Trade Team Update

Just when you think you've seen it all... another historic day in the markets as gold closed up over $90 marking a single-day gain of 11%. This is an unprecendted move unlike the markes have ever seen.

What happened to gold? That's the big question on trader's minds as we close out the day... in my view that's a move rooted in pure panic buying. It's not even a fundamental move, it's a strong emotional reaction to what's happening in the U.S. financial system.

But there was one piece of news that hit the wires this morning that gave gold the fuel it needed to run all the way up to the $865+ level. And this piece of news ties directly into something I talked about a few weeks ago. From Standard and Poor's securities rating division came these comments:

Pressure is building on the AAA US sovereign rating, notes the ratings remain stable - says the AIG bailout weakens the US fiscal profile, the AAA rating must be earned, its not guaranteed

Pressure building on the 2-year, 10-year, and 30-year Treasury debt? Ratings not guaranteed? I called this issue in the 8/24/08 EUR/USD weekly outlook:

I believe it’s possible the Treasury might have to tell debt holders that the Treasury can’t pay and may have to offer some kind of buyout for pennies on the dollar. When I say debt holders I’m specifically referring to buyers of U.S. debt – bonds. I’m talking U.S. government issued bonds.

One of the reasons bonds are called securities is because they are considered “no risk”. The U.S. government has never once defaulted on paying a debt holder. If budget deficit or monetary reasons somehow for some reason prevent the Treasury from meeting their debt payment obligations the effect on the dollar would be disastrous and could even start a military conflict. I only give this less than a 10% probability of ever happening, but it’s something I’ve thought of anyway.

It was a crazy call at the time but now that we have the S&P ratings agency telling the markets pressure is mounting on the spectacular AAA rating on U.S. debt was a real wake-up call to the markets.

Nobody listens to me but they listen to players like S&P and when S&P comes out with comments like that it's only natural to see "safe-haven" buying of gold. It has to be that way.

Let me be clear -- if U.S. debt gets downgraded it's very likely we'll see the single biggest move ever against the dollar. That being said, if the U.S. either defaults on debt or has to enact some kind of deferred payment plan not only will the USD die we could be looking at an international incident leading to a world war. No, I'm not a conspiracy theorist, I don't get into that crap but I'm telling you what's going to happen should this issue with U.S. treasuries keep unfolding in a negative way.

A trader commented today that I "have no idea about anything". Well, I called the post-Labor Day meltdown of the financial system and referenced this issue with bonds. So, keep throwing hate and I'll keep working harder to predict and forecast moves in these markets that nobody else will make or even thinks of.

Wall St.:

The Dow was massacred today losing another 450 points. Wall St. is an absolute mess. AIG stockholders are well on their way to seeing their stock zeroed out. Morgan Stanley was on the hot seat today, selling off hard. You might recall just a few short days ago Morgan was at the bargaining table to supposedly help bail-out Lehman Brothers.

As of this afternoon Wachovia was putting together a bail-out plan to save Morgan Stanely. This is madness. And this mess on Wall St. is not going away anytime soon. This proves the Fed and Treasury are putting on another smoke and mirrors act and using big household Wall St. names as props to bail-out our entire financial system.

The Fed nationalised AIG and the U.S. taxpayers are on the hook for at least $85 billion. Oh, and guess what, the U.S. taxpayers now own the popular English football team Manchester United! I love it... how's that for some irony! Go Chelsea!

Some rough numbers show the Fed has put out over half a trillion dollars of taxpayer money in Wall St. bail-outs starting with Bear Stearns all the way to where we're at today. I believe that number is higher because I know the Fed makes backroom deals with these firms to sweeten the pot.

The Fed is in trouble and they are running out of cash in their reserves. The Fed's reserved are so low that the Treasury had to create a $40 billion debt auction this afternoon. Basically, the Treasury is going to create $40 billion worth of debt out of thin air and then sell this debt.

The proceeds from the sale of magical debt will be given to the Fed. It's amazing how the central bank can avoid securing credit and liquid cash like normal people do. Now do you see why the Fed is unconstitutional and will be the ultimate financial demise of America?

These debt auctions will get more frequent and will get even bigger. Watch.

EUR/USD:

The crazy thing is that all these events and issues are terribly USD-. The Wall St. bail-outs, the printing of money, the creation of debt, the pullback in foreign investment, the expanding Trade Balance and Current Account, the sharp decline in growth, the increase in unemployment... all USD-.

Our financial and economic condition is worse now then when the Fed first started cutting interest rates. It's worse now then when they stopped cutting interest rates and started getting hawkish about inflation.

Right now inflation is not the top economic priority as it was a few months ago. We're in a period of massive delfation with commodities unwinding and the dollar rocketing up the USD Index.

Inflation is an issue but price pressures have dropped dramatically since July. The real inflation issue is going to arise in a few months because real is the creation of money without the backing gold. Real inflation is created when the Treasury runs the printing presses and adds physical currency to the money supply through the creation of credit and debt. It's a flawed system and now the system is sick and has no one but itself to cure the illness.

The euro made strong gains today. With what's happening in the bond market, on Wall St., and with our continually weakening fundamentals I must urge strong caution against holding USD long positions.

It's a fact the dollar has been on a historic run, especially against the euro. The dollar has just beat the crap out of the euro and it's showing few signs of letting up.

In a "normal" world the EUR/USD should be above the 1.5000 level right now based on what's happening within the financial and banking system in America. A few weeks ago we spoke about the Fed needing the dollar to be strong knowing a meltdown was on the way.

So for me and my trading, I'm going to do whatever I can to keep my positive open euro shorts from going into drawdown. If the market decides to come back to earth and realize what a mess the Fed is making and that the USD printing pressures are working 24/7, market players could send the euro up rapidly. You don't want to be caught in a move like that.

The market correlated variables are in shambles. All correlated markets have broken down and are operating with minds of their own. Today the euro was slightly correlated with crude and the Dow, and then it finally tried to catch up with gold. Tomorrow it could be a different story.

Tomorrow we get the Philly Fed Index and Initial Claims. I don't expect to see USD+ data from either one of those. It may not even matter. We could have a new catastrophe to deal with in the markets tomorrow and the fundamentals may not even matter.

I literally cannot count on or trust anything right now in these market conditions and season of extreme volatility and risk. The only thing that can be trusted is our own instincts and trying to keep an advantage on the markets.

The euro made a nice run, but I don't exactly trust it yet. Today's move had a lot to do with profit-taking on euro longs. That run up from the 1.4100 level to the 1.4300 level showed some big profit-taking within the price action. But there is serious risk with adding new shorts because of the financial turmoil.

No trader can trade on "hope". That's not part of the equation, but it is my hope that the market finally realizes what a mess the dollar is in and the powers that are proping up the dollar can no longer hold the euro back from crushing it. I don't think the manipulation can go on forever.

If you're trading, use strong risk and money management with your trades. We've seen wild moves this week and they could get even wilder before the week's closed out.

Be smart.