Tuesday's Musings

Good Morning...

1. As you all know, North Korea tested a nuclear bomb.  Normally this would cause a rise in gold and a rush to the US$.  It did temporarily last night, but the US stock market is up today.  The investors are getting numb I suppose to North Korea's antics.  Kim will probably do something awful here soon if everyone ignores them.  Obama's rhetoric was pretty strong this morning, but I would guess that Kim ignored it.  Most of the Asian markets were closed for Lunar New Year, and so we may get a different viewpoint tonight as Asian investors come on-line.
2. G7 released a statement pledging to avoid devaluing their exchange rates.  "We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates,"  Phooey... How will the finance ministers back their words with action when every single central bank is devaluing their currency.  Look for the "spin doctors" to explain to everyone how they are not devaluing their currency. Taro Aso, Japan's finance minister, said the G7 agrees that Japan is not devaluing the Yen, and the policy is only aimed at reversing deflation.  Hey what???
1. The truth is that most (if not all) the central banks are forcing their currency lower.  Ok, I've seen it argued that the laws of supply and demand for a country's currency are no longer in effect (or at least temporarily suspended).  I suppose then that the devaluation is just an "unintended consequence" of fighting deflation.  
3. Did you read my sentence about Janet Yellen's upcoming speech yesterday?  Yellen signaled the Fed will continue their easy policies even after the unemployment target of 6.5% is reached.  She suggested the Fed could sustain easing beyond the end of its bond buying by continuing to hold interest rates near zero.  Yellen and Bernanke are trying to calm the investors and traders fear of an abrupt end to easy money.  PROFESSIONAL TRADERS INVEST ON EXPECTATIONS.  Just a hint in dropping easy money could send the markets into a tail-spin.  However, Yellen's speech seems to show the conflict between her and James Bullard of St. Louis Federal Reserve.  He suggested recently that the Fed could "throttle back" bond purchases sometime in 2013.  
1. Yellen also supported Bernanke's warning that deep cuts in fiscal spending would be devestating to the stock market.  Hey, you can expect this from Yellen as one of her best friends is Nancy Pelosi.  Dear Nancy certainly shares the view of spend, spend, spend...  
2. Nancy Pelosi:  Did you observe what she said recently?  She said that Washington D.C. does not have a spending problem.  What?  Being out of balance to the tune of $6 trillion is the past 4 years of Obama's regime is not a spending problem?  Folks, try running your own finances that way, and observe if the banks and creditors don't think you have a spending problem.
4. Swiss Franc slipped yesterday against the Euro.  The central bank said it will take steps to prevent the Swiss Franc from further appreciation.  Ah, the poor Swiss... French President Hollande wants the Euro to "devalue" (remember he is part of the G7).  Ah, the politician vs the G7.  
5. Mexico is showing signs of a slowdown.  Production fell 1.1% in Decmber from a year earlier.  That caused the Peso to drop to a one month low.
6. Hey Canada, what is happening?  You were doing so very well.  The Canadian economy is slowing, and they just booked a 9th straight month of trade deficits.  They have revised their economic growth downward as well. 
7. Desperately seeking growth:  Robert Gordon, Economic Professor at Northwestern University...  Mr. Gordon did a study which found that on an average there are six different constraints that reduce the annual US GDP by .2%.  1. Demographics, 2. Education lags other industrial nations in reading, math, and science 3. Income inequality - middle-class is disappearing and jobs being created are in the "poor" 4. Globalization - jobs are shifted overseas or are being automated in the US.  5. Environment - the carbon tax acts as a drag on economic growth 6 Massive household and economic debt -- paying on debt is not productive for economic activity, and many people and the Federal government are not making headway because of interest payments (he is referring to state and local governments more than the Federal Government).
8. Read this http://www.bloomberg.com/news/2013-01-16/davos-pitch-for-dynamism-rams-into-end-of-growth-debate.html

Nancy Pelosi obviously does not agree with Mr. Gordon.  We do not have "no stinking spending problem" (which I assumes we don't have a debt problem either).  

As the market is rising, be aware (as I said Sunday) the risk is increasing that a correction will take place.  We could easily see a 40-45 point pullback in the S&P 500 as the S&P tests 1520.  Therefore, I strongly suggest to hold any longer term investments until the market provides a better viewpoint of the trend.  Short term traders will position themselves for trades both ways - long and/or short.

Right now the Gold market and the stock market are not providing clear indication of reversals, even after the North Korea bomb testing.  Remember, being in cash is not a bad thing in low inflation or deflation.