BY ALEX HAYWOOD

TRADER MONTHLY RESEARCH REPORT: APRIL

I have resigned from the professional undertaking of coin flipping. I am not here to tell you where golds going to be. I have no idea. Thats my existentialism. I am a student of uncertainty, I have no idea where the stock market is going to be. So when I am creating trades in my portfolio for my clients, I am agnostic. I just want to enhance the probability that I make money come what may."......Hugh Hendry

How stock markets decouple from bad news in other markets

History repeating itself........similar rhyme
So the primary risk drivers of the past 2 weeks have been the Cyprus Banking crises and the precedent set on depositors Bail-Ins and Italian election stalemate resulting in heavy bank losses in Europe. What has been noticeable is the divergence between certain G7 economies stock performance vs peri Europe. The American bulls seem to be digesting every bit of European bear scraps.

The Tequila Crises = the PIGS crises(well only in regards to debt but
not currency) However we have seen this pattern before where its the end of the financial world and the contagious effects of bad policy response and bank losses will sweep global asset classes. Case in point, the Mexican Economic Crises of 1982 and 1994. In both cases we had a tremendous stock market outperformance in 1982-1987 and 1994 -2000 after the crises was fully digested by international markets and mild corrections took place in places like USA of 10%. During the early 1980s in England under the Thatcher Government we had a similar environment to what we have now in the UK. Large austerity programmes, high unemployment rates and major downsizing of the public sector followed by business tax cuts. However FTSE 100 experienced one of its great bull trends of 200% increase into 1987. Early 1980s Bull run into 1987 after markets swept aside Peso Crises and Austerity in the UK

So the European sovereign debt crises has been upon our shores since 2009......and since that time the great decoupling has been happening between European peripheral stock markets to that of the German, American, English and Asian stock markets. DJIA, FTSE, DAX ..IBEX, FTSE MIB

Mexico of the 1990 = Europe of the 2009, except Mexico owns its currency and printing machines. This European debt crises has the same component parts to that of the Mexican Peso Crises of 1982 and 1994.....over inflated and debt ridden private and public sector, over-leveraged banks and debt servicing unsustainable. The prescription was the same......classic Neoliberal economics of classic bailouts and draconian austerity programmes so the Wall Street banks are saved for bad investment decisions and tax payers taking on the burden of repayment of debt. Germany needed to save their Banks like USA bank in the Peso Crises and instead of taking the losses Germany and the EU imposed the same new Milton Friedman solution of downsizing public sector, privatization programmes and debt restructuring. So the burden was left on the local population. At the time when Mexico had to restructure its debt, the Brady bonds, and impose severe austerity programmes the contagion effects and mass media hype led the investment community to think that Americas exposure was going to severely slow down its economy and bring it to its knees......but each bit of negative news has had a marginal effect on Wall Street. Initially in late 1994 when the Mexican Stock index

plummeted around 50% Wall Street corrected 7%. Throughout the next few years as more negative headlines hit about Mexico unstable economy and public riots and disorder so did the American Stock Markets continue to correct marginally less and accumulate positions to rally impressively throughout the 1990s. Does this sound familiar?....at the beginning of the European Crises we had global correction but since then Periphereal stock markets have continued South whilst USA, Asia, Germany and England continue to decouple and head north and recent news such as Italian political state and the Cyprus bail-in have marginal effects beyond the shores of its own economy and just give greater buy entries into these decoupled markets. The Mexican stock market changed course very soon and headed due north after its ability to devalue the peso 50% in a few short months after its crises.....this led to a lot of Main Street disorder and unemployment but resulted in a tremendous bull run in the stock market. MEXICAN STOCK INDEX MEXBOL..NOMINAL YIELD PARTY

So why have not the European peripheral stock markets not recovered from the crises like Mexico......and the simple answer is the EURO STRAIGHTJACKET.......Italy, Spain, Greece etc dont own their own currency or have independent monetary policy to devalue their independent currency.......the Euro to them is like the Gold standard was to the World during the 1930s after the Great Depression. If you as a nation were on the Gold standard then your ability to print money was at the mercy of not economic performance but rather of how much yellow metal you

possessed. Thus countries that left the gold standard first such as UK, Japan, Canada, Australia and Japan were the first to recover from the Great Depression and the British were the first pioneers to use Monetary policy in an aggressive manner after the Great Depression and thus stock market performance ensued. So if a nations objective for performance is measured by its stock market returns and using the stock market as a confidence trick then it is critical to have ownership of your own currency and money printing press otherwise your economy is left to stagnate for prolonged periods if not decades. Italian Stock Index FTSE MIB.

