Trends I'm Watching

Globalization Is Compressing Market Reaction Times

Trend: Interdependencies in global markets often cause unanticipated ripple effects that can make or break investors.

Cesar Zambrano at Forexfraud.com describes the playing field in globalized markets below.

The turbulence in our global trading markets witnessed in May appears to be abating.  Volatility measures have dropped nearly 50%.  Traders, forced to delay their vacations to oil-stained sandy beaches on the Gulf, are staring at their screens pondering their next medium-term moves.  It’s time to catch our collective breath. 

A financial crisis in the not too distant past could generally be confined to the economic region of its origin.  However, in today’s interdependent world of globalization, a debt problem in Greece can immediately send shockwaves through every trading market around the globe.  Technology and innovation have compressed reaction times from months to mere seconds.  An idea in Hong Kong appears the same day in London.  News travels in nanoseconds, now aided by the Internet and “24X7” cable news channel services.  The trend is pervasive and offers opportunity for the savvy investor. 

When Is the Best Time to Buy Gold?

Trend: Gold prices are boosted by the flight to safety and hedging against inflation, while asset liquidation and deflation drive the price down.

Charles Hugh Smith looks at the four forces acting on gold and tries to make sense of recent price action. Click on the link below to read his chronology of trends in gold prices since 2007.

Link: charleshughsmith.blogspot.com

Charles Hugh Smith sees four forces acting on the price of gold. Acting in opposition at times and in concert at other junctures, these forces make a mockery of any simple explanation of gold's wild price action.

1. gold as a safe haven--"flight to safety" in volatile, risk-averse times
2. gold as a store of value and hedge against inflation
3. gold as an asset to be sold to raise cash to pay down debt that is due
4. gold as an asset which becomes less attractive in deflationary eras

Here's the bottom line:

All this suggests that gold's short-term price swings depend on the global financial situation. If deflation is once again foreseen as a risk, and cash must be raised quickly to pay down debt or make interest payments, then recent history suggests gold could swoon as it did in late 2008.

If global economic growth resumes, then gold's long history as a hedge against inflation suggests the current uptrend could continue unbroken until the next global financial panic occurs.

To assume new highs will be reached on a "flight to safety" ignores the lesson of 2008: gold is subject to losing a third of its value in short order if a liquidity crisis forces players to sell anything in their portfolio that still has value to raise desperately needed cash.

Mutual Fund Outflows Are Growing

Trend: The Investment Company Institute reports redemptions have been surging in equity mutual funds.

Andrew Mickey at Q1 Publishing describes the mutual fund outflows that indicates that mutual fund investors want out of the stock market.

Mickey's insight: As history has proven time and time again, mutual fund investors buy and sell at the worst possible times.

Link: Andrew Mickey, Q1 Publishing

The herd is running for the exits.

Mutual fund investors are selling out at a faster and faster pace each week.

The Investment Company Institute, which tracks mutual fund inflow and outflows, reports redemptions have been surging in equity mutual funds. The last week of April, investors put in a net $1.85 billion into stock mutual funds. Since then though, it has been all downhill.

Investors pulled out a net $1.44 billion in the first week of May, $10 billion the next week, $1.1 billion the week after that, and $17.4 billion in the last week of May.

It’s happening all over. Canadian investors pulled out between $1 billion and $1.5 billion from mutual funds in May.