Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
FED Balance Sheet Current State - 5th Mar 21
The Global Vaccine Race Against Time and Variants - 5th Mar 21
US Treasury Yields Rally May Trigger A Crazy Ivan Event (Again) In Stock Market - 5th Mar 21
After Gold’s Slide, What Happens to Miners? - 5th Mar 21
Racism Pandemic Why UK Black and Asians NOT Getting Vaccinated - NHS Covid-19 BAME - 5th Mar 21
Get Ready for Inflation Mega-trend to Surge 2021 - 4th Mar 21
Stocks, Gold – Rebound or Dead Cat Bounce? - 4th Mar 21
The Top Technologies That Are Transforming the Casino Industry - 4th Mar 21
How to Get RICH Crypto Mining Bitcoin, Ethereum With NiceHash - 4th Mar 21
Coronavirus Pandemic Vaccines Indicator Current State - 3rd Mar 21
AI Tech Stocks Investing 2021 Buy Ratings, Levels and Valuations Explained - 3rd Mar 21
Stock Market Bull Trend in Jeopardy - 3rd Mar 21
New Global Reserve Currency? - 3rd Mar 21
Gold To Monetary Base Ratio Says No Hyperinflation - 3rd Mar 21
US Fed Grilled about Its Unsound Currency, Digital Currency Schemes - 3rd Mar 21
The Case Against Inflation - 3rd Mar 21
How to Start Crypto Mining Bitcoins, Ethereum with Your Desktop PC, Laptop with NiceHash - 3rd Mar 21
AI Tech Stocks Investing Portfolio Buying Levels and Valuations 2021 Explained - 2nd Mar 21
There’s A “Chip” Shortage: And TSMC Holds All The Cards - 2nd Mar 21
Why now might be a good time to buy gold and gold juniors - 2nd Mar 21
Silver Is Close To Something Big - 2nd Mar 21
Bitcoin: Let's Put 2 Heart-Pounding Price Drops into Perspective - 2nd Mar 21
Gold Stocks Spring Rally 2021 - 2nd Mar 21
US Housing Market Trend Forecast 2021 - 2nd Mar 21
Covid-19 Vaccinations US House Prices Trend Indicator 2021 - 2nd Mar 21
How blockchain technology will change the online casino - 2nd Mar 21
How Much PC RAM Memory is Good in 2021, 16gb, 32gb or 64gb? - 2nd Mar 21
US Housing Market House Prices Momentum Analysis - 26th Feb 21
FOMC Minutes Disappoint Gold Bulls - 26th Feb 21
Kiss of Life for Gold - 26th Feb 21
Congress May Increase The Moral Hazard Building In The Stock Market - 26th Feb 21
The “Oil Of The Future” Is Set To Soar In 2021 - 26th Feb 21
The Everything Stock Market Rally Continues - 25th Feb 21
Vaccine inequality: A new beginning or another missed opportunity? - 25th Feb 21
What's Next Move For Silver, Gold? Follow US Treasuries and Commodities To Find Out - 25th Feb 21
Warren Buffett Buys a Copper Stock! - 25th Feb 21
Work From Home Inflationary US House Prices BOOM! - 25th Feb 21
Man Takes First Steps Towards Colonising Mars - Nasa Perseverance Rover in Jezero Crater - 25th Feb 21
Musk, Bezos And Cook Are Rushing To Lock In New Lithium Supply - 25th Feb 21
US Debt and Yield Curve (Spread between 2 year and 10 year US bonds) - 24th Feb 21
Should You Buy a Landrover Discovery Sport in 2021? - 24th Feb 21
US Housing Market 2021 and the Inflation Mega-trend - QE4EVER! - 24th Feb 21
M&A Most Commonly Used Software - 24th Feb 21
Is More Stock Market Correction Needed? - 24th Feb 21
VUZE XR Camera 180 3D VR Example Footage Video Image quality - 24th Feb 21
How to Protect Your Positions From A Stock Market Sell-Off Using Options - 24th Feb 21
Why Isn’t Retail Demand for Silver Pushing Up Prices? - 24th Feb 21
2 Stocks That Could Win Big In The Trillion Dollar Battery War - 24th Feb 21
US Economic Trends - GDP, Inflation and Unemployment Impact on House Prices 2021 - 23rd Feb 21
Why the Sky Is Not Falling in Precious Metals - 23rd Feb 21
7 Things Every Businessman Should Know - 23rd Feb 21
For Stocks, has the “Rational Bubble” Popped? - 23rd Feb 21
Will Biden Overheat the Economy and Gold? - 23rd Feb 21
Precious Metals Under Seige? - 23rd Feb 21
US House Prices Trend Forecast Review - 23rd Feb 21
Lithium Prices Soar As Tesla, Apple And Google Fight For Supply - 23rd Feb 21
Stock Markets Discounting Post Covid Economic Boom - 22nd Feb 21
Economics Is Why Vaccination Is So Hard - 22nd Feb 21
Pivotal Session In Stocks Bull Bear Battle - 22nd Feb 21
Gold’s Downtrend: Is This Just the Beginning? - 22nd Feb 21
The Most Exciting Commodities Play Of 2021? - 22nd Feb 21
How to Test NEW and Used GPU, and Benchmark to Make sure it is Working Properly - 22nd Feb 21
US House Prices Vaccinations Indicator - 21st Feb 21
S&P 500 Correction – No Need to Hold Onto Your Hat - 21st Feb 21
Gold Setting Up Major Bottom So Could We See A Breakout Rally Begin Soon? - 21st Feb 21
Owning Real Assets Amid Surreal Financial Markets - 21st Feb 21
Great Investment Ideas For 2021 - 21st Feb 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Three Breakouts That Could Break the Stock Market Rally

Stock-Markets / Stock Markets 2010 Mar 29, 2010 - 05:24 PM GMT

By: Justice_Litle

Stock-Markets

Best Financial Markets Analysis ArticleThree “breakouts” of recent days – interest rates, the U.S. dollar and China trade tensions – give ample reason to be cautious.