Thus Periphereal Europe is on the road to nowhere with severe austerity programmes and its inability to devalue the Euro so that its exports can be competitive in the world markets.

Argentina Stock Market and the recover from its debt crises through rapid currency devaluation.Peripheral Europe dont have this currency devaluation option

Periphereal Europe is looking more like Japans lost 2 decades with regards to a currency that is too strong for its export sector and hence flagging stock market that has been a value trap for 20 years. However Japan still was able to maintain a good standard of living for the working class and have a very low unemployment rate. This is not the case for the likes of Spain, Greece, Italy etc.

Japan Stock Index..Nikkei unable to bounce after stock market fall due to rapid currency appreciation leaving its export sector crippled in the face of strong Yen

Euro=Gold Standard=Economic Straight Jacket So the major lesson we can learn from this neoliberal crises economics prescription is that either like the Anglo Saxon you print your currency till the Nominal yield party continues breaking new frontiers in the stock market (even if Main Street is being left in the sewer) or The German economic model of financial invasion across Europe to hijack all the weak currency, so as to continue the longevity of its major international source of revenue in the export market, and use weapons of mass austerity destruction to cripple economies so that Peripheral European governments surrender their power to Brussels and Berlin. What we do know is that through the next decade we shall continue to have this Nominal yield party with brief corrections of 20-40% as Ben Bernanke experiment is based on his observation of why America slipped back into recession in 1937/38 was that the FED tightened to early before the recovery was underway and this was 9 years after the depression. Bernankes entire thesis is based on 2 observation points....Japan in the 90s and the Great Depression and his conclusion to both is the

lack of aggression in sustaining a full onslaught of liquidity pumping. The last time the Fed nationalised the yield curve ( as is currently the case in the treasury market) was in the late 1940s/1950s where they controlled the 10 year yield below 2% whilst inflation was running in excess of 4% and this led to the baby boomer stock market rally from the 1950s-1970 of 400% in that period.

The next bubble from all this printing?...."the unintended consequence" Everyone talks of the next asset bubble being burst. However they pick either the stock market or some other arbitrary monetary bubble. As can be seen by the relentless March of the DJIA over the past 100 years this nominal invasion of the atmosphere has brought about corrections of no more of 60% since leaving the gold standard followed by surges upwards of between 100 to 400%. Thus stock markets don't have bubbles but just mere periods of bubble deflation so that asset confiscation happens between the haves and have nots.

So where is the next bubble from this excessive global monetary press printing?

Consumer Confidence vs DJIA chartis this the divide between the bourgeois and proletariat

The above chart would have looked the same during the 1980s. Well the next bubble is a class divide society bubble....ie a political bubble as a result of the the ever growing gulf between the Wall Street conquerors and the working class(at least the few who have jobs)..... The concentration of capital seems to be heavily skewed after a Great Recession/depression and like after 1929 it took around 5 yrs till fascist and ultra right wing parties become vogue....aka Hitler, Mussolini and the likes. So this money printing is creating political bubbles where Main Political party voters are shifting their allegiance to the more popular ideological parties that serve their new aspirations. Just need to look at the current political landscape in Europe where Italy's 5 star Movement of Beppe Grillo and Britians UKIP with Nigal Farage are a few examples of where votes are being captured. I suppose the bursting of a political bubble is more severe than the bursting of an asset bubble although its the asset bubble bursting central bank response which then creates the political bubble.

In conclusion:

As we have seen on the DJIA since the beginning of the 20th century its corrections are less severe since leaving the gold standard and old highs are revisited at a greater velocity provided Central banks are active in both competitive currency devaluation and liquidity pumping. It took 30 years for the 1929 highs to be revisted (USA under the Gold standard) whereas the 2007 highs took just over 5 years. This is the classical Nominal yield party or more appropriately named Zimbabwe Markets. European peripheral nations will be left behind for decades (as can be seen in the Japanese markets due to the yen strength) if they decide to hold onto the Eurozone straight jacket or if there is no European yield convergence and significant Euro devaluation. So although USA, German and UK markets look stretched it seems that corrections will always be of the magnitude of approximately 20% before rapid rises again. So to be a participant of the global stock market yield party a country needs to be owner of its currency and then employ aggressive devaluation tactics to compete in the export market. Most importantly from a trading/investing perspective any bad news on foreign shores being hyped by the media such as the Peso and European crises provides opportunity for new longs in equity markets that have independent monetary systems.