• And a dollar cruising toward its 2008 lows.

Everything is rallying…in terms of depreciating dollars. Mission accomplished. Ben Bernanke needs George W. Bush’s ol’ “shock and awe” flak jacket.

In case mainstream media coverage made you glaze over, here’s the quick and dirty of the Federal Reserve’s fateful decision…

• The Fed will buy $600 billion in Treasuries over the next 8 months
• The mortgage securities the Fed bought during QE1 now reaching maturity will continue to be rolled over into Treasuries, as they have been since August. That’s another $275 billion, give or take
• There was also the caveat that more of this could be in the works if unemployment stays high and inflation (as defined by core CPI) stays low.

Hmmn… If the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that’s the consensus guess)…and the Fed will purchase $875 billion in Treasuries over the next eight months (that’s two-thirds of a year)…

[Pause for back-of-the-envelope math]

…then we quickly see the Fed plans to monetize all of all the debt that Treasury plans to spit out from now through the middle of next year, and then some.

This is yet another reason we don’t expect the House Republicans to convert to the gospel of fiscal responsibility any more than they did last time they were in the majority: They can indulge in demon spending unto oblivion…and the Fed will have their back.

“If this were Greece or Ireland,” Bill Bonner wrote yesterday before the announcement, “the government would be forced to cut back. With quantitative easing ready, there is no need to face the music. If bond buyers will not finance America’s trip to bankruptcy, the Fed will provide as much brand-spanking-new money as necessary.”

The main difference between QE2 and its predecessor is this: The bulk of the junk the Fed put on its balance sheet during QE1 was mortgage securities, with about $300 billion of Treasuries thrown in for good measure. Now it’s all Treasuries, all the time.

And most of those Treasuries are of medium-term duration – very few 30-year bonds are in the mix. Thus, the yield on the long bond rocketed past 4% yesterday. It sits at 4.05% as we write.

Still, what’s really notable about QE2 is the form it did not take. In August, former Fed vice chair Alan Blinder wrote an Op-Ed in The Wall Street Journal. He tossed out a number of suggestions for QE2 that, for better or worse, would actually goose the economy and not just shore up the banks’ balance sheets:

• The Fed could buy assets beyond the realm of Treasuries and mortgage securities. It could buy corporate bonds, small business loans, or credit card receivables
• The Fed could stop paying interest on excess reserves to member banks. And if that didn’t encourage them to make more loans…
• The Fed could start charging the banks interest to stash their excess reserves.

Yesterday, the Fed chose “none of the above.”

It didn’t even take up Blinder on his suggestion to adopt new language hinting at an even-longer lasting commitment to near-zero rates. We just got the same old blather about “exceptionally low” rates “for an extended period.”

Yawn.

Stretch.

“Today,” Fed chief Ben Bernanke wrote in this morning’s Washington Post by way of explaining himself, “most measures of underlying inflation are running somewhat below 2%, or a bit lower than the rate most Fed policymakers see as being most consistent with healthy economic growth in the long run.”

Of course, that “underlying” inflation level does not take into account your need to eat, or heat your home or drive to work.

And it’s only going to get worse. Your neighborhood grocer is seeing his costs rising. “The big challenge,” says the CEO of a California grocery chain to The Wall Street Journal, “will be how much can we swallow and how much can we pass along?”

He’s holding out as long as he can, but skimping on tires for your delivery trucks (seriously, that’s one of his cost-cutting measures) only gets you so far.

Yesterday, we discussed rising food, gold and commodities costs in the context of the Fed decision during this interview with Financial Survival Radio. Have a listen here:

Addison Wiggin

for The Daily Reckoning

All Treasuries All the Time: The Impact of QE2 originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

By Chris Gaffney

11/02/10 St. Louis, Missouri – Yesterday was busy here on the desk, with the normal flurry of Monday trading combined with a number of calls to the desk regarding our MarketSafe CD which will be closing out shortly. But the currency markets were fairly quiet ahead of the elections today. But as I pointed out yesterday, trading yesterday was nothing more than the quiet before the storm, as the currency markets were rocked overnight with surprise rate announcements by both Australia and India. I warned you that this week was going to get interesting.

The big news overnight was the Reserve Bank of Australia’s announcement that they would add another quarter point to their benchmark interest rate in order to steer their economy clear of inflationary pressures. The move pushed the Aussie dollar (AUD) to above parity for the first time in nearly 30 years. I pulled a chart of the Aussie dollar which shows that it moved through $1.00 on July 30, 1982 and hasn’t revisited this level since. 1982 was a great year for yours truly, as I was enjoying my last year in high school, listening to Billy Squier and watching MTV. For those of you who don’t believe the Aussie dollar can move above parity, it had traded all the way up to 1.49 back in 1973 (when Chuck was enjoying his senior year in high school!) But we will have to wait a while before we see those kind of levels again as the Aussie dollar couldn’t hold the $1.00 level last night and moved back just below parity as of this morning.

This was the first move by the RBA in 6 months, and caught most economists off guard. RBA Governor Glenn Stevens said the economy has “relatively modest amounts of spare capacity” and citing risk of inflation rising again over the medium term in his statement following the rate increase. Australia’s economy has been enjoying what looks like a very sustainable level of growth with unemployment at just 5.1% and inflation running at a modest 2.8%. But pressure on commodity prices has the RBA worried about inflation risks, and prompted RBA Governor Stevens to take action. This is one reason the Aussie dollar has been such a long-time favorite of the desk; the RBA has done a fantastic job of being proactive, and steering their economy through the global downturn.

The move by Australia also helped their sister currency, the New Zealand dollar (NZD), which moved solidly above 0.77 cents. The kiwi was also helped by a report which showed wages in New Zealand increased which could force a move on the part of New Zealand’s central bank. The kiwi may be a good alternative for those investors who feel they already have too much of their portfolio invested in the Aussie dollar. Both countries look to continue raising their rates, and commodity prices should stay strong with the growth in the Asian region.

Shortly after Australia announced their interest rate move, India joined in with a similar 0.25% move. India’s move was squarely aimed at reducing what is the fastest inflation rate among developed nations. Consumer prices rose just under 10% in India during the month of September. Reserve Bank of India Governor Duvvuri Subbarao said he expects inflation to slow to just 5.5% during the first quarter of 2011 and the economy to expand 8.5%. But he also sounded a word of caution to currency speculators, throwing cold water on any expectations of further rate tightening in the immediate future. The Indian rupee (INR) has gained just 4.8% versus the US dollar in 2010, versus an 11.52% jump by the Aussie dollar. Part of the reason for the lagging performance of the rupee is that interest rates in India remain well below those offered in Australia and Brazil. But growth rates in India, and the sheer size of their economy has many investors comparing it to China instead of Brazil or Australia. And when you make the comparison between China and India, interest rates in India do look attractive.

The moves by Australia and India highlight something that I touched on yesterday: the global economy is on two very distinct paths right now. Countries in Asia are back on a growth path (many never left it!!) and have clearly entered a tightening mode in order to prevent inflation from growing out of control. The economies of the US, Japan, and parts of Europe are still languishing in a no-growth mode with policymakers looking to start another round of stimulus efforts. So where would you rather put your money: in economies that are growing and where you can get higher interest rates; or in economies that are stagnant with interest rates near zero. It is a pretty easy question to answer, isn’t it? This obvious answer is what is propelling the higher yielding currencies of Australia, New Zealand, India, and Brazil up versus the US dollar and euro (EUR).

