Tuesday, 8 December 2009

Wild trading in the global markets

John Mangun
Outside the Box

Friday foreshadowed trading in the financial markets for the first quarter of next year.

Last week I predicted that there would be days when gold would trade $50 higher and the dollar two or three euros lower. I was completely wrong and slightly right at the same time.

On Friday the dollar was higher by one euro and gold dropped $50. Although I was wrong about the direction of the dollar and gold, the lesson we learn from that Friday is that we will see increasing volatility and wild trading in the global financial markets.

I know that you might think that all of this has no impact on your life and your wealth. Unfortunately this is 2009 and everything, one way or another, is connected to everything else. You already know that the price you pay for gasoline is determined in part by the interest rate which some New York bank charges a high fashion designer to buy cloth for next season’s clothing collection. The price of the rice you eat is determined in part by a London-based multibillion-dollar hedge fund that just took a profit trading wheat in Chicago. The amount of buying by a gold dealer in Mumbai affects the price you will pay the next time you buy an electrical cord. It is almost impossible to escape the impact of the global financial markets.

Trying to understand the effects of trading in these financial markets is very difficult. Our brains are wired to think in straight lines. That is, we look for and find comfort in scenarios that are simple and linear. If this happens, then this should happen. The world does not work that way anymore, if it ever did.

On Friday, the US government released employment numbers for the month of November. On the surface, US unemployment dropped to 10 percent from 10.2 percent in October. Even some local newspapers headlined this as proof that the US economy has turned around and all will soon be wonderful and back to normal.

Traders took this information as an opportunity to heavily sell gold and just as heavily buy the dollar. However, stock prices in the US were unchanged. European markets were mixed and Asian stock exchanges traded higher in Japan and mixed around the region on Monday.

If the US economy is now going to boom, you would think that the stock markets would have followed the gold and dollar markets. Gold is up nearly 20 percent in three months. The dollar is down around 5 percent in the same period. A very good level in both markets to take profits.

The reason the stock markets did not immediately follow to the upside is that the employment numbers are very far from being “strung, strong, strong” in the words of one banker.

It is ironic that those critics who cannot believe any economic numbers that come from the Philippine government automatically assume the numbers from the US are always perfect and unbiased. I have news for you. Economic data in the US are just as, if not more, political as in the Philippines.

The methodology of the unemployment numbers includes a variety of “adjustments.” One is the birth/death model. In order to express unemployment as a percentage of the working force, you have to count that force. Therefore, you need to figure out how many people entered the labor market in a particular month due to reaching a certain age and how many left because they died. Other factors include things like figuring how many extra temporary employees are hired and then fired during the time school starts. Things like that.

Although the number of people who became newly unemployed in November was insignificant from October, the number of people employed was still dropping in November, although at a slower rate than in October. But the underlying unemployment numbers are very damaging, given a very good reason that the US stock market did not boom like the dollar.

One number that was much higher was the number of new people hired for temporary jobs. The theory is that companies hire temporary workers before they hire permanent workers and this is supposed to be a good sign. However, the number of people who have been unemployed for more than 28 weeks, the long-term unemployed, continues to increase. We talk about underemployment as a major problem for the Philippines. The US is encountering that same problem but on a much greater scale.

You need to look at the bigger picture at all times. You are probably not directly involved in trading the global markets, but the results in these markets may have an impact on your decision-making, and they certainly have an impact on your financial life.

The crisis is far from over. The US is not booming. Currency and commodity prices are going to remain volatile and often driven by “false” information. Ignore these markets at your own financial risk.

PSE stock-market information and technical-analysis tools were provided by CitisecOnline.com Inc. E-mail comments to mangun@email.com.

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