The Reaction in the Euro
The reaction rally in the Euro appears to be on schedule. The March low at 10458 held during April so at the very least that implies a 2 to 3 month reaction rally. Bank dealing desks reported to us that their trading lines have been cut. We previously reported that we suspect the ECB has asked behind the curtain for the banks to stop selling the Euro. Liquidity has dried up even in the bond markets and this is not a good sign for the fall warning that we may see high volatility after the ECM turning point.
Weekly Bullish Reversals begin at 11450 and 11535. A weekly closing above this area should spark a rally back to retest the more important resistance forming in the 12000 followed by the 12500-12600 area. We also have technical resistance in the 11800 area during May. Those looking to convert from Euros to dollars should wait for just now since we have completed a 10 month correction holding the primary support at the 10300 level. Yes, the Euro will most likely break the 80 level. However, that is unlikely to unfold untilAFTER 2015.75 moving into the 2017 time period. This type of a reaction should shift the general view of the Euro back to a positive position briefly.
We still see June is where higher volatility should start and keep in mind that the main turning point in still the September time period lining up with the ECM (9/20-10/1). We could see August as a reaction high on a closing basis.
Technically, the Euro fell below the Uptrend Line intraday, but has held above this technical support on a monthly closing basis. We have remained within the Breakline Channel so everything is still within a normal trading range with nothing unusual unfolding so far.
Understanding the Reverse Side of the Flight to Quality
QUESTION: I’m having trouble reconciling your call between the next downturn (due to start in 2015.75 and your call on the Dow potentially doubling or more. Aren’t equities historically a very good predictor of the economy? Or do you think this time will be different dynamics driving the downturn (cyclical) vs. the rally in the Dow (influx of capital flows). Could we have a situation where equities rally AND the economy enters a recession? Thanks for all your hard work and eye-opening articles.
JL
ANSWER: Equities decline with the confidence in the public sector. People run to the government bonds, and this we call the Flight to Quality. What happens when the crisis is confined to government? The gold promoters characterize this as hyperinflation, where money becomes worthless. I have explained that we are not facing that stage EVER in the US economy. The currency will be replaced electronically before that ever takes place.
Nonetheless, when CONFIDENCE collapses in government, theFlight to Quality will reverse. People will invest in the private sector and sell government bonds, smelling a default in the wind.We are more than likely going to get the first kneejerk reaction, where equities will DECLINE and people will rush into government bonds, even with negative yields. This should create the final bubble top in debt, and then it will reverse in a Flash Crash type move. Traditional people will buy bonds and lose a fortune. Others will sell their stocks at the lows and jump on short positions. This will set the stage for a crazy period that comes around every so often, measured in hundreds of years.
We are waiting for the CONFIRMATION. The computer will give us that signal and we just have to go with the flow. It may be worse than trying to give a 5-year-old cough medicine. Yes, it tastes horrible, but it is necessary for the cure. The majority will not be able to make that transition thanks to their preconceived ideas and preconditioning. Many pilots who flew prop planes could never fly a jet because they could not make that transition to faster travel requiring quicker reaction times. This is the type of transition we face. We just have to abandon all prejudice and go with the markets. As they say – the trend is your friend.
Beware of Government Bonds
COMMENT: Dear Martin,
Thank you for all you do, you are really great!
Looking for the exact day of default for Greece in Wikipedia I stepped into a monumental article where I could not find any reference to a default, but only an endless epic of efforts to avoid default.
“On 21 February 2012 the Euro Group finalized the second bailout package (Greece) (see below), which was extended from €109 billion to €130 billion. In a marathon meeting in Brussels private holders of governmental bonds accepted a slightly bigger haircut of 53.5% Creditors are invited to swap their Greek bonds into new 3.65% bonds with a maturity of 30 years, thus facilitating a €110bn debt reduction for Greece, if all private bondholders accept the swap.”
Well, I was one of the “clever” guys who bought the Greek bond expiring in March 2012 few months before maturity. I paid 60 cents on the dollar expecting to receive the dollar back in two months (with the help of IMF, Troika, ECB). Unfortunately the bond was included in Brussels’ “invitation” to swap, which in ISDA terms is a default. When I told my custodian that I intended to refuse the “slightly bigger haircut” I was informed that the Bank only received instructions on how to accept the swap. Acceptance was the default choice and the custodian never received the instructions on how to refuse, so the two months bonds were converted in 24 bonds maturing in 20+ years.
All the best!
FM
REPLY: Beware of any government bonds, notes, or bills. They will change the rules any time they need to.