But the rush into these currencies is a bit worrisome, as “hot money” is never stable and is starting to inflate what could eventually turn into a bubble. Nouriel Roubini, the NY University professor who correctly predicted the housing crash, highlighted this growing bubble in a conference early today. Roubini said, “Prices may be running ahead of economic fundamentals” but also said the “party” can go on for a while. Interest rate differentials will continue to flood these markets with cash, and their central banks will need to try and keep their currencies from appreciating too quickly. One way these central banks can try to control the currency is by building up reserves, which can be used in currency interventions, and as I pointed out yesterday, India has done just that. But Chuck has always warned that currency intervention only works in the short-term, and even countries with some of the largest reserve pools (Japan) have trouble fighting the currency markets. While I appreciate where Roubini is coming from, I agree that the party can go on for a while, and we might as well participate (I’ve never been one to miss a good party!!)

Back here in the US we have finally arrived at Election Day. Hopefully everyone will take the time to get out and vote. I know I am planning to stop by the polling place on my way home. I may have led many to believe I wouldn’t be voting with my statement yesterday when I said that it really doesn’t matter who has the helm of a rudderless ship; but I feel it is my civic duty to vote, and hope that everyone else gets out to vote also. While I do believe the debt that has accumulated over the past several years is pushing the US economy in a scary direction, which will not be avoidable, I still want folks in congress who will at least recognize that we have accumulated this debt and need to do something about it!! You have to start attacking this debt much like you eat an elephant, one bite at a time. And I would like to see members of our congress push up to the table.

But the elections are still not taking center stage in the markets here in the US. That ground is being held by the FOMC, which is set to announce the size of its new stimulus effort tomorrow afternoon. There is not really any question over whether or not they are going to announce the stimulus measures, but the questions are now just how large the stimulus will be. Most believe they will announce $500 billion of new bond purchases spread out over the next few months, but many (including Chuck) believe the actual amount will be much larger. The currency markets have “baked in” a 500B figure, so if the stimulus is anything less, we could see a rally in the US dollar. If they come clean and announce a number that is closer to what I think it will eventually turn out to be, the dollar will be sent to the woodshed. After all, if the FOMC is flooding the markets with US dollars, the value of every dollar has got to go down (according to the laws of supply/demand).

I would expect the Fed to take a cautious approach with QE2 and just announce a $500 billion package, knowing that they will likely have to come back and announce a further package sometime later. And who knows, if the dollar continues to drop (as I believe it will) our exports may actually turn the economy back around and start to pull us out of this malaise. But that theory would stand a much better chance if we still made things in the US! I think the process will be longer, as we will need innovation and the creation of new products and new markets overseas to really increase our exports enough to make a difference.

Hong Kong’s Monetary Authority was recently granted authority to invest in bonds and stocks on the Chinese mainland, giving them the ability to further diversify their currency holdings. The Hong Kong dollar (HKD) has been pegged to the US dollar for a number of years, and recent moves indicate that this peg may be scrapped in favor of a link to China’s currency. Chuck mentioned this possibility earlier this year, and many investors have been purchasing Hong Kong dollars as a surrogate to investing in the renminbi (CNY). Hong Kong’s financial markets are more advanced than those on the mainland, and there is definitely a possibility that China will decide to let the Hong Kong dollar float prior to releasing the peg on the renminbi. With a peg to the US dollar, Hong Kong’s monetary policies are tied to the US, but their economy is more closely aligned with China. We have seen a tremendous jump in the cost of forward contracts in the Chinese currency, indicating the markets believe the Chinese will take further steps to loosen their grip on the renminbi. A first step could be to let the Hong Kong float.

The metals are largely unchanged from yesterday, but they could be impacted by the election returns here in the US. The metals are seen as “safe haven” buys, and the questions surrounding the elections and the size of the FOMC stimulus efforts could definitely produce some volatility in the metals markets.

To recap, both India and Australia raised rates, starting off what will be several rate announcements in the coming days. US elections will take place today, with a change in the ownership of the house predicted. FOMC will be announcing their rate decision (most likely no move) and the size of the QEII. And finally, China may be looking to let the Hong Kong dollar float prior to releasing their tight grip on the value of the Chinese renminbi.

Chris Gaffney
for The Daily Reckoning

Never mind sky-high deficits and a crushing debt overhang, at its most recent FOMC meeting, the Federal Reserve all but guaranteed another round of quantitative easing.

While the American central bank did not officially expand its quantitative easing program last month, it did reiterate its willingness to institute more aggressive monetary policy measures in order to combat the risks of deflation.  Furthermore, Mr. Bernanke did officially downgrade the Federal Reserve’s outlook for inflation.

The truth is that the US is insolvent and its policymakers will stop at nothing in order to avoid sovereign default.  So, it should come as no surprise that at its latest meeting, the Federal Reserve downplayed the risk of inflation, thereby setting the stage for another round of money creation.

Make no mistake; Mr. Bernanke has already created copious amounts of money. Granted, the Federal Reserve’s previous monetisation was highly secretive, but you can be sure that it did occur.  Allow us to explain:

You will recall that during the depths of the financial crisis, the Federal Reserve expanded its own balance-sheet and bought all sorts of toxic assets from the financial institutions.  By doing so, Mr. Bernanke created money out of thin air and bailed out the major banks.

Thus, the banks were able to dump their garbage assets on to the Federal Reserve and once they received the newly created cash in exchange for these securities, they loaned this money to the US government by purchasing US Treasuries.  In summary, in the previous round of quantitative easing, the Federal Reserve created new money and instead of lending it directly to the US government, it used the banking cartel as its conduit.  Back then, not only did the Federal Reserve create more than a trillion dollars, it also dropped its discount rate to almost zero; thereby allowing banks to borrow money cheaply!  It should be noted that since the banks were able to obtain such inexpensive funding from the Federal Reserve, they had absolutely no qualms about re-investing this capital in US Treasuries.

At first glance, the Federal Reserve’s stealth monetisation plan seemed flawless.  The banks offloaded their toxic assets on to the Federal Reserve, they made fortunes by investing in US Treasuries and the American government got access to a cheap source of funding.  Magic!

Despite the fact that this financial wizardry was a lifeline for American policymakers and their banking cronies, let there be no doubt that it was an unmitigated disaster for the American public.  Not only did the Federal Reserve nationalise the banks’ losses but more importantly, Mr. Bernanke’s money creation efforts have seriously undermined the viability of the US Dollar.

It is noteworthy that since bailing out the major banks and orchestrating the stealth monetisation, the Federal Reserve has been busy purchasing US Treasuries.  Furthermore, it is now almost certain that in next month’s FOMC meeting, Mr. Bernanke will unleash yet another round of quantitative easing.  In other words, in order to fund Mr. Obama’s out of control spending, Mr. Bernanke will create even more dollars out of thin air!  Allegedly, this new round of money creation will drive interest-rates lower, thereby helping the US economic recovery.  Or so the story goes.

