Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Has Next UK Financial Crisis Just Started? Bank Accounts Being Frozen - 21st July 19
Silver to Continue Lagging Gold, Will Struggle to Overcome $17 - 21st July 19
What’s With all the Weird Weather?  - 21st July 19
Halifax Stopping Customers Withdrawing Funds Online - UK Brexit Banking Crisis Starting? - 21st July 19
US House Prices Trend Forecast 2019 to 2021 - 20th July 19
MICROSOFT Cortana, Azure AI Platform Machine Intelligence Stock Investing Video - 20th July 19
Africa Rising – Population Explosion, Geopolitical and Economic Consquences - 20th July 19
Gold Mining Stocks Q2’19 Results Analysis - 20th July 19
This Is Your Last Chance to Dump Netflix Stock - 19th July 19
Gold and US Stock Mid Term Election and Decade Cycles - 19th July 19
Precious Metals Big Picture, as Silver Gets on its Horse - 19th July 19
This Technology Everyone Laughed Off Is Quietly Changing the World - 19th July 19
Green Tech Stocks To Watch - 19th July 19
Double Top In Transportation and Metals Breakout Are Key Stock Market Topping Signals - 18th July 19
AI Machine Learning PC Custom Build Specs for £2,500 - Scan Computers 3SX - 18th July 19
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

How to Play the New Normal: Spiking Stock Market Volatility

Stock-Markets / Stock Markets 2013 Jun 24, 2013 - 12:29 PM GMT

By: Money_Morning

Stock-Markets

Shah Gilani writes: Strap on your seat belts...and get ready for a ride...a very bumpy ride.

After having assumed US equities would keep chugging higher with little deviation from "up," things are starting to look a bit different.

Have you been watching Japan? It's a cautionary tale that is about to play out in the US, and globally.


Massive monetary easing in Japan since January tanked 10-year JGB (Japanese government bond) prices and the yield on their 10-year bonds doubled. On top of that, Japanese stocks soared 32%, only to see a series of huge one-day drops and a few smaller-bounce upside rallies.

The volatility has been unprecedented.

The question for investors now is: How do you make money now that the Fed has signaled the beginning of the end of quantitative easing that has stimulated global markets higher?

Here's the first thing you need to know.

Crisis = Danger and Opportunity

Volatility is the new normal, or abnormal, and it's going to be everywhere.

The Federal Reserve, the Dr. Frankenstein of this monster, just hit the master switch to bring that volatility to life.

The Fed took care to build up the markets. It drove the dollar down to hike exports and in the process got some people hired.

It liquefied banks with money by buying their crappy mortgage-backed paper for good old cash...which the banks leveraged to buy more crappy mortgages to sell to the Fed.

Now that's how you trade when you have a backstop! They liquefied the government's mounting deficit problems by buying almost all of its new debt.

To be precise, they didn't buy it directly from the government.

The banks bought it from the government first, then they repo'd (repurchase agreements) those bonds between each other to generate even more short term cash, which they then used to buy more of the government's bills, notes and bonds, which they then sold at marked-up prices to the Fed.

Now that's how you trade when you have a backstop!

So far so good, right? The play by the Fed was to keep interest rates at basically zero for borrowers, not like you, but kind of like the banks, oh yeah, that would be only the banks.

Everyone benefited by super low rates.

Corporations borrowed cheaply to pay down more expensive debt and borrowed still more to buy back their stock to decrease their total number of shares so their earnings per share looked a lot better. Which was all part of the plan to hike stock prices.

The Fed's idea of creating an equity asset bubble was to make the market hit new highs so people got all warm and fuzzy inside and with that wealth effect making them dizzy, they reached into their empty wallets and purses to whip out their credit cards to spend, spend, spend. Why? Because it feels good.

Don't you feel good?

Fed Exit Strategy: Pee in the Punchbowl

But the party had to end sometime. And Thursday was the beginning of the beginning of the end of the party.

Because the dollar was beaten down, other countries had to beat down their currencies (because they need to export too!). We're about to see the residual effects of all that beating down (which ironically was caused by something called stimulus).

We're going to see real currency wars. The first salvos have already been fired. The big guns are eventually going to come out. Welcome to massive currency volatility.

Because interest rates were so low for so long, yield-starved investors clamored for junk bonds that had some decent potential for income. Issuers fell over themselves to supply the demand and hundreds of billions of dollars of junk has been injected into ETFs and CLOs (collateralized loan obligations) and CDOs (collateralized debt obligations) and are now all subject to massive volatility if rates rise and rising rates impact issuers' ability to pay what they owe investors.

Welcome to massive high-yield debt volatility.

Because banks have been so pumped up (kind of like on a cocktail of steroids and creatine) and have to deal with rising rates, they will hold off making loans to consumers because they don't want to get caught lending long at fixed rates when their short-term borrowing costs (which is how they finance their loan books) are rising. Mortgage money will be more expensive.

Welcome to massive volatility in housing...mortgages, home prices and everything to do with housing.

And that's just the beginning.

Where Do Investors Look

So how do you make money in the markets?

Here's what me and my subscribers did, in my Capital Wave Forecast service.

We shorted the Australian dollar (by buying puts on an ETF) because currency wars will necessitate Australia devalues its currency to sell more of their commodities...that trade is up 85%.

We shorted 20-year maturity bonds (by selling puts on an inverse bond ETF), not once but twice. We saw the Capital Wave known as QE-forever rolling over as bond vigilantes began selling the 10-year in spite of the Fed's stimulus, like what happened in Japan...those trades are up 64% and 52%.

We shorted junk bonds (by buying puts on two ETFs: HYG and JNK) because the money chasing yield into junk paper began to topple over...those trades are up 57% and 56%.

And we got into these positions a few weeks ago.

We're also short corn and NASDAQ and looking Frankenstein straight in the eyes.

Oh yeah, we're long gold too. Hey, nobody's perfect. It's the market after all. Fortunately, we're only down 15% on that trade, and we're sticking with it!

So, if you want to make some money in the markets, play all the asset classes, play the volatility, play the new "Abby Normal" (a bow to Mel Brook's Young Frankenstein, which is certainly more entertaining than what we're about to live through).

Source :http://moneymorning.com/2013/06/24/how-to-play-the-new-normal-spiking-volatility/

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning 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