Euro drops out of its "managed" range but for now risk on trades prevail

EUR/USD has broken below $1.34 and as the chart above clearly illustrates the range which has been "managed" during the last few months, since October 2008, has been violated. It would seem that the efforts of several constituencies including Asian investors, hedge funds and even such trading wunderkind as Goldman Sachs were unable to protect the bottom of the range on the double whammy of deadlock regarding a rescue plan for Greece and the downgrade by Fitch with a negative outlook, confirmed today but rumored yesterday, of Portugal's sovereign debt.

Targets in the mid $1.20's are now firmly on the agenda for the euro in the intermediate term but one should be cautious of some near term erratic behavior as the EU struggles with all kinds of frenzied initiatives designed to look like it knows what it is doing with respect to the ever increasing anxieties regarding the sovereign debt picture for Greece, Portugal, Spain, Italy etc.

When the second most traded currency in global markets enters a crisis one would imagine that risk aversion would be on the increase but the manner in which asset allocators keep piling into high yielding debt, equities and other exotic securities is a wonder to behold. At least for the time being.

Is this the 21st century version of the Keynesian mutliplier effect?

The graphic above is taken from the following source and is also to be found at The Business Insider. Here is the explanation provided by Nathan Martin and which is cited by Joe Wiesenthal in his reproduction of the chart

This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

Average debt/GDP ratio in advanced economies expected to reach the levels seen in 1950

This article from Bloomberg illustrates the point that many are making which is that the financial markets are, to a remarkable extent, under-estimating the gravity of the sovereign debt build up.

March 21 (Bloomberg) -- Advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures will not come close to bringing deficits back to prudent levels, said John Lipsky, first deputy managing director of the International Monetary Fund.

All G7 countries, except Canada and Germany, will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, Lipsky said in a speech today at the China Development Forum in Beijing. Already this year, the average ratio in advanced economies is expected to reach the levels seen in 1950, after World War II, he said. The government debt ratio in some emerging market nations had also reached a “worrisome level.”

“This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up,” Lipsky said. Stimulus measures account for about one-tenth of the projected debt increase, and rolling them back won’t be enough to bring deficits and debt ratios back to prudent levels.

Striking graphic of US income growth (or lack thereof)

The bizarre dynamics of the Risk ON/ Risk OFF switch

More and more we have markets that go up primarily because of short covering by over-zealous bears who get too confidently pessimistic during the RISK OFF phase of the game, and go down when the hedge funds enjoying the RISK ON phase get too enthusiastic, and then stare at each other wondering where the next punter is to whom they can unload their positions.

As referenced in a blog posting here , almost exactly one year ago, we had better get used to increasingly bipolar capital markets.

Today's NFP: too much optimism already baked in?

This recently captured chart showing the very high percentage of S&P 500 stocks which are trading above their 20 day simple moving average suggests that, to apply the Keynesian notion of perceptions regarding the judging of beauty contests, the markets may well have already discounted the fact that average opinion regarding how the average investor will regard the data, is very favorable.

Could we be setting up for a buy the rumor and sell the news event?