Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: patron_anejo_por_favor who wrote (379)	2/21/2004 10:02:51 AM
From: mishedlo	Respond to of 116555

Intervention Triggers Massive Short Covering Author: Jim Sinclair/Dan Norcini Even the Central Bankers Were Surprised! If you think today was anticipated anywhere, you are kidding yourself. The bottom line for today’s action in the yen, euro, gold and all associated items was the funds flow from Japanese intervention by selling borrowed yen for dollars which was then injected directly and massively into the US economy via the New York Federal Reserve bond-trading desk. The Japanese sell yen for dollars and send the dollars to the New York Federal Reserve by instant electronic transfer. These dollars are then invested by the New York Fed in the US bond market across all maturities, not by debiting their member banks accounts at the Fed but rather by open market purchase of all sellers. That is the nuclear difference in a non-traditional tool. The liquefying effect is the exact same mechanism that is used when increased money supply feeds into the US economy with this one delicate but nuclear difference. That difference is that when it is money supply injected into the US economy by traditional means, it goes into only the commercial banking system. That would not do the job today because the commercial banks have lost their positions as primary lenders to the Hi-Techs of the world. GM owns the mortgage company Ditech, and would not benefit directly and immediately in a massive way by the standard traditional method of increasing liquidity. Enter our now non-traditional Japanese friends. By the New York Federal Reserve using Japanese owned dollars immediately and massively produced by having borrowed (by printing) huge amounts of yen then selling those yen for dollars and shipping those dollars electronically to New York, GM wins. The non-traditional Japanese electronic bank shot is the best possible way to liquefy the new Internet-based lending system. Housing is booming now because in hot areas you can borrow 100% of the cost of the house you want to buy if your credit is above water. Yes, 100%. You need only get a copy of the Robb Report to see the 100% mortgage adds looking for big earners. What triggered this stampede today was the over crowded long side of the yen market which is a form of a short of the US dollar. What we saw today was based on the fear that the deceleration of the momentum on the upside of the US equity market might in fact presage a decline. That would be a political negative for the incumbent and a total replay of why his father lost the election even though he won the war. In order to stop a decline in the US market the Federal Reserve managed a preemptive liquefying of the system. This is an act usually done to stop a precipitous decline in equity values but was done ahead of that possibility. The Fed, ECB and BOJ were shocked by the market reaction. Today is the beginning of volatility never before witnessed on this planet. Gold will now move one day soon $50 up, down and up again. The euro will move ten cents in day. There is no stopping this as the world is awash in paper money looking for a home. Think about the following: The US market was off today in terms of the Dow by 100 points around mid afternoon. In six minutes yesterday, the equity market dropped 100 points within a very short period of time. The NASDAQ was off 22 at the same time. Selling of US securities is not what makes the US dollar go up. Yet, illogically at that time there was a major rally in the US dollar. The ultimate tool to offset a decline in the value of equities is to provide liquidity directly into the entire economic system much like adrenaline is injected directly into the heart of an expiring patient in the emergency ward. It is called the Japanese bank shot! The inviting conclusion is that the rally in the US dollar was this time a reflection of the decline in the euro and yen coming out of massive yen intervention that triggered massive long liquidation. Note that last night the euro was rising in Asia as the yen declined which was STRANGE. New less knowledgeable but huge speculators hit the panic button when the yen leaped and hammered the euro plus covered dollar shorts of all forms including long gold. And now for a quick synopsis of today’s events: * The reason all this started was a decision within the Federal Reserve management to liquefy the system as a preemptive strategy due to the last six days of negative equity market price action and the implication of an equity market that begins to throw off good economic statistics rather than rise. Clearly the Fed is on the side of the incumbent. That implies that whatever is needed will be done to provide the incumbent with a bullish equity market. The cost of doing this is beyond your wildest imagination in its implications for the future. As Mr. Russell the wisest 92 year old on this planet today said, “Welcome it, as it is an opportunity to own cheap gold.” * The magnitude was simply the result of massive anti-dollar positions going for cover as technical systems called for that. Last month alone the long position in yen grew by a minimum of $72 billion and much of it panicked at the same time. * The duration of this will be that of any short cover when fundamentals scream the opposite. The duration of this is defined in the cost of intervention and the outrageous implications of an inflationary nature. * Today will be one of the days that will be reviewed for years by academics seeking to understand the magnitude of the currency fluctuations. The answer is simply that the shorting of the dollar got so overcrowded that it corrected itself - practically speaking - all in one session. Conclusion: Stay the course. Get rid of margin only. It is going to get more and not less volatile in the weeks and months ahead. I am afraid all the administrations since Nixon have put a dagger in the heart of America by trading off traditional financial wisdom of balanced spending for political power. This day’s surprising event is the beginning of the USA’s economic death rattle