Thursday Market

Before I update the indicators, today’s market action was really weird and I need to reflect on it. The market gapped open at the narrow resistance pivot — and ranged between the narrow and the wide resistance pivots. The “headline” for today’s action was “market up a lot — 2-4%”. The headline “explanations” are flimflam. A little bit of truth, a lot of missing bits, and a general tone that is completely bogus.

These massive gaps up/down at open/close — which are very prevalent in today’s markets — have nothing to do with the actions of American investors – ie in today’s case, buying American stocks rationalized by whatever the headline-of-the-day is. Today’s trading action was actually quite narrow — thus helping resolve the question that arose yesterday (ie how does the market resolve the daily volatility begets volatility?? answer — it gaps). Tomorrow’s pivots will be narrower — trading floor risks will be lower — and thus there will be more trading floor liquidity.

These gaps are the result of foreign currency adjustments, foreign portfolio flows, and arbitrage of global stock indices/futures by hedge funds. These global pressures on the open are completely unpredictable to a small investor — and I am cynical enough to believe that those who do this also manipulate the media headlines. In today’s case, the gap was likely to be a combo of a European stock rally (which itself is rather meaningless) and a bearish decline of the dollar. Is the purpose to – eg bring in a small investor who looks at today’s headlines and buys tomorrow right into a plunge? Who knows and this point who cares? This sort of market manipulation/arbitrage — where the media is itself complicit thru its own laziness/corruption — is really dangerous.

Underlying all of this however is my realization that if one is mostly in cash — which I am — then one is making a huge bet on a particular currency. Currencies are the only remaining non-correlated asset — esp if you include gold as the anti-currency currency. And they will remain non-correlated since every investor and asset owner has to use some currency as the unit of account for their portfolio. What this means is that it is more important to pay attention to diversifying and hedging currency/cash exposure than it is to diversify/hedge the entirety of the rest of one’s investments. There is no such thing as “the price of a currency”. Rather, all currency is valued relative to another currency.

It is illegal (golly – ain’t that swell for big global banks/corporations and governments) for a small investor to denominate their portfolio in a currency that is not the legal tender in one’s country. The only option for a small investor (who doesn’t have access to overseas accounts or a large enough portfolio to have a FOREX broker) to diversify/hedge currency exposure is via a few ETF’s. These are a truly horrible option. The issuer steals most of the interest income — and the government taxes the capital gains by asserting that this is not actually a currency exchange (eg exchanging a dollar for 20 nickels). But this is the only option to reduce risk in a portfolio that remains in a single country. And you can damn well bet that nothing will ever change to improve things for the little guy. If anything, it will likely get worse via capital controls.

With that in mind, I am going to try to assess these currency ETF’s to see how I can put some of them together to create a diversified portfolio of cash. To be blunt, as long as other assets (stocks, bonds, etc) are so highly correlated — and not at all cheap; then cash is better than they are. And when such a time comes that other assets are reasonably priced; then a diversified cash position will allow me to decide WHICH currency I should use to purchase that asset. This also provides me with the most return for what is really quite valuable in a deleveraging world — liquidity. It is insane that liquidity should earn a return of absolutely nothing. If “nothing” is truly the only return available, then there is absolutely no reason to relinquish that liquidity by putting it in a fractional-reserve bank. Far better to stuff cash in a mattress where at least the liquidity is available to you.

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