Unfortunately, as any serious student of economic history knows, there is no such thing as a free lunch.  By adding trillions of additional dollars to the monetary stock, Mr. Bernanke may succeed in bailing out his friends in high places but he is seriously jeopardising the US Dollar.  In fact, bearing in mind the recent developments, it has become clear to us that the Federal Reserve wants to debase its currency.  In our humble opinion, the US Dollar is a doomed currency and there is a real risk of an abrupt plunge in its value.

If our assessment turns out to be correct and Mr. Bernanke unleashes the second phase of quantitative easing, you can be sure that the US Dollar will slide against most un-manipulated currencies (which are few and far between) and hard assets.  In fact, monetary inflation is the prime reason why we believe that the ongoing bull-market in stocks and commodities will continue for several more months.

Look.  The US economy is swimming in debt and the total obligations (including social security, Medicare and Medicaid) now come in at around 800% of GDP!  Furthermore, this year alone, Mr. Obama’s administration plans to spend another US$3.5 trillion, meanwhile the US Treasury will raise roughly US$2.2 trillion from issuing new government debt!  Clearly, these numbers are unsustainable and you can bet your bottom dollar that the Federal Reserve will end up buying a large proportion of the newly issued US Treasury securities.  As the American central bank funds more and more of Mr. Obama’s spending by creating new money, it will trash the value of its currency.  In fact, given the growing imbalance between the government’s spending and tax receipts, very high inflation is inevitable and even hyperinflation cannot be ruled out.

For the sake of their financial well being, it is crucial that investors understand that inflation or even hyperinflation is a monetary phenomenon and a strong economy is not a pre-requisite for the debasement of a national currency.  Whatever the reason, if a central bank decides to significantly increase the quantity of money in the system, that currency’s purchasing power will always diminish.  This is how fiat-money regimes have operated since the beginning of time and this era is no different.

It is interesting to note that throughout recorded history, the worst excesses of inflation occurred only in the 20th century.  Undoubtedly, this was a direct consequence of the adoption of fiat-money.

Figure 1 highlights all the hyperinflationary episodes in recorded history and as you can see, with the exception of the French Revolution (1789-1796), all of the other disasters occurred in the last century.  In fact, it is an ominous sign that 29 out of the 30 recorded hyperinflations in human history occurred during the 20th century!

Figure 1: Hyperinflations in history

Source: Monetary regimes and inflation, Peter Bernholz

Let there be no doubt, a paper money system usually ends in the reckless destruction of money and it is no coincidence that all hyperinflations in history have occurred in the presence of discretionary paper money regimes.  Furthermore, it is important to understand that a political system based on democracy is inherently inflationary and political leaders have been responsible for all major inflations in the past.  Conversely, history has shown that monetary systems binding the hands of political leaders are essential for keeping inflation in check.  If history is any guide, metallic monetary systems have shown the largest resistance to inflation and this is due to the fact that currencies anchored by a tangible asset cannot be inflated ad infinitum.

It is our conjecture that the current monetary system is absolutely pathetic; a system designed to enslave society.  Unfortunately, the vast majority of humans do not understand the endless inflation agenda and this is why the perpetrators get away with this crime.  Furthermore, let it be known that the Federal Reserve is largely responsible for the incredible inflation we have experienced over the past century.

Figure 2 plots the cost of living in Britain, France, Switzerland and the US.  As you will note, the cost of living in these nations was relatively stable for over 160 years (1750-1913) but once the Federal Reserve came to power in 1913, everything changed.  Suddenly, the cost of living exploded in these nations, so it should be clear that the Federal Reserve’s covert policy of currency inflation and debasement is solely responsible for this mind numbing inflation.

Figure 2: Cost of living in various nations (1750-1998)

Source: Monetary regimes and inflation, Peter Bernholz

Unfortunately, the Federal Reserve and its allies have not finished inflating and over the following years, they will create even more confetti money.  Under this scenario, cash will continue to lose purchasing power and the asset poor middle-class will get even more impoverished.  If our assessment is correct, cash will prove to be a disastrous ‘asset’ over the next decade and once the Federal Reserve’s manipulation ends, fixed income securities will also depreciate in value.

Bearing in mind our grave concern about high inflation and the very real possibility of hyperinflation, we continue to favour hard assets such as precious metals and energy.  At present, we have allocated roughly half of our clients’ capital to these sectors and it is our belief that this should be an adequate inflation hedge.

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets.  In addition to the monthly report, subscribers also receive “Weekly Updates” covering the recent market action. Money Matters is available by subscription from www.purusaxena.com.

Puru Saxena

Website – www.purusaxena.com

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients.  He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright © 2005-2010 Puru Saxena Limited.  All rights reserved.

Yields have been plummeting. But some of the action is almost certainly due to the Federal Reserve once again buying Treasuries. Since August 19, the Fed has bought $40 billion in government bonds.

But the Fed has no influence over foreign buyers of U.S. Treasuries. And these purchasers have been coming on strong.

Data last week showed that foreigners bought $117 billion in net Treasuries during August. This is the second-highest monthly total of all-time. Just a hair under the record $118 billion purchased by foreigners in November 2009.

Foreign buying of U.S. government debt has been in an uptrend since early 2009. Apparently the death of the dollar isn’t so convincing abroad.

Here’s to help from abroad,

Dave Forest
dforest@piercepoints.com

Copyright 2010 Resource Publishers Inc.

Note:

The information provided in this newsletter is based on the independent research of Dave Forest and Notela Resource Advisors Ltd. and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade any securities or commodities named herein. Information contained in this newsletter is obtained from sources believed to be reliable, but is in no way assured. All materials and related graphics provided in this newsletter and any other materials which are referenced herein are provided “as is” without warranty of any kind, either express or implied. No assurance of any kind is implied or possible where projections of future conditions are attempted. Readers using the information contained herein are solely responsible for verifying the accuracy thereof and for their own actions and investment decisions. Neither Dave Forest nor Notela Resource Advisors Ltd., make any representations about the suitability of the information delivered in this newsletter or any other materials that are referenced herein for any purpose whatsoever. The information contained in this newsletter does not constitute investment advice and neither Dave Forest nor Notela Resource Advisors Ltd. are registered with any securities regulatory authority to provide investment advice. Readers are cautioned to consult with a qualified registered securities adviser prior to making any investment decisions. The information contained in this newsletter has not been reviewed or authorized by any of the companies mentioned herein.

Before you rush more money into commodities, make sure to note the chart below. It shows the past 18 months of trading in the U.S. dollar. While the dollar has long-term problems, its recent down move has left it stretched like crazy to the downside. The best bet over the short term is that the dollar rises and the extreme move in commodities gives back some of its gains.

Tuesday’s revival in the fortunes of the dollar came to an abrupt standstill when the minutes from the FOMC meeting confirmed a willingness to act further to buy bonds in the open market to spur lending. And while the story was hardly new, the minutes also included discussion as to why the central bank felt a need to engineer higher consumer inflation expectations. Investors were quick to discount a further debasement of the value of the dollar and immediately put the currency back on the back foot.

