Who’s to Blame for This Bear Market
Panic!
That’s a good way to describe the markets for the past couple weeks.
With most investors freaking out, two of the most powerful men on the planet have been trying to calm things down.
So far, both have failed.
One sent the markets tumbling even more. The other sent the markets rallying…but just for one day.
Of course I’m talking about Obama and Bernanke.
After the rating agency S&P downgraded theU.S.debt, Obama tried to calm the markets by addressing the issue on national television.
Following his speech, markets plunged an additional 3%.
The next day it was Bernanke’s turn. His promise to keep rates at zero for two more years sent the markets rallying… for a day. At least he was more successful than Obama.
Those two announcements tell a lot on what’s really going on with the economy. It also tells me exactly where you should be looking to profit in crisis times like these. Let me explain…
A Crisis, Courtesy of Washington
Two weeks ago, I wrote that the debt ceiling discussion was nothing more than an embarrassment in Washington – a political game that Congress was playing.
At the time, I mentioned how the U.S. economy is falling apart, while U.S. politicians keep pointing fingers instead of actually resolving anything.
I also told you how the political failure in Washington is creating a lot of uncertainties in the economy. When business owners are uncertain about the future, they bide their time, and wait to act.
As a result, firms don’t hire, and consumers don’t spend.
The most recent episode of Washington’s political failure came last week, after the U.S. downgrade. The White House and the Treasury tried to argue the downgrade, calling it a “$2 trillion math error.”
Yeah, right.
It’s always easier to shoot the messenger rather than fix the real problem. The government’s clear inability to handle the deficit was the main reason for the downgrade, not an accounting issue.
Now we’re all dealing with the penalties for their incompetence.
Namely, a crisis of confidence in the markets. Investors feel the leadership is not strong enough to manage our fiscal responsibilities and promote growth.
WithWashingtonfalling down on the job, the Fed is the only game in town left to fix this mess. The problem is… that’s not enough.
Sorry Fed, Printing Money Won’t
Help This Time
The goal of QEII, the Fed’s money printing program, was to stimulate the economy and boost stock prices.
The Fed was hoping higher stock gains would make people feel richer and spend more. But the plan backfired.
QEII boosted stock prices just as planned. But unfortunately, this extra liquidity also made the real economy worse by increasing prices of gas and food.
In the end, higher inflation killed the wealth effect that the Fed was counting on.
And the stock gains from QEII were just recently completely wiped out in a matter of days!
If monetary policy could promote growth, we would be booming. Instead, we’re flirting with another recession, despite all the free money.
So it’s very unlikely QEIII will work any better than QEII. The Fed has run out of options.
No wonder we just had another market crash.
Stocks May Fall,
But Profit Opportunities Remain
The only bright side to this stock market mess has been in the currency markets.
As you probably know, there’s no such thing as an across-the-market bear market in foreign currencies. Everything is relative.
So even as certain currencies plummet right along with stocks, there are plenty of currency pairs that have been rallying since August 2nd.
Here are a few examples of pairs that have rallied below…
- GBP/AUD: Up over 1,500 pips since August 2nd.
- EUR/ZAR: Up over 1,000 pips since August 2nd. (My own Exotic FX Alert subscribers just grabbed a quick 75% gain on this pair.)
At the same time, there are also great shorting opportunities in this market. Unlike in stocks, it’s just as easy to short-sell currency pairs as it is to buy them.
- AUD/USD: Plummeted over 1,000 pips, before bouncing back.
- AUD/CHF: Plummeted over 2,000 pips in under two weeks.
These are just a few of the currency pairs that started moving as stocks dropped. As a trader, I am loving the extra market volatility that’s creating these opportunities.
Of course, it is possible that stocks could make an about-face in the coming weeks and steal away this volatility.
But givenWashington’s track record, I’m sticking to the bear-market currency trading opportunities for now.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
P.S. In this type of bear market, you really can’t afford to ignore the profit opportunities in foreign currencies. If you’re just getting your feet wet in this market, you might enjoy our new crash course in foreign currency trading. It’s a quick way to master the ins and outs of the $4 trillion spot Forex market. Click here to get started.