and not good news for the gold bear, the dollar bull or the equity bull. If the founding fathers of the US were here now they might attempt another revolution and find themselves in chicken coops at Gitmo. I will do a gold market analysis for you this weekend after Kenny and I speak. Trader Dan Norcini sent this to me today which will provide further enlightenment on the day’s happenings: Hi Jim: The reports I have been able to obtain thus far about today's rout in the currencies reveal that the BOJ was actively attacking the yen rather than passively waiting for it to rally before they stepped in and then sold it as has been their recent pattern for the last year or so. These coattails exactly with the scenario you sketched out about the need for liquidity to be injected into the system to support the stock indexes. Throw on top of that a so-called "terror alert" in Japan which curiously flows to the U.S. Dollar and not gold (??) and the trap was sprung for the speculators. The aggressive assault touched off stops with the BOJ chasing it and then the snowball effect took place. Of course, all that dollar buying then spilled over into the other various crosses mangling the rest of the majors. The Aussie is now some 4 cents off its high over 80; the British Pound has been knocked down nearly 6 cents off its peak near 191 and the Euro is down some 4 cents from the 1.29 level. The question begs to be asked, "What exactly has transpired in the global economy that has caused the serious concerns of just the past week in regards to the massive U.S. current account deficit and recent blow-out just last Friday in the trade deficit figures to instantly disappear?" The answer to that is obvious – NOTHING. If anything, a rallying dollar will work at cross purposes to these concerns and only serve to further aggravate the situation. There remains not the slightest doubt in my mind that the U.S. administration wants and NEEDS a weaker dollar if they have any hope of getting the American job machine up and running. I can well imagine the ridiculous scenario in which officials attempt to explain to the rest of the nation as we head into the main election season that a strong dollar is in this nation's best interest as it will help to crush our exports making them less competitive thereby killing profits from export related industries and reducing their need to hire more workers! Additionally, they can then gleefully answer the critics who assert that U.S. indebtedness is out of control by stating that they are doing their best to make certain that it gets worse by aggravating the current account imbalance! Preposterous? But that is exactly what a rallying dollar will do. The Chief Central Banker himself is on record as stating before the Congress that the weaker dollar will be necessary to bring down the current account deficit. The only possible explanation for today's debacle therefore in my opinion is that we are witnessing a deliberate and systematic attempt by the Central Bankers of the G7 to cause as much confusion, chaos and uncertainty as they possibly can in an attempt to stem the dollar's RATE of decline. They and they alone are the SOLE SOURCE of the "excess volatility" that they are constantly bitching about. Left to itself, the market would swiftly move to make the adjustments necessary to address the global imbalances created by the policy maker's continuous meddling. That is precisely what the market has been attempting to do by dragging the dollar lower and precisely what these megalomaniacs are doing their best to thwart. The unvarnished truth is that Central Bankers despise speculators since the specs refuse to play by the rules that these all-knowing elitists have manufactured for what they consider to be their own private playgrounds. The dollar must fall and yet these demi-gods do not approve of the speed of the fall and therefore have set out to make certain that the speculators remain cautious, unsure and hesitant - the idea being that this will work to make the dollar's fall more "orderly." Having now managed to run most of the dollar buy stops and cleaning them out, the question is “who exactly is left now to buy the dollar, especially at these levels?” Will hedge funds now suddenly reverse positions and go long the dollar as they anticipate a new bull market in the greenback? I do not think so. What these people have managed to create is the situation that now exists in which a stronger dollar will remove the artificial support from the bond market which has kept interest rates on the long end artificially low. If the dollar were to rally much further, the BOJ would no longer have any particular need to intervene in an attempt to weaken the yen. Their previous attempts to weaken the yen have been grudgingly allowed by the Fed as long as it was understood that such intervention would not be an attempt to reverse the trend in the dollar but only serve a defensive purpose to protect their export markets. Otherwise they would be at cross purposes to the administration. The Fed can tolerate a bit of a short term pop in the dollar as long as it does not seriously threaten the interest rate environment and play havoc with the derivative market but they would adamantly insist on a line being drawn beyond which they will not acquiesce. Additionally, the U.S. has insisted that such purchases of dollars would be recycled into the U.S. bond markets to assist Uncle Sam in keeping the interest rate environment friendly. Bond traders have become quite adept at anticipating this inflow and have followed BOJ intervention events quite religiously and positioned themselves accordingly. Today's sell-off in the bonds was the result of this mindset in action. One of the floors of support under the bond market gave way as bond traders judged that BOJ intervention would not be necessary with the dollar at this level. Should bond traders begin to back away from the market and long term rates begin to rise, rest assured that the fragile American stock markets would take notice and no doubt give policy makers a rude awakening. What will then happen to the best laid plans of these mice men?