Observations on the market

There are some interesting observations on the market.

With the downgrade of Japan, the yen actually went up and gold went down. Japan debt to GDP ratio is 200%.  This level is second only to Zimbabwe and yet the market considers Japan a SAFE HAVEN to mitigate the risk of the unrest in Egypt when the market went down last Friday.

Sovereign debt in Europe continues. While there are all kinds of attempts to find solutions,

sovereign debt continues to be a problem.  There are no improvements in the situation in Ireland and Portugal.  Italy looks increasingly vulnerable. There is high still high probability that Ireland may default.The public has forgotten that these problems are still lurking in the background and will suddenly surface again.

USA deficit got  worst with a report last week.  At the Davos meeting this week, there was a proposal of US$100T credit ( or shall we say debt ) to support the growth of world economies. Thus, money printing rolls on globally. We had  QE II and QE III is coming. There is no clear exit strategies for the Fed. Letting go a down slope while skiing is easy but the trouble is knowing how to stop.

Every time bond price dropped, it is supported by the next day. There is no secret of the Fed manipulation. Actually, the Fed is pretty open about it. They went in to buy more bonds. The question is how long it can continue.

In view of all these factors, gold price had a big correction this week in January until on Friday, it reversed up together with the dollar and oil because of the Egyptian unrest.

Over the last few weeks, there were talks of gold being a standard. The president of World Bank mentioned about a gold standard although he denied it later. Next came a surprise. Fed Governor Hoenig shocked many observers when he stated, “The gold standard is a very legitimate monetary system...We're not going to have fewer crises necessarily. You will have a longer period of price stability or price level stability, but I don't know that you'll have lower unemployment, I don't know that you'll have fewer bank failures.”  For this to come out from a team member of the Fed reserve, it is an important timing. Finally, a comment made by Allan Greenspan in 1997 was revived on the Internet. Greenspan was the cause of this big bubble and money printing exercise. Apparently, his views as a good economist and his actions as a politician or civil servant is widely divergent. For gold to become some form of standard is a remote probability but it is interesting that it is being discussed more frequently.

Finally, food commodities continue to rise. During end January, it had a false break down but went straight up causing short traders to run for cover.  High prices of food have started to cause instability in countries. There are riots not only  in Tunisia and Egypt which finally caught the media on Friday. Other hot spots include Yemen and Jordan where unrest are starting to appear.

We are certainly threading on dangerous ground. While it is important that inflation needs to be tamed at the early stage. But what is happening is the the opposite. We are adding fuel to the fire denying that it has started.  

While the money-printing-induced high we're currently on may feel fun today, the unavoidable inflationary smackdown we'll experience tomorrow most certainly will not.

Well, the market rallied back on Monday. It is still very bullish. I have to agree to the adage “don’t fight the FED" and " the Trend is your friend”.  All talking heads on CNBC are bullish now.  But one question:  “ If the economy is so good, why the need for quantitative easing?”