Deflation vs the 3rd Year

January 19, 2015, 09:15 am ET, BY Robert S.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

"Panic Early" The Swiss National Bank is the first to wave the white flag in the Global Currency War.

The Swiss National Bank shocked markets Thursday by abandoning the Swiss Franc's  exchange rate floor of 1.20 Francs to the Euro, which the Swiss National Bank had imposed more than three years ago to stop the Franc from appreciating too much against the European single currency. The "peg" between the two currencies was an attempt to keep exports competitive; more than half of Swiss exports go to EU countries. The shock move was felt across the globe as the Franc immediately strengthened by more than 30 % against the Euro (1% moves in currency crosses are rare and viewed as extreme) and has since settled around parity with the Euro which amounts to a 16% move in value since the floor was removed. The move caused plenty of collateral damage: Stocks in Swiss Companies (heavily dependent on exports) fell 16%. It engulfed Eastern European neighbors whose mortgage debt is denominated in the Franc and wiped out at least two international Foreign Exchange brokers as well. 

To maintain the "peg" the SNB bought hundreds of billions of Euros which it devalued Thursda, so even its own assets plunged in value! The SNB has taken a huge loss. To "panic early" and get out in front of the coming panic by other world central banks who will be compelled by market forces to eventually abandon their efforts to combat deflation. 

This coming week is likely to be busy and potentially quite volatile. On Tuesday President Obama delivers his annual State of the Union address. Also on Tuesday, The IMF will give us its latest guess on economic growth.  The World Economic Forum kicks off on Wednesday and on Thursday ECB President Mario Draghi announces the exact Quantitative easing number and composition that is supposed to support his "whatever it takes" pledge to stave off deflation. 

I have long been of the opinion that the heightened FX volatility we have been experiencing, coupled with crashes in commodities (Crude -60% since June), Global Bond Yields and High Yield Credit have been pointing to an impending "major" correction for Equities (see chart 1below). Additionally, and as THK has been writing extensively about, The Fed has withdrawn stimulus from the US economy and thus there is no longer a net to absorb bad news or soft economic data (chart 2 below). 

While I believe that the preponderance of evidence is pointing toward a significant (30% +) market correction, what I am more confident about is that we are entering a period of heightened volatility.  The US stock market has shaken off many macro signals and divergences over the last couple of years, and it could happen again because positive catalysts do exist. The 3rd year of the US Presidential cycle has been quite positive, averaging gains of + 15% since 1920. Additionally, in the year following a year in which the US $ Index has been up > 10%, the market has never been down since 1965, and the average annual gain for these years has been 15.3%.

The good news for us is that Thomas's proactive strategies, and The Strategic Plan Strategy in particular, are designed for us to make money regardless of which direction or at what levels of volatility the stock market moves with. If the market falls aggressively down like the plunge in commodities, global interest rates and High Yield Credit are pointing to, we can win big! If instead, the market shakes off these warnings and rallies to new highs as the Presidential cycle and strong USD would suggest, we can win big! All with risk controls! 

Support and Resistance Plot Chart for

Real Time Updates for Repeat Institutional Readers:

Factset: Request User/Pass

Bloomberg, Reuters, Refinitiv, Zacks, or IB users: Access Here.