Market Break Into G20

Posted by Jeff Carter
on October 19th, 2010

Yesterday, Tim Geithner said that the US would not be devaluing the dollar. When have we heard that before? Virtually every Treasury Secretary since Donald Regan has said they wouldn’t devalue, but only the Reagan administration actually followed through!

The dollar break was overdone. Eventually, it will be of lower value than it was at its low because the American government, not the Fed, is going to be forced into a tough choice. Cut services, cut the size and scope of government, and initiate pro-growth policies to pay off the massive debt incurred in the last two years OR inflate. Governments almost always choose to inflate.

Interestingly, Brazil has decided not to go to the G20 meeting. Instead they raised the taxes they charge foreigners. Brazil said it was to reduce foreign investment into Brazil, but it’s protectionism pure and simple.

China decided to raise interest rates 25 basis points ahead of the G20. This increases the value of their currency and gives them some bargaining room going into the meeting. The move by China has caused some of the froth to leak out of commodities and they are all lower.

When moves like this start to happen, sometimes they can start to look like a freight train. If you are not on board, the way to trade it is ambush the market. Trade small, and go with momentum. If the market turns against you for a short time, take a deep breath. If big mo is truly in your favor it will turn and go your way. The S+P just left the station last night so there might be room to jump on for a nice trendy ride lower.

Most G20 meetings are pretty meaningless, but given that the market has seen 25 competitive devaluations of currency in the past couple of weeks, this one might have some fireworks. It will be interesting to watch. It is important for the US to lead. Competitive devaluations lead to protectionist trade wars. Protectionist trade wars lead to worldwide economic stagnation. Sometimes even to wars. It is critical that cooler heads prevail.

That also means that the US cannot have it’s cake and eat it too. A massive QE2 would tick off the rest of the world and the currency war would be on. Some of the gas coming out of the market is a lower expectation of how much debt Bernanke will buy.

If a 25 basis point hike by the Chinese, a slightly lower than expected earnings report by Apple are all that it takes to bust a market rally, then this rally was based on smoke and mirrors. A real rally should be able to endure small interest rate hikes and small shocks to the market.

There are significant fiscal problems that many countries have to work through. Look, the Frenchman are striking in France. President Sarkozy wants to raise the retirement age from 60 to 62! Imagine what will happen in Europe when real austerity measures are taken. Imagine what will happen in the US, when governments at every level have to undertake austerity measures.

The problem isn’t one particular category of government spending. It’s public pensions, and entitlements.

video of strikes all over France

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

You might be interested in: