Enzio's Clock

 Recent market developments

Just to minimize memory games, here is what has happened of late. Of course, some of this has been due to Mr. Obama's election, and also to fourth quarter window dressing:

Just one thought before we proceed. Seems to me as if "the" difference of this crisis to more recent ones is that peoples' faith in the banking system has wilted. The last time that I remember this was during the Herstatt bank crisis in Germany in the early 1970s...

Wall Street

In our recent piece, we expected some market "firmness"(*) until this May: after that, Pres. Obama's honeymoon definitely will be over, mired in his inability to manage Congress and strong personalities in his Cabinet. Again, we are not full of "Schadenfreude"; it just seems as if he is inheriting a mountain range of disasters that he has to manage....and we, of course, wish him well. (*"Firmness" is perhaps misleading: what I am seeking to convey is that that one-way market slide from October 2007 is over with, that's all.)

These challenges will erode the credibility of any "stimulus packages" that he initiates. Indeed, I, for one, don't think that Keynesianism (i.e. massive spending on public works) really works in post-industrial economies such as America's, Europe's or Japan's. After all: how many college graduates really want to go and dig tunnels and build bridges? And where are such tunnels and bridges headed to?

All of which suggests that America's Economic Time™ has to worsen:

• the excess demand for money intensifies, particularly once the credit card mess re-emerges, and
• the resulting excess supply of goods intensifies in the wake of belt-tightening.

Perhaps quixotically, we welcome the worsening Economic Time: the "old templates" are returning, namely

• money is being re-valued, as in: "all of a sudden", a unit of money means something again, and
• jobs are being re-valued, as in; "all of a sudden", employees are starting to value their jobs again. Well, not quite in Asia and Europe, but that will come, rest assured.
  

The market implication has to be that earnings will fall further, dragging stocks down with them. So even if we are close to/ at the bottom of "L", watch sporadic market falls of up to 20%. Savvy traders should prosper in such a buffeting - which traditionally has been stronger when Presidents offering "change" took office (e.g. Kennedy, Reagan and Clinton)...

What does this imply for the yen?

The yen

The table above suggests that the yen has remained firm since August.

This ties-in with Wall Street's subsequent firmness: risk appetite has diminished, so people unwound their carry trades. This means that they

• sold their investment instruments and
• converted these proceeds back into yen in order to re-pay their yen debts.

But if you agree with my stock market scenario just noted, then that fish flopping around very well could result in risk appetite rising, particularly among savvy traders.

The market implication is  more carry trades and thus a weaker yen.  

What does increased risk imply for the Swiss Franc?

The Swiss Franc

It, too, has risen heftily since Obama's inauguration. My guess is that the chickens of irresponsibility are jetting home to roost - and driving our faith in the dollar ever lower.

The market implication has to be that - if faith keeps falling in the US market and thus the dollar, people will seek a safe haven currency, so the Swissie will keep strengthening. Not that the Swiss Franc is exactly fool-proof either, going on what the chickens of irresponsibility have wrought on once rock-solid UBS; however, the market perception just may be that the Swiss Franc is the "gold standard" of currencies yet again...

Indeed, here is an out of the box idea: if you believe that increased risk appetite will result in more carry trades and thus in a weaker yen, then how about going long the Swissie and shorting the yen?

Finally, what does a decrease in faith in the  financial sector imply for gold?

Gold

One final observation for 2008: is "inflation" the ONLY way to look at where bond yields might be headed?

We, for one, have argued that the "store of value" argument goes beyond mere prices. We are most concerned about the nasty magnitude of America's Federal public debts - and those of the world's worst hedge fund, the U.S. Fed - infecting the market.

"All of a sudden", people will say "forget about inflation - I just want my money to be safe". Well, then gold must  keep rising. After all, next to bricks and mortar, is there any other store of value around once the very bank that you placed your money with has turned shonky, and even the bedrock of financial muscle, America's financial system, has been shaken at its very roots?

The market  implcation has to be  "In gold we trust"...so up it goes!