Click on link for updated table throughout the day at http://www.interactivebrokers.com/en/general/education/FX-View.php?ib_entity=llc

U.S. Dollar – The dollar has consequently shed 2.25 cents per euro, which rose from $1.3775 to $1.4000 within 24-hours. The dollar index remains sickly at the midweek point and is 0.3% lower in early trading. The dollar had risen on Tuesday when it appeared that risk aversion, caused by what appeared to be a further orchestrated move by China to curb growth, might be the order of the day. The revelation that the Fed might be prepared to bolster inflation expectations through future policy adjustments undermined the currency’s earlier gains and sent its index to a nine-month low.

Euro – It’s the European single currency that continues to pick up the dollar’s slack. On Tuesday ECB member Axel Weber warned that it would be less dangerous to exit from a loose monetary stance than to find out later it had been too lax for too long. His observation that the risks of a Eurozone recession were low reminded investors that the chance of further bond purchases in the Eurozone is diminishing. That view was buttressed after a positive revision to data for industrial production across the Eurozone in July, while fresh August data beat expectations of lower output and built further upon earlier gains in the summer. The month-on-month jump in industrial output of 1% means that annual output stands 7.9% higher than a year ago. The euro currently stands at $1.3969.

British pound – While Axel weber was tentatively suggesting that monetary policy should revert to neutral the same can’t be said of Bank of England policy maker David Miles. He warned of the dangers of a premature removal of monetary stimulus. However, with government departments in Britain scrambling to finalize precisely where the axe must fall over the next couple of years, the outlook for economic growth looks challenging to say the least. The recovery trajectory plateaued over the summer in the face of an austerity plan and today’s employment picture turned bleak. The September benefit claimant count confirmed the deterioration in the prior month sending the overall count to an eight-month high at 1.473 million. The turn in the cycle was further evidenced by a dip in the Nationwide Building Society’s consumer confidence index, which slid to its weakest in 18-months. Home prices are resuming a downturn interrupted by economic recovery a year ago, while uncertainty over the outlook is restraining consumers’ appetite to spend. The pound nevertheless continued to improve against the dollar possibly because further quantitative easing will be larger in scale than in the U.S. coupled with the fact that British inflation remains above target rather than below as is the U.S. case. The pound buys $1.5843 while it slipped to its weakest in five months per euro at 88.09 pence.

Japanese yen –Demand for higher-yielding assets resumed after the FOMC statement and helped remove some of the elevated demand for the safe haven of the Japanese yen. Asian stocks rose after Bank of Japan Governor Shirakawa said he’d research more on how to apply the recently announced ¥5 trillion fund to include the widest range of assets possible in order to expand the economy further. The dollar remains hemmed into a narrow range for now but is higher at ¥81.85 against the yen. The yen slipped against the euro to ¥114.24. Yen demand was also tempered after some bullish economic data. Machine tool orders for August unexpectedly rose and built upon a previous gain, rising 10.1% on the month to stand 24.1% higher compared to one year ago.

Aussie dollar – A downturn in a measure of consumer sentiment in September appears to be nothing more than a blip on the radar. The October reading for Westpac’s consumer confidence rose 3.3% to 117.0 to reinforce the health of economic recovery. The march of the Aussie unit continued spurred by healthy Japanese data, a decline in demand for the safety of the yen and a broad revival in risk appetite sufficient to keep the Aussie dollar close to its highest since exchange rate controls were abandoned in 1983. The unit today buys 98.81 U.S. cents.

Canadian dollar – The Canadian dollar remains buoyant thanks to soaring commodity prices and rising equity prices. At 99.51 U.S. cents this morning the loonie is fast-approaching a clash with parity against the greenback – a date rudely interrupted six-months ago by fears over global recovery. It took exactly 30 days for the Canadian dollar to hit a 2010 low of 93.00 cents having last reached parity on April 21. It’s taken five months to practically reverse that loss.

Andrew Wilkinson

Senior Market Analyst                                                               ibanalyst@interactivebrokers.com

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities or other financial instruments mentioned in this material are not suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. The information contained herein does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before investing, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Following the USD Index peak at 89 in early June 2010, the Dollar has been on a near relentlessly slide to the recent low of 76.90 which represents a 14% fall in just 4 months. The fall in the Dollar has again brought out the perma Dollar collapse proponents who have periodically come out to reiterate that the U.S. Dollar as measured by the USD index is destined to crash and burn which is set against the perma deflationists who continuously propose that DEFLATION will result in the Dollar rallying to new highs as a consequence of debt deleveraging, which again was most prevalent just as the U.S. Dollar peaked. Therefore this in-depth analysis will seek to conclude towards a probable trend forecast for the USD index into Mid 2011 (9 months forward).

Dollar Collapse…. Again ?

In the face of the relentless dollar collapse mantra due to hyperinflation or the Dollar Soaring due to debt deleveraging deflation mantra for the past 3 years, the actual dollar trend is illustrated by the below graph shows that in actual fact the USD is UNCHANGED from where it was some 3 years ago! Which illustrates that much of that which you will read in the mainstream press and BlogosFear has its basis in propaganda rather than analysis focused on the monetization of probable trends as both perma crash and boom crowds are most vocal just as the USD index turns in the opposite direction, which means that both perma crowds of propagandists would have LOST money had they actually acted on their respective mantra’s.

So be under no illusion when you start reading or hearing volumes of commentary that states that the US Dollar is going to collapse or crash during the next x days then you have to consider the above historic 3 year record that implies that all they are doing is pumping out propaganda regardless of the actual subsequent trend.

Before I get to the meat of the analysis and forecast for where the USD could trend to over the next 9 months, here is a re-cap of my USD analysis over the past 2-3 years.

• Update – 1 March 2008 – Dollar Bear Market Bottom called, initial target of 80. ( DELEVERAGING- Gold and Commodities Teetering on the Brink of a Bear Market?)
• Update 2 – August 2008 – Dollar Base building complete – breakout targeting USD 80 ( The US Dollar Bull Market )
• Update 3 – October 2008 – Expecting USD to correct after rallying to between 87and 90, targeting support at 80, to be followed by a resumption of the up trend targeting USD 92. ( U.S. Dollar Bull Market Update )
• Update 4 – January 2009 – USD Sideways consolidation trend into July / August 2009 (US Dollar Bull Market 2009 Update 4)
• Update 5 – August 2009 – USD Attempting to bottom above 75, for a trend to 90 by year end (U.S. Dollar Bull Market Trend Forecast 2009 Update )
• Update 6 – November 2009 – USD failure to rally to date and weakening trend at 75, concluded in a revised dollar target of 84. (U.S. Dollar Bull Market Scenario Update )
• Inflation Mega-Trend Ebook - 30th Jan 2010 – USD targets a trend to 84 during the next 3 months (April / May 2010).

May 2010 saw the Dollar soar as a consequence of the Euro-zone sovereign debt crisis to a peak of 89 by early June, with the uptrend subsequently evaporating as the Eurozone sovereign debt crisis failed to trigger a collapse of the Euro to presently take the USD to all the way back to where it started the year.

British Pound GBP Forecast into Mid 2011

I recently completed an in-depth analysis and concluding forecast trend for the British Pound Against the U.S. Dollar (GBP) (04 Oct 2010 – British Pound Sterling GBP Currency Trend Forecast into Mid 2011), which touched upon many aspects that impact on the USD trend that I won’t repeat in this article such as :

• All fiat currencies in a perpetual free fall against one another
• The inflation mega-trend and the continuous loss of purchasing power
• Long-term trading ranges
• Deflation delusion mantra
• Currency wars
• U.S. Dollar reserve currency status
• Impact of Debt and Deficits
• Gold and Euro
• GBP Technical and fundamental analysis

Therefore, if the reader requires a fuller understanding of the innards of my on going currency markets analysis and subsequent forecasts, then it may be worth reading the above in-depth analysis, the conclusion for which is inserted below that helps build towards a forecast for the USD Index.

BRITISH POUND CONCLUSION

The people of Britain should count themselves lucky to have a government that gives all of the signs that it in tends on getting a grip of the budget deficit, though contrary to the politicians statements the government will NOT be able to prevent total debt from increasing by 50% over the next 5 years, which suggests that most of the politicians do not understand Britain’s debt situation as they confuse deficit reduction with debt reduction. Nevertheless the positive outcome is for a lower pace of decline for sterling than the dollar (the U.S. is busy printing money to finance a military it cannot afford) which therefore implies a higher UK GBP rate as long as the proposed cuts and deficit reduction materialises, which according to my own analysis suggests that the government should be able to do so for at least the next 2 years, so in currency trends terms this is bullish for sterling for at least the next 1-2 years against the U.S. Dollar, which is set against the US authorities showing NO signs of restraint in terms of getting a grip of the deficit instead the opposite is true.

In terms of the GBP trend, the UK appears to have entered into the goldilocks zone (comparatively speaking) i.e. deficit reduction without triggering a double dip recession, a trend that looks set to continue for at least a year. The big question mark is how will the US economy perform relatively speaking, all the signs are for the US economy to continue to underperform the UK for the next 12 months which confirms a bullish GBP trend.

GBP Final Forecast Conclusion

The British Pound is in a multi-year bull market against the U.S. Dollar, I expect the current phase of this bull market to see GBP trend higher into mid 2011 targeting a rate of between £/$ 1.80 and £/$1.90 as the below forecast trend graph illustrates (current £/$ 1.58), though I would not be surprised if GBP trades above £/$1.90. I also expect sterling to strengthen against the Euro that targets a trend high E/£ 1.30 (current E/£1.15). However the forex markets will be just as volatile as they have been during the past 2 years as future sovereign debt and banking sector crisis will temporarily result in a surge of safe haven dollar buying, which will present future opportunities to short the dollar.

GBP Forecast Implications for USD Index

The above forecast for GBP to rally by 17% rally by mid 2011 when applied to the USD rate suggests a likewise 17% downtrend to target approx USD 65, which is clearly very bearish that implies a new all time low for the USD Index, though GBP just comprises 12% of the USD Index so it does not mean that it will actually get there, hence the need for this article.

EURO Trend Analysis

The Euro comprises 60% of the USD index which therefore represents the prime determinant for the USD index trend. The current rate is 139, a quick analysis of the price chart suggests the Euro is targeting 145. A stronger breakout targets 150-152. The current trend is overbought therefore the Euro is unlikely to reach the target without a serious correction, the last correction was some 9 dollars, which suggests that a correction from the 140 peak could retrace to 131, which coincides with the support level trendline.

Possible Implications for the USD Index

The Euro target of 145 implies a 3.5% drop on the USD index to 74 which coincides with the last major USD low. A further out target of 150 implies USD 71 which coincides with the all time USD low. This first suggests USD 74, then USD 71 further out. The only question mark is in the timing of the trends as immediate future implies that the Euro should correct towards 131 which coincides with USD 82.

So clearly the following stands out:

1. $/Euro 1st target 145 (USD 74)
2. $/Euro 2nd target 150 (USD 71)
3. $/Euro Correction target 131 (USD 82)

Japanese Yen

Ouch! – If there is a currency war taking place then Japan is definitely losing the war! The Japanese Yen comprises approx 14% of the USD Index, so roughly ranks along side the British Pound in terms of trend impact. The Yen has clearly been in a strong uptrend against the Dollar that is nudging towards the upper end of a multi-year channel that suggests upside is limited to not far above the current level of 122, perhaps just 123. This suggests that the Yen should start a correction in the near future towards first 116, and then secondly 110, which represents a 5% / 10% correction against the dollar.

Implications for the USD

A 5% – 10% correction against the dollar, translates into a USD move to 81 and then 85. Which therefore is supportive of the dollar at least in terms of dollar yen, as I don’t see it happening in terms of the USD index. However an imminent Yen correction implies that the dollar could experience a lift in the near future towards 80 before year end, beyond that it is not clear as the Yen could base at 116 before setting itself up for a new all time high against the dollar i.e break above 123 i.e. suggesting dollar strength into End 2010 and then weakness into mid 2011, which roughly matches Euro expectations, though out of sync with GBP.

Who is Winning the Currency War ?

The mainstream press has belatedly woken up to the fact that all exporting countries are vying to devalue their currencies against the primary destination for all junk goods, the United States. Without repeating what I wrote at length in last weeks analysis (04 Oct 2010 – British Pound Sterling GBP Currency Trend Forecast into Mid 2011 ), clearly the above pairs show that the currency war is definitely not being won by Japan, though the Germans appear to be prospering from the bankrupting PIGS to some extent, so who is actually winning the ‘currency war’ ?

Dollar / Yuan

Saving the best till last as China is the master currency manipulator as evidenced by the flat lining graph over the past 2.5 years. Which illustrates the degree to which China manipulates its exchange rate against the U.S. Dollar. The Dollar / Yuan trend is highly political where the Chinese only respond to political pressure in terms of letting the Yuan appreciate.

Pressure is building in the U.S. for action on the Yuan / Dollar peg which if it follows the last major revaluation suggests that the recent rally may just mark the starting point for a major but gradual revaluation of the exchange rate over the next 2 years to a level that will be followed by several more years of a highly managed fixed rate to again eventually result in political pressure on China to revalue once more.

Implications for the USD

The Yuan is not part of the USD Index which on face value suggests that it should not have a significant impact. However to push the Yuan lower against the dollar the Chinese will be selling Dollars (or buy less dollars) for Yuan thus increasing the supply of dollars and thus pushing the dollar lower against all currencies which I anticipate will be at least a year long trend of extra downward pressure on the US Dollar. The implications are for the USD to trend lower over the coming year to a NEW USD low much as transpired during the last revaluation.

China Winning the Currency War

All of the above mentioned countries consistently run huge trade surpluses against the US Dollar, which should in a free floating (falling) currency market result in a greater rate of descent for the US Dollar as a consequence of the trade imbalances, but especially China is refusing to allow these imbalances to correct themselves, instead China sees primarily the US Consumers (Mall Zombies) as a prime driver for China’s economic growth even if it means they ultimately suffer huge losses on their $2.5 trillion of reserves, which given the big picture is a small price to pay for Chinese GDP doubling approximately every 8 years to now stand at $5 trillion annually. Therefore China has been winning the currency war for a decade and is now expanding its operations to force competitors such as Japan out of business by FORCING the Japanese Yen higher, which is why Japan and other western nations are preparing to dump huge amounts of their currencies on the market in an attempt to counter Chinese actions. China’s strategy is for a gradual revaluation to both sooth Washington and allow its exporters to adjust to the gradual currency appreciation which means there won’t be much impact on the trade deficit, unless China starts to import U.S. goods and services.

