The Next Sound You Hear

Traders and investors are running toward the exits. There is a combination of reasons for this not least among them the imminent approach of the big fat holiday season and the end of the year book balancing dance.

Almost everything is down, off, slip-sliding, mud-sliding and downhill sledding today. U.S. equities are way off. Oil is looking for the bottom of the ocean. The dollar is down against the euro, up against the yen and GB pound. No rhyme or reason. The exits are crowded – and confused. Bond yields are down across the three majors. The U.S. 10-year is flirting with a 2.00% yield.

In spite of very negative news out of China on manufacturing, the Nikkei and Shanghai exchanges were up. In the U.S., despite consumer sentiment reaching an eight-year high, stocks are down because oil is causing a disturbance in the force. Europe was down significantly today, too.

Is there a good dose of irrationality? Sure there is.

But what lies in back of it all can be boiled down to one (rather complicated) idea. The U.S., despite its enormous size and influence, cannot be expected to carry the world’s recovery burden. (Let us give kudos to Canada for its proportional role in keeping the economic fires burning.) That is dawning on analysts.

The U.S. financial system, while the most solid among the big players, is still deeply flawed. There is too much reserve cash lying around. Some lending restrictions are weighing down the economy. However, the U.S. is still the best game in town and the dollar is still a good bet.

Leaving Japan aside for a moment, let’s consider Europe and China. More centralization in the E.U. system has left all constituent members paralyzed. It’s getting hard to keep track of the months and months the European Central Bank has been thinking of solutions and not doing anything.

Hyper-centralized China has made countless blunders as it tries to sustain its large economy through use of non-market apparatuses. That chicken is coming home to roost. China will have an even worse time competing with a more light-footed America in manufacturing. And, the fact that the U.S. is moving toward energy independence will hurt China even more. Why is Chinese money flooding into real estate in America’s big cities? One word: opportunity.

It’s hard to know what to make of Japan. It is mired in a set of attitudinal difficulties that seem unsolvable by policy alone. The country is apparently very rich, but consumers are reluctant to spend. Savings rates are very high, but the money has no place to go except overseas. (Read again – the United States.)

Then there is volatility. When that bane of traders and investors hits, many, many seem to lie low. Not surprising. An erratic market makes it hard to find profitable trades. At least if volatility is low and a market is heading up, or down, consistently, you can place your bets accordingly.

Where is gold headed for the moment according to fundamentals? Up and down, back and forth, with a slight bias toward the downside. Technicals may tell a very different story, but that’s the fundamental truth right now. 

Wishing you as always, good trading,