Be Prepared for a Wedgefest!

A Storm is Brewing!

Some very long term chart scenarios are coming to a head at the same time. As these charts are forced into ever tighter trading ranges, the rebound when they finally break will be explosive. First up is Sterling vs $ or cable to traders (so called as it was the first currency traded via the undersea cable link between the UK and the USA). It has been rampant of late testing a previous high of $1.63 this mainly due to Dollar weakness brought on by QE3 but also by the misplaced confidence in the UK economy. I still believe we will test the all time low of $1.08 once the real state of the UK debt ladened economy becomes clear to all. The budget deficit has continued to grow with government spending increasing year on year throughout this parliament term. Tax receipts have been mildly affected by raised taxation but will fail to rise further. The significant cull of highly paid traders and brokers in the City will have a dramatic affect on income tax collection during the normally high January period and once again during the spring bonus time. The post Olympics correction is underway and the upward trend in unemployment will once again be resumed. Industrial order backlogs are diminishing which will focus the attention of employers who have been prepared to hold onto excess employees in the hope of an expansionary phase, wrong! The high street continues to be a demanding environment with the growth of charity, pawn and pound shops showing no abating. The growth in these outlets merely confirms my significant concern for commercial property which is grossly overvalued as a sector. Eventually, high street shops, office blocks and possibly some industrial units will be allowed to be converted into residential. This will drive housing property down to a more stable pricing multiple (to average earnings) which will reignite lending. Of course, this purge in the system will first flush out all the highly geared operations and cause a mini crash in itself. Until that is done we cannot move forward. As Warren Buffett says `When the tide goes out you can see who has been swimming with no trunks on`.

Anyway back to Cable. $1.63 is a massive resistance which if broken will lead a charge to $1.64. If this is breached, I am totally wrong and will eat my hat. I believe the bottom of wedge will go (currently $1.55) starting the long journey lower. As I have stated in several blogs on the UK, Sterling has performed much better in the last two years vs the Euro than the Dollar which harms our export potential eg  Dollar import commodity costs higher but out export markets of Europe get weakened by Sterling’s strength.

Next up, the FTSE. The rush of enthusiasm following QE3 helped propel the index close the the top of its wedge. If it closes above 5900 (not that far away) significant further gains are implied with an attempt on the 2007 high in prospect. It is clear that QE around the world is driving certain asset classes into bubble territory and this is no exception. Despite all the very real global problems in the world today, Syria, Iran, Afghanistan, Japan/China island dispute, China slowdown, Europe, Fiscal cliff, Western world budget deficits, Japans budget deficit, US drought, the markets are mesmerised by easy cheap money. Lets be clear about this, the world is changing down a gear, not to raise revs because all the debt problems have been solved and the headwinds are now tailwinds, it is because there is a massive abundance of global productive capacity which was put in place to meet the insatiable consumer demands brought about by historically unheard of credit growth. This is history and will not repeat itself no matter how many QE`s you do. The debt is real and it is huge. Inflationary tactics currently being deployed are extremely risky which no one can forecast the outcome of. I watch (how sad) the import and export numbers of most countries and two factors are striking over the past year. Firstly they are not growing in volume terms and secondly the import components are generally the weaker of the two components (how can this be?). Everyone wants to export their way out of trouble, a fine concept in normal times when the world is healthy, but when all nations are trying to do the same thing at the same time, the result will be messy.

The Yen is a topical subject with this blog of late and my favoured trading instrument. Previous blogs have highlighted its 40 year ascendance and why I believe that is coming to an end . The wedge high (Yen weakness) was tested last week and held fast. I believe it will give way  in the next two months as the central bank finally gives in to mounting political pressure to meet its goal of 1% inflation. The economic data over that period will deteriorate (adding to the central banks urgency) at an alarming rate thus confirming the counties slide into recession. The support or point of entry to this trade is between ¥ 77.50 and ¥ 78 which is not far from current levels. If I am right and the wedge high is broken, my objective is ¥ 83. My overall belief is that it will fall to ¥ 100. One of the reasons why I feel confident is highlighted in the bottom two charts see below


Below is the Dow Jones from 1997 to date (6000-14000) and above is the Nikkei from 1997 to date (22000-8000). From left to right the outcomes is a mirror image even if the path taken to get there is not quite so. Why is this of interest and why should it lead me to be negative of the Yen. Well, in the words of the late grate Max Bygraves OBE (and my mums favourite) `I wanna tell you a storyyy`

I mentioned in my previous blogs about the demographic time bomb which has now exploded in Japan. In brief, the rapidly ageing population and strong currency has lead to a seismic shift in employment away from manufacturing and into social/health care. The Japanese have been very clever. They have used the strong Yen to shift manufacturing away from Japan. This once second biggest economy of the world is outsourcing its manual work to the rest of the world. As they have precious little natural resources this make double sense. Once you have created significant income streams of foreign currency, a weaker domestic currency will greatly enhance the Yen value of such cash flows. Hence, Japanese company values would be greatly enhanced in Yen terms. At the passing of the next few central bank meetings, the pressure will grow, until eventually the genie will be let out of the bottle and significant monetary easing will be undertaken. This will put the Yen on a sustained downward trajectory and reverse the fortunes of the Nikkei. It is possible to play the spread between the two indices, eliminating the currency risk, via spread betting. I have always found IG Index very easy to use.

The US Federal Reserve have put great stead in inflating the equity asset bubble as a way of preventing the economy from collapsing. The US president is very grateful of all the QE help he can get. Indeed, he was quick to herald the latest unemployment figure as testament to his policies. However, when he came to power he promised to halve the annual budget deficit. Had he done so, unemployment would be akin to some of the worse performing European nations. The Dow Jones is indeed on a high testing all time records, with all that lay before it, it might be wise to `Fight the Fed` a phrase which has lead to all who have tried in the past, worse off. This time round it might pay off. Sell Dow /Buy Nikkei… currently 4660 points the difference.













Monday, October 8th, 2012 Predictions

3 Comments to Be Prepared for a Wedgefest!

  1. […] believe Sterling will follow the fortunes of the UK`s financial position which is down. In my blog `Be prepared for a Wedgefest` I highlighted the charts of Sterling and Yen. Following the recent December budget deficit and […]

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  3. […] Performance: Part 2 Reviews the staggering gains from my recommendations in Be Prepared for a Wedgefest October […]

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