June 22, 2011

Short-term: 2 green, 1 yellow, 1 red
Intermediate-term: 3 yellow, 1 red
Composite: Neutral

A poor follow-through day is not good news for this bounce. And most shares had no liquidity – high bid-ask spreads, computer/automated programs drove most of what did trade.

In more significant “under the headlines” news, word is leaking out that money market funds in the US are now heavily levered to commercial paper issued by European banks. They do not have significant business in the US that generates USD. So how are they going to generate the dollars to pay off the commercial paper? Money market funds — marketed as a “safe” cash alternative — have now become a major bet on a currency squeeze and on the balance sheet quality of European banks and on a Greece bailout. With zero rewards to be delivered to fund holders – if the bet pays off. Money markets have now become part of the Wall St scam. The Federal Reserve knows this – it was mentioned by Bernanke at his press conference yesterday.

This creates a perverse problem. There is no escape from volatile markets in “cash”. At least not if that cash is in the form of money markets. Money market fund holders are now checkmated. We are now a full participant (well not a “full” participant since we will receive no rewards/bonuses – only expenses/risks) in all the financial chicanery merely by “sitting on the sidelines” with “cash” in a “safe” money market fund. If those scare quotes scare you, they should. Because when risk is transferred to those who are merely demanding that a currency serve as a unit of account; then the currency no longer really functions as money.

This really has become a completely insane financial world. Zero-yielding money market funds now require a freaking HEDGE in order to preserve the principal. Longer-term, this means only one thing — get physical gold and silver in your possession and out of the banking system. Not futures, not leveraged, not with debt, not miners, not ANY of the financial/paper crap that has built up around everything. That doesn’t mean all your “cash” devoted to that — because, like it or not, gold/silver are NOT legal money and they never will become so. They may become de facto money if/when the entire financial/legal de jure fiat money system breaks apart. But that is solely emergency fund or EOTWAWKI.

For everything else — your long-term plans re “retirement” (a quaint 20th century notion that will soon die) or other long-term saving — you are stuck in the world of financial risk with no escape (and no reward unless you actively manage that risk). And in that world, the dollar is actually massively undervalued against other currencies — most especially against the Swiss france, the commodity currencies (A$, NZ$, C$), and to a lesser extent Yen, Euro, Pound. Unfortunately also, in that world, “value” doesn’t really drive trading strategies in shorter time horizons.

As an aside. This is perhaps another example where we will be forced to emulate the “Japanese housewife”. Who recognizing that their savings would yield nothing but still risk everything, decided to embrace the risk, learn about it, and become a currency carry-trader.

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