“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Saturday, November 16, 2013

Deflation Fears in Europe

In my reading this morning I came across a rather revealing story on the Dow Jones wires concerning that surprise interest rate cut over it the Eurozone last week. Do you remember? That was when we learned that the ECB had cut its main interest rate down to paltry 0.25%, which by the way is a record low.

Now come some comments from one of their council members, a Luc Coene by name who tells us why the bank acted with no advance warning.

The actual story was reported in a Belgian newspaper, L'Echo. In it, Coene states that recent low inflation figures had greatly concerned the members of that council.

here is a quotation: "Once the first signs of deflation are showing, it's already too late to do something. So we've avoided playing with fire".

This confirms my suspicion that the bond buying programs of the Central Banks are losing efficacy.

Here is the problem - what happens when or if the economy no longer responds to ultra low interest rates, Quantitative easing/bond buying programs, government stimulus measures etc?  Then what?????

I have said it before and will say it again - the problem is excessive levels of debt combined with deep-rooted, systemic structural issues that MUST be dealt with. Monetary policy cannot in and of itself CURE ANYTHING. All it does is to create huge imbalances and distortions in certain asset classes. We are witnessing this first hand in the ever-inflating bubble in the equity markets.

The Yellen-led Fed will do absolutely nothing to slow this process.

7 comments:

  1. Dan: You hit the nail on the head.The D (eflation) word is what is driving the Central banks of the US, Japan, Europian Union and UK to continue QE. Gold could settle and test close to the $1000 level by January.

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    1. If we see widespread persistent deflation that the Central Banks can do nothing to prevent, then we have reached the end of the current monetary system. We cannot suffer debt that rises in value (real terms) year on year for long without mass default taking place, wiping out the banks.

      Is that not precisely the scenario many hold Gold as insurance against?

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  2. Hi all,

    Imho, one doesn't necessarily have to see deflation everywhere.
    You may have deflation in some parts of the economy, and inflation in some others.
    If banks don't loan, if money velocity is plumetting, if more and more middle-class people are getting fired from their job, then actually you may witness something terrible like :
    - inflation in all the goods you can't live without : food, water, gas...
    - deflation in most of the things you don't need, but use as an asset. Real estate, gold, etc...
    Why?
    Because people without enough money would eventually have to sell their gold, their flat, whatever has any value in order to buy food, pay their taxes, etc...
    Debt is deflationary.
    Nor only for people, but for countries, pushed to sell their gold in order to erase part of their debt. You have to be a creditor like China to play another game.
    If the manipulators like to gather wealth, power, control, why would they simply hate gold all the time? If they are pragmatic, this is just a cycle for them. Make gold collapse when too many bought it. Then soon buy it at a bottom when everybody hates it, sold it, and make it jumpt to the moon once more.
    If wealth, control, power are the end game, who cares about the means? Dollar collapse. So what, if they are in the right end of the trade when it happens. Gold down or up? Same. Now it seems that they are pushing gold as down as they can, being probably short. But imho, once they can't push it anymore, once most countries, people, gold bugs sold everything they had and prices can't drop any longer, they'll reverse their positions.
    With long term production cost of gold around 1200 $ and not many ways to decrease them in the future, if I don't need to sell my gold now to buy food or anything vital, if I can wait a few years to keep it as an insurance against sudden inflation and trend reversal, I have no problem keeping it.

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  5. Inflation in the stock markets indeed.
    Look at the CDUR cycles compared to prices.
    The CDUR of this time unit is the not bold line, but the normal line.
    Last cycle was :
    - prices up, CDUR up
    - prices...flat and even a little up, CDUR down.
    That's a sign of trend continuation.
    Now Cdur is going up once more, taking prices with it.
    I'll wait for Cdur to top up there to see if I see a new opportunity of shorting SP on the shorter time unit, as I did last time at double top 1270+, but it's tricky :)

    Thanks a lot Dan for sharing as you do, it's really nice to feel connected with other traders, especially real professionals who share their wisdom for free!

    Just trying to share a few of my principles :

    1) trading by checking 3 time units charts and not just one can increase your odds of being right. If I see a signal on the weekly time unit, and that signal is confirmed in the monthly time unit too, it is a stronger signal. But then I'll need to act asap and therefore see if my hunch is right : the faster time unit must confirm the signal...here the daily time unit. Price waves is a consequence of influences of several different waves and trends on different time units. Usually the slower time unit is 4 times slower than the faster one. You can have month / week / day / 4 hours / 1 hour for example. Master this and you'll improve your trading.

    2) Prices are the final judge, but you can read many things outside the price units. Many indicators are used to try to anticipate price reversals. ETMACD for example, if reversing down while Bollinger were in phase 3 will anticipate a phase 4 in Bollinger Bands in a few more candles, thus an opportunity to trade with the reversing Bollinger band offering a nice level from which to put a stop loss, which is exactly what I did on my last long trade on gold on the 4h time unit at 1270.

    3) don't try to forecast where the market is going.OK, you can have scenarios ready. But don't reason the market. Let it reason you. All you can do when trading is to decide when to get in, where to put your stop loss, have a first target, check if that risk/reward ratio is ok, and then let the market decide. I don't believe those who predict where prices will be in X candles. It's only a matter of probabilities, not certainties. TA is used to improve your odds and help you get in the market at key levels where the risk / reward ratio is interesting enough so that you can earn money in the long run.

    4) trade small enough so that you don't listen to your emotions. If you listen yo your emotions, you are dead. A bit like in this very good extract which could be a metaphor : the box is the market, and if you listen to your emotions, this is what will happen.

    http://www.youtube.com/watch?v=yIDtN8CDQmk

    Have a nice week all :)

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  6. Hubert

    Really informative posts…thanks for sharing.

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