As discussed here during the past two days, the IMF has warned that the post-QE equities and mutual funds sell-off can very quickly drain market liquidity. The consequences could be gravest in the emerging markets – although the developed markets will not escape the vortex. It’s the fault of excessive risk taking in the financial sector – the IMF admits – and the banks, especially.
Lack of liquidity means a shortage of cash. When liquidity “dries up” this is a not once-off situation, but, typically, a shock market condition whereby there is a generalized sell-off accompanied by a scramble for cash. The highly leveraged state of finance prior to the market shock means that post-shock there is not enough cash to pay all those who suddenly demand it.
Yesterday, the San Francisco Fed’s John Williams – long-time adviser to Janet Yellen and Fed policy maker – told Reuters that the Fed could keep interest rates near zero for another year. Should the US economic situation deteriorate, he explained, it would just be a matter of “another round of asset purchases”.
Williams’s rhetoric is consistent with the tactic of smoke-and-mirrors, called “forward guidance”, which has been used by the Fed during the past eighteen months. The assurances of the end of QE and the imminent raising of interest rates are meant to “guide” markets and businesses into post-QE behaviour, and by some miracle, then realize the economic growth that QE was meant to inculcate.
The problem is that despite years of QE and near-zero interest rates, the economic growth has not materialized. In fact, as many market commentators – and now the IMF – have pointed out: economic risks are even greater now than they were prior to the 2008 “Credit Crunch”. In this context, Williams’s irreverent comment about simply turning on and off QE like a tap, is a travesty and an insult. QE is known to be subject to the law of diminishing returns – the longer it’s applied, the less it achieves. Additionally, QE has been a drug that got the stockmarket and borrowers high at the cost of tax payers and their real spending power. To suggest more of the same, Williams is insulting the market’s intelligence and showing the Fed to have insincere and loose tongues.
Bitcoin is both the nemesis and the remedy to the liquidity spiral that the global economy is caught in. The decentralized blockchain represents a bloodless coup against the global economic leadership who have neither a solution nor a plan “b” for the mess they’ve made.
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Gold, like it’s commodity companion, Bitcoin, has completed a minor correction and is retaking $1,230 before making its approach on $1,250.
The S&P500 leads the equities race to the bottom. Like so much hot air leaving a led air-balloon, investors are dumping company stocks. Other speculators are shorting the equities indexes – a sensible trade given the circumstances – but quite risky given the diminishing liquidity on the way down. Will your broker be able to pay out on that profitable position when you decide it’s time to close?
The US dollar has been devalued by years of QE and will be returning to its mean value over the coming months or years. (No Chart Today)
Time of analysis: 12h00
Yesterday’s last analysis update noted that Bitcoin was correcting from its high of $417.99 (Bitstamp). We had spotted MACD reverse divergence to previous lows – and these were, in fact, plumbed by MACD overnight.
Bitstamp Hourly Chart
When a consolidation happens around a psych level such as $400, it is difficult to anticipate the depth or duration of correction. $400 is not the level of any significant Fib extension, so we have no reason to believe that the corrective price action is anything other than market participants taking profit, opening new positions, suddenly seeing the dizzy height to the bottom, changing their minds, changing position, etc, etc.
The extent of reverse divergence should catapult price to the upside. The next thing to watch for in the hourly and four-hourly chart is regular divergence in relation to previous MACD and RSI highs. The divergence will herald the wave top.
We have an advancing wave on the chart, and it is incomplete. Expectation is bullish:
– the wave to the upside has five-wave structure
– price is correcting just below the 4-hour 200-period moving average (200MA)
– price is above the daily 20-period moving average (200MA)
$433 – overlapping Fib extensions
$453 – high of a previous corrective wave during the decline
$460-$465 – confluence of Fib extensions and a long-term trendline. Possible reaction zone for a larger correction.
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Last modified: July 12, 2015 10:56 UTC