Meanwhile American workers are deluding themselves into believing that they deserve to be paid ten times Chinese and other asian workers for performing similar servicing or manufacturing jobs. The bottom line is that the U.S. is highly uncompetitive in terms of worker productivity where even a currency crash of 50% would not make much difference. In my opinion there is absolutely nothing that the US can do but to go through the painful process of making their workers more productive after having been on a debt binge for the past 30years that financed living standards. The government / Feds only answer is to print money, they do not have any other answer as the politicians cannot engage in policies of severe austerity, far greater than that which Greece is suffering that will effectively have the voters throw them out of office, therefore the money printing debt monetization trend of the giant debt and liabilities mountain that some say stands at $200 trillion, which is far beyond the official tally of $13 trillion which ridiculously under estimates the true level of US debt. For instance the nationalisation of Fannie and Freddie alone added $10 trillion of liabilities, effectively doubling the US national debt at the time. The debt monetization trend will continue for the next decade if not longer as INFLATION (take note delusional deflationists) will be the prime mechanism that eats away at the debt mountain and purchasing power of US wages so that they converge in terms of real competitiveness with the rest of the world.

The Cold War Trade Deficit Policy

The manifestation for this lack of competitiveness is the trade deficit. It is NOT the fault of the Chinese that the trade deficit exists, it is the fault of the US consumers who BUY CHINESE and JAPANESE JUNK! This is as consequence of the policy of successive US Governments dating back to the midst’s of the cold war era when the United States used the Dollar as a global reserve currency weapon against the Soviet Union to exert control over other nations through currency and trade and to achieve this meant that the U.S. was required to operate a trade deficit so as to advance the U.S. centric global financial system that succeeded in squeezing the financial life out of the Soviet Union as its currency collapsed. The only problem is that the U.S. and the rest of the world had become so drunk on the U.S. perpetual trade deficit policy that instead of correcting this following the collapse of the Soviet Union i.e. by reducing the dollars reserve currency role, it just continued as the U.S. imported Deflation in consumer goods and services from Asia in exchange for mountains of U.S. Dollars that reinforced the dollars hold over the global financial system but only upto the point where the U.S. were able to maintain the value of the U.S. Dollar.

Today we have near zero US interest rates whilst at the same time the trade deficit counter parties are siting on ever expanding mountains of dollars, which MUST EQUAL a falling dollar rate UNTIL interest rates RISE to reach an equilibrium point against the surging dollar holdings. But as mentioned earlier the U.S. is drunk on the trade deficit policy and that of foreigners financing the US budget deficit which has the effect of gradually diminishing the reserve currency status of the U.S. Dollar which has the tendency of accelerating the trend for a falling U.S. Dollar. Now I am not talking about a collapse, what I mean is the overall multi-year trend for ever lower lows and ever lower highs.

What Does this mean for the Dollar ?

The U.S. is pumping out deficits without end of $1.5 trillion per annum, whilst at the same time lecturing the world on capitalism when in actual fact it through its actions has become the worlds biggest socialist state that does what all socialist countries do best which is to print money to finance federal and state deficits. The continuous flood of dollars is set against the exporters all fighting to devalue to hold onto the US export markets. This also suggests a slower relative rate of descent for the Dollar than should take place, if not reinforcing the trading range of USD 90-70, because as the dollar slides towards the multi-year lows so will the intensity of foreign central bank actions to force their respective currencies lower intensify. Ultimately the dollar’s multi-year trading ranges are destined to take steps lower all the way to the ultimate panic stage when hyperinflation kicks in which it eventually will do as the fundamentals of the ever expanding total debt as a % of GDP suggests ever higher inflation all the way towards ultimate debt default through ever higher inflation.

Don’t be lulled into a false sense of security by the ongoing false calm before the inevitable debt default storm via high inflation! After all that’s what Icelanders thought before their economy and currency went POOF, that’s what the Greeks thought before their interest rates suddenly more than tripled with the Germans stepping into bail them out (temporarily).

Hyperinflation ?

Given the ever expanding debt load it appears hyperinflation will be the ultimate destination. When ? Don’t know, Hyperinflationary panics are akin to stock market crashes (especially in today’s technology enhanced hyper-speed world), they can only be recognised at best a few days before the event though more likely a few hours before there is a panic run on the U.S. banking system as depositors panic out of dollars and into anything else, we are talking trillions of dollars dumped in perhaps a couple of hours sending the dollar into a nose bleed dive that no central bank will be able to prevent, that’s how hyperinflation will start.

Again don’t take this as a forecast for hyperinflation because it can’t be forecast, it is a fiat currency panic event. Luckily inflation protection strategies can also protect against aspects of eventual hyperinflation. Note – I do not see any signs that suggest a Dollar hyperinflation event is imminent or likely during the next 12 months.

USD / USB Trends Analysis

My in-depth analysis during August warned of the U.S. Treasury bond bubble that was primed to burst (26 Aug 2010 – Deflation Delusion Continues as Economies Trend Towards High Inflation ) since which time US bonds after a wobble into September have maintained their value as the interest rate risks has been transferred over to the Dollar. Therefore bond investors have in actual fact lost 8% of the value of their bonds since the August Bond market peak.

The normal expected tendency is for a falling dollar to be accompanied by lower bond prices, and a rising dollar to be accompanied by higher bond prices. This has been more or less the case until the most recent price action which has seen a disconnect between the Bond market and the U.S. Dollar. This illustrates the degree to which the US bond market is being manipulated through a wide variety of measures to monetize government debts by means of the banking system by basically allowing banks to generate huge profits at little risk as they are able to borrow form the Fed at near zero rates and then go and buy government bonds on leverage of X20 upwards at typically 3% and therefore banking profits of 60% so what do the banks care if they lose 8% in terms of the dollar value, or a another 4% to 8% on real inflation measures (shadowstats) when they are banking 60%+ profits courteously of the Fed.

However at some point there will be a snap back into alignment between US Bonds and the Dollar, which means that the U.S. Treasury Bond market remains a bubble primed to go pop!

USD Index Long-Term Trend Analysis

ELLIOTT WAVE THEORY – The Elliott wave pattern suggests that the USD index is in a corrective triangle that implies the downside is limited to about 75, and that it could target a trend to as high as 88. However the triangle is corrective which implies that it should ultimately resolve towards a break lower, though possibly not for several years.

TREND ANALYSIS – USD is targeting the uptrend line at about 75, and trending in a wider down channel that targets a low of 70 by mid 2011 and an upper channel line of 88. Given the lower high, probability on balance favours a break of 75 to target 70. With another more severe down trendline also intersecting by mid 2011, therefore implying mid 2011 as a possible significant reversal point.