Upside breakouts are normally seen as bullish. But in the past few trading days, we’ve seen a few that are anything but.


Breakout #1: Interest Rates

The first breakout of note is in interest rates. After ranging sideways for the first few months of 2010, the 10-year rate is on the rise again – seemingly drawn toward the critical 4% level.

1

In keeping with the rate breakout, U.S. Treasuries fell hard this week. (For interest rates to rise, bond prices have to fall.) The government routinely raises money by holding “auctions,” in which securities are sold off to the highest bidders through official channels. Fewer buyers than expected showed up for the latest auctions, causing concern.

“De Facto” Default

Higher interest rates make borrowing more expensive. When rates rise, debt service costs go up, for individuals and governments alike. An interest rate spike could thus act like a hammer blow for an economy still in the early stages of recovery.

But the real looming fear is that, at some point, investors – particularly foreign investors – will lose faith in U.S. Treasury bonds.

Because Uncle Sam borrows in his own currency, it is technically impossible for the U.S. government to default. It’s just a matter of printing more scrip.

But if the U.S. government is forced to “monetize” its debt – i.e. pay it off by printing reams of fresh dollars – that could be a de facto default if not a de jure one. (“De facto” is a Latin expression that means “by the fact,” or “in practice.”) When a government monetizes beyond the point of no return, bad debt becomes bad currency. The value of the currency then plummets.

And yet, though bonds took a very hard hit last week, the $USD did not. In fact it is surging.

2

Breakout #2: The $USD

The $USD breakout offers our second reason for concern.

With apologies to Mark Twain, rumors of the dollar’s death have been greatly exaggerated. For some time now, the dollar’s pending demise has become a note of conventional wisdom.

Here at Taipan Daily, your editor has been a contrarian dollar bull for months now – sometimes to the snorting and scoffing of others – not because he has any great faith in the greenback, but because the euro looked so precarious and the $USD predictions seemed so overwrought.

In the context of a global economic recovery, it is a bad thing for the $USD to be rising. There are a few reasons for this:

• A rising $USD suggests U.S. investors are withdrawing capital from emerging market investments, thus pushing up the dollar as the funds come home.

• A rising dollar threatens the many countries around the world that have smugly issued large amounts of dollar-denominated debt. (Issuing too much dollar debt was the mistake that led to the Asian Currency Crisis of the late ‘90s.)

• A rising dollar hurts U.S. exporters, which further angers American politicians (like Senator Chuck Schumer) and fuels their heated trade-war rhetoric against China.

The dollar’s latest breakout has a lot to do with Europe. As the Greek crisis comes to a head, it has become clear that Germany – the country that wears the pants in the eurozone – does not believe in “ever closer union” when the phrase matters most.

There are open questions as to whether the euro will survive long term, and if so, in what form. Short-term bursts of hope (in respect to Greek resolution) miss the key point: As a reserve currency candidate and a meaningful $USD alternative, the euro can no longer be trusted.

It is simply too plausible, likely even, that when the debt hits the fan for Spain or Italy or Portugal, investors will be put through this same song and dance all over again.

Because currencies trade relative to each other, a euro headed lower means a dollar heading higher. That, in turn, leads to political tension and the escalation of risks as noted above.

Breakout #3: China Trade Tensions

Less than three weeks ago, President Obama unveiled a plan to double U.S. exports over the next five years. "In a time when millions of Americans are out of work, boosting our exports is a short-term imperative," Obama said.

It’s hard to increase exports with a strong and rising currency. When the value of a country’s currency goes up, that makes its goods more expensive for the rest of the world.

This is why China has long held its currency down – to keep exports competitive and sale prices cheap. China’s leaders have long sought to keep the country stable by employing as many people as possible. Exports have been crucial to this goal.

But now the U.S. has an aggressive employment mandate too. Politicians are thus growing increasingly vocal in their criticism of China's currency peg, which they see as unfair competition. Influential columnists, like Nobel laureate Paul Krugman, have argued we should take a “baseball bat” to China in terms of forcing a currency adjustment.

There is no chart for this, but news flow points to a fresh "breakout" in China trade tensions – our third reason for concern. Rhetoric has grown notably heated on both sides.

This is frightening because, among other things, China sits on a massive mountain of dollar-denominated assets. It has been argued, fairly convincingly, that China cannot sell off those assets without doing great harm to its own financial position. But if Beijing’s leadership is forced into a trade war stance, there is no guarantee as to how rational the response will be.

Those who casually argue for punishing tariffs, as Krugman and others do, seem to have forgotten the lessons of the Smoot-Hawley Tariff of 1930, and the dramatic downward spiral in global trade that resulted.

By Justice Litle
http://www.taipanpublishinggroup.com/

Copyright © 2010, Taipan Publishing Group

Justice Litle is editorial director for Taipan Publishing Group. He is also a regular contributor to Taipan Daily, a free investing and trading e-letter, and editor of Taipan's Safe Haven Investor, which helps guide readers to new global investment frontiers and safe harbors.

Justice_Litle Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules