The markets cheer of bailout and everything’s well. Suddenly capital is migrating back towards Spain and Europe. Everything is great and the debt problems are cured forever. Debt to GDP no longer matters as investors care not. Any problems would be dealt with a magical bailout and the money will poof out of thin air and magically add growth somehow decreasing the debt to GDP. The inevitable is prolonged indefinitely and no collapse is possible. Investors are patting themselves, and those who provide the stimulus that the junkies need, on their backs. Nothing can stop Spain from launching to infinity at it’s current pace. Forget a 200% gain in a year, Investments in Spain are like magic lamps, you put your hand out, make a wish and you are granted infinite wealth.. Or the Midas touch.
Forget holding anything at all but Spanish stocks. Afterall, The ECB is pumping hundreds of billions of euros in, as Spain has hundreds of billions of euros pouring out. It must be magic and the balancing act is magic. Afterall, Germany with all the bailouts they are making won’t be pulled down with the rest of the mess.
Perhaps this is the calm before the storm, or perhaps all is well again… until it isn’t. I am skeptical about us shooting straight up to 14k in the dow while all is well in Europe.
Of course we all know, sentiment over a supposed solution can change. Capital flows can revert back to their previous trend and the capital flows must continue in order for the rally to sustain itself indefinitely.
Nevertheless, stocks are going up and not many people are long. Everyone’s getting bearish and the market is leaving without them. The major macro factors are like a slow moving, but powerful train moving. You can probably jump in front of the tracks a few times, and especially when no one else is on the tracks…. but you better avoid the big money and not get caught following the hot money at the wrong time and be very quick to recognize when it’s coming. Great time to buy chasing a quick buck, but that train is coming and it will hit hard.
It’s been great following the market, however, tread carefully. The calm before the storm and dark before the dawn lulls those into thinking that the tide won’t move but one direction. The tide drifting out before the tsunami may comfort all those people to look and say “what cool seashells, now that the tide is out, let us all go play with sponge bob.” But before they know it, in comes the flood and they will be lucky to survive.
As swing traders, it’s often beneficial to forget the big picture. At least for 90% of the time. Focusing on what might happen in the long run can scare you away from several winning trades. But there is nothing wrong with gradually starting to keep a larger percentage of cash on the sidelines as we go higher in the face of increasing macro risk, while continuing to trade in and out of the best setups you can find. Part of strong earnings is preventing losses that are difficult to recover from. That may occasionally mean missing out, but as a result you reduce volatility and position yourself to take advantage of the supreme market conditions. Nevertheless, you have to adapt. If we come screaming past new highs and continue roaring forward, and a strong trend emerges, jump on until it slows or shows signs of slowing. But generally you have to be very nimble the more overbought things get.
For now, everything is fine, but I do not expect that to last. Fortunately when it all comes back and the tsunami comes, it will hit Europe the hardest, and capital will migrate into the U.S. of A, particularly into bonds and the dollar at least until the problem has subsided, or until a new problem in the US arises. Remember there was an August not too long ago where the market crashed and the S&P downgraded US debt. Yet TLT skyrocketed and yields continued lower and not everyone shared the same concern. In the short term, it was a huge event, but as time passed, it proved that it was only a short term move, similar to the ’87 crash or flash-crash in that it soon bottomed and recovered afterwards. Why? Because you don’t downgrade the US debt. Not yet. If the US debt is the problem, then the rest of the world should also be downgraded as thy are more of a problem. People will continue to buy US debt as it remains the world’s reserve currency. So bring whatever problems you have, the US debt will continue to be purchased. The concern occurs when other parts of the world collapse starting with most of Europe and other key currency countries like Japan. Soon, the US debt starts to become an issue because the money can only flood into one area for so long. With every dollar that comes the government’s way, they will spend 2, and most of it will be used just to pay off the interest on the debt. That is a huge problem and meanwhile local governments lack the power to keep printing to solve their budget concerns. So although there may be a constant creation of new debt, it ultimately will be owed back–plus