Markets are playing exactly according to the script. Stocks rallied for 4th day straight on the news of European fix. I have been writing for a while that CBs( Central Bankers of the world) have learned their lesson from the 2008 crisis and they would prevent such a crisis from developing again. So we see that the ECB, BOE, SNB, BOJ, BOC and of course the FED has come together to provide liquidity to the market. Once again, I have been writing that the only thing the CBs know is how to pump in money in the system and although such an action will only delay the inevitable balance sheet contraction, it will provide some much needed time for the speculators and too big to fail banks to make some more money.
The CBs have set up US Dollar swap lines for the “Zombie European Banks” who survive on leverage and are actually dead men walking. That has resulted in the short squeeze in the world stock markets. This should lead to further decline in US Dollar and a rally in Equities.
However, I am not sure if the corrections are over or we shall see renewed weakness again. It seems that the “Big Banks” are buying all that their clients are selling. Again, this is in anticipation of Santa Clause coming early on September 21st. There may be some disappointments and we might see some selling the news. The weakness in the market may continue till October. But the bottom-line is, the mega bears are going to be disappointed that world has not ended as predicted and Zero hedge will go ballistic with different conspiracy theories. For the next three months, we will see these dooms day soothsayers go rabid with froth in the mouth. They may still be vindicated at a later date sometime in 2012, but for entirely different reasons. More on that later.
The new trade now is “Buy Euro and Sell Gold”. In fact, the corrections in precious metal may have just started. Let me show you the chart from Chris Kimble.
Both the precious metals have broken multiple support lines and from technical perspective, it may be time to short them with a tight stop.
From fundamental perspective, once again, the big money is leaving Europe but they want that flight to be low key and orderly. So on the superficial level, there will be show of strength of Euro and with the help of the CBs, sell gold. Precious metals should be considered as insurance to inflation and break down of fiat currency. I do not see US Dollar going out of fashion any time soon. In fact, with the balance sheet contraction looming over the global economy, brake-up of Euro zone and a possible Geo-political clash in Middle East, the flight to safety will be towards US Dollar.
It is going to be an interesting time.