SUPPORT / RESISTANCE – There is heavy support in the zone 71 to 74 which suggests any downtrend into this zone is going to be rough, very volatile i.e. unlike the swift downtrend from the 88.71 high.

PRICE TARGETS – The USD Targets 71 to the downside and 80 to the upside.

MACD – The MACD is confirming a pattern for a corrective triangle, which suggests that the USD should make a higher low i.e. hold the uptrend line to thus target the upper end of the down trend channel.

SEASONAL TREND – The recent trend is inline with the seasonal tendency for the USD to weaken between June and October, a continuation of which would suggest the dollar to now be near a bottom and trend higher into mid 2011.

USD MEDIUM-TERM TREND ANALYSIS

ELLIOTT WAVE THEORY – The Elliott wave pattern clearly manifests in 5 wave patterns in both directions, which on face value implies that the USD should be near a bottom for a rally towards 80, before targeting a break of below 74 towards a target of 72.

TREND ANALYSIS – The USD uptrend line support is even more prominent on the short-term chart at USD 76.30, which implies that a USD low is imminent to target a trend higher into early December. The downtrend line suggests that the USD will meet strong resistance at 79.

SUPPORT / RESISTANCE – There is heavy support in the zone 74 to 75, and resistance at just above 80.

PRICE TARGETS – The USD Targets 74 then 71 to the downside and 80 to the upside.

MACD – The daily MACD is heavily oversold which implies a reversal is imminent. However the lower low implies it that it should not be a final low i.e. the MACD implies that the current USD low should break on the next swing lower.

USD Index Forecast Conclusion

The U.S. Dollar is in a downward spiral, as the further it falls the further it will fall in the future as the weaker the Dollar becomes in terms of its status as the global reserve currency as other currencies start to be seen as possible alternatives. BUT this long-term downtrend does not suggests a crash or collapse is imminent as the perma dollar collapse proponents continuous mantra suggests. In fact whenever you see a surge in such commentary than one can conclude that the U.S. Dollar is either at or near a significant bottom which could result in a substantial multi-month USD index rally, which appears likely in the near future.

The key targeting levels for the USD are the all time low of 70.70 and the preceding high of 88.70. Actual USD price action is subject to banking sector credit crisis and sovereign debt crisis events as we saw during May 2010 that will result in temporary dollar spikes. Therefore volatility will be just as high as has been observed over the past 3 years. As is usually the case, these crisis events cannot be forecast, but that the USD trend should revert to the fundamentals based technical trend as the crisis event subsides which is as concluded to below.

USD Index Forecast Final Conclusion

The USD index is targeting a trend to a new all time low in the region of USD 69-70 by mid 2011, that will be followed by a strong rally that could see the Dollar retrace all of the decline back towards USD 80. The problem is with the timing of these trends as volatility will be high. It’s a tough exercise but I conclude in the USD taking some time to base following the mid 2011 low before the subsequent bounce to 80 takes place. Therefore the forecast trend is USD 69-70 by mid 2011 followed by a bounce to 80 by October 2011. The immediate future is suggestive of an imminent bounce towards 80 by early December before the final swing lower to a new all time low takes place as illustrated by the below forecast trend graph.

Risks to the Forecast

The risks to the forecast are that the doom and gloom perma dollar collapse proponents are right (this time) and the USD is going to burn a hole through the floor, or that the earlier elliot wave analysis is more accurate than I give credence to, which implies that the USD is in a converging triangle that suggests that the USD will rise towards 88 from the current low, which I would actually say is more probable than the Dollar crash / collapse alternative.

Stocks Stealth Bull Market Closes Back Above Dow 11,000

The Dow on Friday closed above 11,000 at 11,006 for the first time since just before the May 6th Flash Crash. Off course no one saw the flash crash coming, but subsequently many have eagerly anticipated its re-occurrence all the way back to above Dow 11k.

The whole summer has seen the perma-bears and the BlogosFear busy confusing what amounts to propaganda with analysis as they took a pre-existing WRONG conclusion and then search for data that supports it, much as the perma deflationists have picked at the odd bits of deflation indications to back up a model that does not exist in reality (26 Aug 2010 – Deflation Delusion Continues as Economies Trend Towards High Inflation).

During the summer months the expectations of another always imminent flash crash morphed into June and July’s bearish Head and Shoulders price pattern, that saw its right shoulder twist and turn as another higher shoulder always materialised hunchback of Notre Dam style all the way into August, which turned into the dreaded always imminent Hindenberg Crash Omen month, which was soon replaced during September by repetitive warnings that that September could be the worst month of the year on the basis of statistics and perma views when it turned out to be the BEST September for 70 years !

Mapping Out the Trend for 2010

The Dow during September continued the trend in line with my last quick analysis of (29 Aug 2010 – UK Economy Booms Whilst U.S. Stutters, Stocks Fail to Follow Crash Script ) that concluded in an anticipated break of the downtrend channel that the Dow had been in at the time, with the primary buy trigger at 10,200 to target the top of its trading range of 10,700 with probability favouring a break higher. With further interim analysis during September confirming this view (05 Sep 2010 – Inflation Mega-Trend Long-term Growth Spiral Continues to Drive Stock Market Trend )

Bottom Line – Nothing new to report short-term the Dow remains in a corrective trading range of approx 10,700 to 10,000. Everybody tells you that September is usually one of the worst months for stocks. I say its in a range with probability favouring a break higher.

The Dow had remained in its corrective trading range that has continued to work off the preceding 13 months bull run, with my last in depth analysis (16th May 2010 – Stocks Bull Market Hits Eurozone Debt Crisis Brick Wall, Forecast Into July 2010 ) concluding that the corrective sideways trend could extend all the way into early October, with trading range expectations for a low at 9,800 to be followed by the Dow targeting a break of 10,7000 with the subsequent price action pretty much having followed this script throughout the summer months. The more time the stock market spent within its corrective trading range the more powerful would be the eventual breakout.

My original expectations remain for the Dow to target 12,000 to 12,500 by year end as illustrated in the January Inflation Mega-Trend Ebook (FREE DOWNLOAD).

Stocks Stealth Bull Market Summer Correction is Over

We are now well into October, and the perma bears continue as to why an end to the so called bear market rally is ALWAYS IMMINENT, despite that fact that the perma mindset has been WRONG SINCE MARCH 2009, who now explain the most recent rally action (after the event) as a consequence of imminent QE2 as the mechanism to blame for being wrong, the reasons for which I touched upon in a recent article (10 Sep 2010 – The Real Reason Why 90% of Traders Lose).

The bottom line remains as I voiced right at the bottom of the stocks bear market and the birth of the stocks stealth bull market in March 2009 – (15 Mar 2009 – Stealth Bull Market Follows Stocks Bear Market Bottom at Dow 6,470). That the stealth stocks bull market will be driven by the twin forces of either economic trends surprising to the upside or Quantitative Easing aka money printing to drive asset prices higher as once Q.E. STARTS IT CANNOT BE STOPPED whilst large budget deficits persist that require debt monetization regardless of what the central bankers publically state, something that I have iterated virtually every month for the past 2 years, including at length in the January 2010 Inflation Mega-Trend Ebook, because the whole banking system has been geared towards ONE OBJECTIVE and that is towards the monetization of government debt either via outright money printing or the fractional reserve banking system that entices the banks with huge profits to buy government bonds as I covered at length in the recent article (19 Sep 2010 – UK Government Stealth Debt Default Continues at Minimum Rate of 3% per Year).

