Wednesday, April 18, 2012

If Things Are So Bad In Europe, Why Euro is Still Above Parity?

Things are not so good across the pond. ECB is unable to make the PIIGS pretty even with 1 Trillion Euro lipstick. (LTRO).  Spain bailout is not a matter of if but when. Italy has just announced that their target for reaching budget target will be postponed by one more year. Given all that bad news, why is Euro still above parity? Why the commercials are long Euro week after week for last so many months as you can see in the COT report. What do they know that we are missing?

ZH and all the proponents of doom and gloom are predicting the imminent end of the world and urging us to load up on gold, gun and canned food. But Gold is refusing to go up, Campbell shares are down in the dumps and only gun sales are up. What gives?

I think the answer can be found in the following graph.

It shows the liquidity pumped in by all the central banks around the world.  And Obama will do anything to get re-elected. If he can make a side deal with the Russians regarding missile defense, do you think he would feel shy of pumping the market?

One might ask, if so much money is being pumped in the system, why we do not see much of inflation, leave alone hyper inflation? There are two reasons. First, inflation is rampant in BRIC countries. It is officially around 10% in India and 9% in China. Actually it is much more. Secondly, In developed countries like USA, it is hidden from direct public eye. If you are doing your groceries, you definitely feel the pinch and see either prices of milk,bread and other essentials are going up every year or package sizes are reduced by the companies who charge the same price as before. It is just because the way they calculate CPI in USA that they are able to show inflation below 2%.

But most importantly, there is a huge erosion of asset values which is kind of deflationary. So basically what we have in USA is stagflation. How does that affect the stock prices? In the long run, not the way Bernanke wants them. But that is another story.

I have been writing not to short the market yet, although the upward momentum is almost over. Because we might go in sideways for some time before any correction and even then the correction may not be very deep.
That’s it for today. Trade safe and do not front run. Remember we do not always have to be in the market.

Thank you for reading