interest, and we have gotten to the point where the whole system requires insane spending to even attempt to pay interest and make good on it’s obligations and prevent huge budget shortfalls, huge shortage of capital and economic calamity. Yes bondholders are perhaps understanding how unlikely it is that tying money up in 30 years in bonds will be a good thing. Nevertheless, when the euphoria of a 100trillion euro bailout of Spain subsides, TLT will be a hot place to be. The taxes around the world are being increased to try to pay for the bonds. Both on federal, national, and international level. Europe will triple it’s fines, put taxes much higher, and attempt to keep the people happy. Meanwhile capital will flee. Manufacturing will flee to cheaper locations with lower taxes. They cannot tax any nation high enough to keep the bond holders happy. Hike rates up to 100% and make everyone your economic slave and see how long they stay in your country. Make it illegal to move and see how much of them put in the work. There is a point when taxes increasing become very harmful, particularly when they no longer become competitive globally. This is not about politics. If taxes were stable globally, and not raised whenever the government comes up short, things might be okay. If you sat down to eat and a waiter suddenly decides that his bills are too high this month and the tips today are low and he suddenly decides to add a 40% gratuity or a tip because he needs more money, do you really think this solution would last? Or would you make sure that particular server never serves you again, even if it means going to a different restaurant? Some might resort to illegal evasion of paying the bill. Ultimately though the sudden tax increases are not policies that the various nations can handle or will be happy with.
Perhaps the problems will be delayed because of calamity in Europe will lead to a huge influx of new US bond buyers fleeing the garbage of Europe and seeking safety. That will give the us federal government a false sense of security and they will keep going into debt, figuring at the rate of new debt buyers, they will still make it until next reelection. And perhaps they will be right…. Ultimately though this will come back to haunt us. First, it must haunt the egregious socialized spending in Europe as they are the worse and to make matters worse have one currency, yet multiple bonds for each country, good luck trying to rob the rich countries to pay the poor when the poor spend like drunken sailors promising retirement at age 55 and full healthcare and full benefits that collectively they can’t afford. Certainly the rich countries footing the bill have citizens that want the same and will only vote for those that provide the most benefits. Meanwhile, the governments can’t afford it, and this scam will not be maintained. Austerity of course, must be implimented because you simply can’t pay off the loans and the interest that everyone owes and the obligations such as unemployment and healthcare when the euro nation is deep in doo doo with +20% unemployment. Yet at the same time, if spending is indeed cut in Europe, people will be unable to pay their loans, cash will be hoarded and a slide into recession will occur causing prosperity to regress to where it would be without all this make believe wealth that is only temporary. The cash shortages in Europe and lack of spending of course will have a global impact.
That is what we will soon be looking at.
However, for now this is already known, both bonds and stocks present risks and all is well. We can push to new highs, but with September and October as typically very volatile months coming up shortly there are greater downsides to continue to accelerate and push down the gas peddle at the same rate. Sentiment among pros and rookies is not good and people are becoming risk adverse. So a crash is probably pretty unlikely just now. It is only when everyone that wants to buy has done so and suddenly something no one was expecting hit where a crash is possible. But the slow moving train is coming around the corner, and the deflationary vortex will return! Obama will be lucky to even make it to election before the market crashes However, he has been working his whole 4 years making sure that if a crisis hits, the republicans get the blame, so he has planned well, and may be able to reverse the strong trend of the incumbent being voted out when the stock market crashes afterall. Conversely, he has fallen out of favor poorly and things are pretty bad, so I suppose it’s possible that even if things are okay people still vote him out. Ultimately I expect it to be a very close race either way and would expect the margin of victory to be only about 2% of the popular vote. (obviously, I realize the popular vote doesn’t always determine the outcome). Nevertheless, for now, keep trading your setups but begin treading a bit more lightly than you normally would.
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