Stocks are in a MULTI-YEAR BULL MARKET that is being driven higher either by corporate earnings surprises to the upside OR MONEY PRINTING in the face of weak main street economic activity. It does not matter which is prevalent at a particular point in time as the markets SPIRAL HIGHER in reaction to both waves of INFLATIONARY buying pressure, something that the dark pools of capital recognised right at the birth of the stocks stealth bull market and have since been eager to bid the stock market higher whilst MOST have FAILED to participate on the rally to date (if not been engaged in betting against) and will continue to do so all the way to new bull market highs which is why it remains STOCKS STEALTH BULL MARKET.

The same INFLATIONARY forces are driving up all assets such as commodities, whilst at the same time holding up other assets such as housing that should be in free fall as the bubble baton is passed from one asset class to another.

In our fiat currency, big government deficit spending, debt accumulating world, governments CANNOT ALLOW FOR DEFLATION, not only that but inflation can literally always be created at the press of a button, therefore as asset prices are leveraged to consumer prices that is where wealth protection strategies should be focused towards.

Where will the stock market go next ?

The summer correction that saw the Dow base at between 10,000 and 9,800 is over, which means that the Dow trend targets 12,000 to 12,500 by year end, which whilst it won’t get there in a straight line, the stock market has done nothing to negate this scenario for the whole of 2010. On completion of the USD forecast, my focus is now for an in depth analysis and chart trend forecast for the Dow to more precisely cover the trend into the end of 2010. To get the analysis in your email in box on completion ensure you are subscribed to my ALWAYS FREE NEWSLETTER.

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By Nadeem Walayat

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Nadeem Walayat has over 24 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem’s forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Investors around the globe are concerned with the economic outlook, not only with the United States but with virtually every country. This has caused not only investors but banks and countries to start buying gold & silver in order to be protected incase of a currency melt down in the coming years.

While the majority is concerned about the eroding economy, we have seen the opposite in the financial market. Gold and equities have risen… That being said the volume in the market remains light simply because the average investor is no longer putting money into the market for long term growth. Instead individuals are now focusing on saving and paying down debt.

That being said we all know light volume market conditions allow Wall Street powerhouses to bid the market up. Not to mention with quantitative easing taking place I’m sure that has also helped the market of late. While we don’t know for sure that QE is taking place as we speak, the sharp drop in the dollar and strong move up in gold are pricing this into the market.

Let’s take a look at some charts…

HUI – Gold Stock Index

This long term monthly chart of the HUI index provides valuable trading signals for both gold stocks and gold bullion. As you can see below this index is trading at a key resistance level after forming a bullish 3 year Cup & Handle pattern. The next 1-2 months for the precious metals sector will be interesting as it tries to break above key resistance. I would really like to see the HUI:GLD ratio break to the upside to confirm if the breakout occurs.

SPY – Daily Long Term Trend

The broad market looks to be forming a short term topping wedge. If this is to occurI expect it to take several weeks to play out. Looking at the chart if we use Fibonacci retracements along with trend line support we can get a feel for where this pullback should correct to.

That being said the broad market breadth and internals seem to be holding up indicating higher prices over the long run. While the short term price action is overbought and I expect a pullback to form, my analysis is pointing to higher prices as we go into year end.

UUP – US Dollar Daily Price Action

Although the majority of investors have a bearish outlook on the economy, we have seen a large price appreciation in equities and precious metals. This is largely due to the fact that the US dollar is quickly getting devalued. Simply put, as the dollar drops, it helps boost commodities and stock prices.

While a rising stock market is great to see, at some point the dollar will become so cheap that it will start to have a very negative affect on the US economy, commodities and stocks. Being from Canada it has always been more expensive to take holidays in the United States, and I remember paying $1.50-$1.70 for every $1 green back. But now the dollar is almost at par making holidays very affordable. The big question/concern is when will they ease off on the printing? At the rate which they are printing the greenback will be at par with peso… well not that extreme but you get the point Eh!

Weekend Market Conclusion:

As we all know the market has a way of making sure the majority of traders miss major turning points. The saying is, “If the market doesn’t shake you out, it will wear you out” and it seems we are getting the later…

The never ending grind higher in precious metals has not had any big shakeouts, rather its wearing out any short positions before rolling over to take a breather. As for the stock market, we are getting much of the same thing as the market grinds higher day after wearing out the shorts before rolling over.

That being said, there is more at work here than just regular market movements. With the light volume in the market we know there is price manipulation and QE (quantitative Easing) which is helping to boost prices and exaggerate market movements.

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Let the volatility and volume return!

Chris Vermeulen

Since the market topped in April and has since been trading sideways in this rather large range, everyone has small positions at work but waiting for a decisive move before fully committing to one side. There could be a few opportunities in the coming days using bonds, the dollar and the SP500 if all goes well which I explain below.

Lets take a look at the charts…

SP500 – SPY ETF, Daily Chart

There has been a lot of talk about a sharp rally if the SP500 could break the 1130 level or the neckline everyone is talking about. Well this week Obama was on TV and the market rallied into that, then again after. I don’t really thing investors or traders were buying things up as he said the same boring stuff he always says without anything new. I feel there could have been another force at work, which we can discus another time .

Anyways, the market pierced those resistance levels and I’m sure a ton of traders have switch their view on the market from bearish to bullish. While I prefer to trade with the trend I can’t help but feel this market is still range bound, which is why I am still bearish at these shakeout levels. The SP500 did break resistance BUT the following candle did not close above the breakout candles high to confirm the move.

That said, the market is now trading back down at support and the next couple of days I’m sure will shed some like on the direction.

20 Year Bonds – TLT Fund, Daily Chart

We have seen the bond price pullback in a bull flag formation. It touched support before bouncing to break short term resistance as it looks to have started another rally. The chart below overlays both the candlesticks of the bond price and the SP500 which is the white line. You will notice they have an inverse relationship. If bond prices continue to rally then lower SP500 could start to rollover.

US Dollar – UUP Fund, Daily Chart

The dollar has fallen sharply the past 10 trading session and it looks to be oversold for a couple reasons. The past couple days the price has dropped straight down and gapped lower. This recent drop has reached a gap window which will act as support and could provide a tradable bounce in the coming days depending how things unfold.

Mid-Week Market Analysis Conclusion:

In short, the SP500 is flirting with resistance and has yet to confirm the breakout. Bond prices look to be headed higher which will makes me think equities could start to sell off any day now… It’s also important to note that the big banks GS and JPM shares have been under pressure and they tend to lead the broad market. Another point to add is the fact the oil has not rallied even though the dollar dropped like a rock? What happens if the dollar bounces? Could oil finally start its next leg down?

Gold and silver continue their steady grind up. The price action reminds me of the 2009 Nov –Dec move. Once that train de-rails its going to have a sharp correction…

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Let the volatility and volume return!

Chris Vermeulen
www.TheGoldAndOilGuy.com