Puru Saxena's Contributions

The world’s most influential central bank wants to inflate American asset prices; thus it is conceivable that the ongoing rally on Wall Street will continue for several months. Look. The Federal Reserve has made it clear that it will keep rates on hold until at least December 2014 and it is also buying US Treasuries across the entire yield curve.

The economies of the developed world are sluggish, unemployment is a real menace and debts are out of control (Figure 1). Nonetheless, the world’s stock and commodity markets are defying all logic and advancing in the face of adverse economic conditions.

You may recall that only a few months ago, the investment community was worried about Europe and many were questioning the survival of the single currency. During that period, investors were dumping all sorts of risky assets and capital was flowing towards the world’s reserve currency and the most liquid government bond market.

Even though the vast majority of the world’s stock markets are in a primary downtrend, it is astonishing that Wall Street has not changed its optimistic tune! For example, Goldman Sachs is still calling for a strong Q4 2011 GDP print and other houses are also urging investors to ‘buy-the-dips’.

The global economy is slowing down, most of Europe is in recession and the US is also on the verge of a contraction. Nonetheless, the ‘risk on’ trade has raged over the past month and somehow, the market seems to be oblivious to the real economy.

After reviewing a host of technical and fundamental data, we are of the view that the world’s stock and commodity markets may be on the verge of a big slide. Remember, for almost two years, the Federal Reserve supported the ‘risk trade’ via quantitative easing.

The majority of the world’s developed economies are growing at a sluggish pace, yet the price of NYMEX crude is trading around US$100 per barrel. Interestingly, the price of Brent Crude (the price most nations pay) is even higher!

Over the past few weeks, we have spent a lot of time digging into the macro data pertaining to the world’s developed economies. After careful analysis, our research has convinced us that quantitative easing (money creation out of thin air) will not end anytime soon.

Only two weeks ago, the price of silver was rapidly appreciating in a parabolic advance. Back then, sentiment towards the white metal was extremely bullish and its price was approximately 78% above its 200-day moving average. Furthermore, on the 25th of April, silver registered a key reversal whereby its price tested the all-time high recorded in 1980 but failed to hold on to its intra-day gains.

On Monday, the silver market experienced a key intra-day reversal. During Asian trading, the price of silver surged to almost US$50 per ounce (+5% intra-day), however during European trade, selling came in and the metal struggled to stay firm. Thereafter, when the US market opened, the price of silver plunged to below its previous close. In other words, the silver market experienced a classic intra-day reversal, which usually markets the end of a parabolic move.

Let’s face it; the availability and cost of credit determine the value of every asset on the planet. When credit is cheap and plentiful, all assets (with the exception of government bonds) inflate or appreciate in value. Conversely, when credit becomes scarce and expensive, all assets (with the exception of government bonds) deflate or decline in value.

On one hand of the spectrum, the bears believe that China is a train-wreck and that its economic growth is unsustainable. These sceptics love to highlight the property bubble in China and they never miss the opportunity to mention the fact that fixed asset investment accounts for a disproportionately large chunk of the Chinese economy. According to the bearish camp, China’s economy is not real

The truth is that the world’s output of conventional crude oil peaked in 2005 and global oil exports are also past their prime. Furthermore, the unconventional sources (tar sands, heavy sour crude, ethanol, natural gas liquids, bio-fuels and shale) are struggling to keep up with the ongoing depletion in the world’s largest oil fields. Therefore, it is probable that the world’s current production of total liquids is at or near maximum capacity.

Let the truth be known, the world is being held hostage by powerful bankers. Thanks to the fiat-money fractional reserve system, bankers have become the ruling elite and as a result, entire nations are going bust.

Lets face it, governments always try to ‘kick the can down the road’. Rather than deal with economic issues in the here and now, they prefer to postpone the pain. Unfortunately, in their attempt to avoid painful economic recessions, the policymakers sacrifice the purchasing power of their currencies and they end up creating even bigger troubles for the future.

Austerity be damned, at this rate Mr. Bernanke will go down in the history books as one of the greatest money creators ever to have walked this planet! Never mind sky-high deficits and a crushing debt overhang, at its most recent FOMC meeting, the Federal Reserve all but guaranteed another round of quantitative easing. While the American central bank did not officially expand its quantitative easing program last month, it did reiterate its willingness to institute more aggressive monetary policy measures in order to combat the risks of deflation. Furthermore, Mr. Bernanke did officially downgrade the Federal Reserve’s outlook for inflation.

Today, many prominent economists (Nouriel Roubini, David Rosenberg and Paul Krugman) and fund managers (Bill Gross and Jeremy Grantham) are forecasting deflation and according to these folks, a deflationary contraction is now ‘baked in the cake’. In fact, these deflationists are extremely worried about the ongoing private-sector debt-deleveraging in the developed world and they are also concerned about the lack of aggregate demand in the industrialised nations. Bearing in mind these two factors, these prominent people believe that deflation is now almost guaranteed and inflation is out of the question.

BIG PICTURE – Global stock markets are in a multi-year bull-market and nominal prices are likely to appreciate for several more months. In our view, we are currently amidst a normal multi-week consolidation phase and most stock markets are likely to stage a sharp year-end advance.

BIG PICTURE – Many prominent economists define deflation as a decline in the general price level within an economy. To make matters worse, these academics use the establishment’s highly manipulated inflation data as their yardstick. Therefore, when the heavily massaged Consumer Price Index (CPI) and Producer Price Index (PPI) show a moderate increase, these folks celebrate the ‘perfect scenario’ of moderate inflation and when the CPI and PPI contract, they worry about deflation.

BIG PICTURE – Today, the economic news is scary and investor sentiment is awful. Therefore, if you are a long-term investor, this is the time to be greedy. Remember, when it comes to investing, nervousness is your friend, comfort your enemy.