Alright, I’ve about made my assessment of this market, and I’m ready to make the call:
I still wish to look at the next real correction, so I will hold off until Monday or later to pull the trigger, but for now I’m thinking we’re heading back up.
We were pretty overbought, and due for a correction, so despite CNBC breathing panic about bad German numbers, I’m resistant to get onboard the dread wagon. Meanwhile, our own manufacturing numbers looked fine. We got a big rebound in automotive, and wouldn’t you know our industrial output was level.
Let me repeat that, it was not declining, it was level. After this big down move, it’s hard for me to think there’s too much of the growth story left to break off and cause more pain.
As the whole planet is suddenly on recession watch, I can’t bring myself to get that negative.
Originally, I never thought we’d double dip. I wanted to see a big sell off in oil and commodities (check) and I figured we’d rebound in the second half on lower input costs for businesses on the backs of commodity hoarding homos.
Then the selloff came, much harder than I expected, foreign debt swaps began to blow out, and it was accompanied by some bad employment numbers and I thought “uh oh, I underestimated this; here we go.”
Now, I’m still hesitant to go to long in case a European solution strengthens the dollar overtly, but I also don’t have it in me to start skipping around in a tin foil hat talking about how to ferment nitroglycerin from lawn clippings or make charcoal out of my feces.
I think the prospects are good for a dollar bottom. Despite the breadth of disappointment over the debt ceiling debate, they managed to cut a few trillion with multi-partisan agreement, which is more than anyone thought possible only a few years ago, and it sounds like entitlement reform is still on the table.
So that bodes well for our debt.
Meanwhile, our borrowing costs have never been lower, so on the other side of the debt equation it doesn’t look like we’re getting crushed.
Also a positive for the dollar.
No need to inflate the currency to make up lost ground.
We might see tepid intervention from the Fed if the euro/dollar disparity narrows too much, but overall I think the U.S. days of easing are closed, barring some sort of catastrophe.
And this last breakdown showed that China and Russia were willing to accept that the fate of Europe and America are the shared fate of the East. China let their currency appreciate a bit. Very reassuring; solutions will be formed with cooperation of world powers. Deleveraging will be handled tactfully. Everyone takes a bit; no one is getting swallowed up.
There’s enough bad news coming from the pressing issues of Europe to keep on the lookout for further selloffs. And global growth has been shit on. However, after a 20% downward correction who’s to say those realities aren’t baked in, somewhere? No need to freak out and lock yourself in a panic room.
I want an elevated cash position, but crude oil doesn’t look like it’s going much lower, so UCO is getting covered within the week. I will also sell off some/all of the shares I purchased on this dip, for profits, to raise cash back to where I was going in.
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Euroland has a US type 2008 financial problem, but unlike the US there may be NO solution. They could take down world markets. The timing and from what level, is the question.
How so?
In 2008 we had a single asset class heavily inflated and woven as exposure across the entire system – housing.
When that asset collapsed, it brought the banking crisis with it; but the housing bust was definitely the cause of the problem.
Now arguably euro debt is very similar to housing, as an exposure goes; lots and lots of people own it and there are lots and lots of derivatives on top of it. If we had a massive right off, it could cause this disaster you have described.
But the ECB has a printing press, last time I checked. Germany and France may be reluctant to get that thing out and start it up, but it is arguably a much easier solution to their problems than trying to reset the system. They’ll cave before the end.
Here, Europe can deleverage and solve their own funding crisis. It is a less complicated problem than the housing bust. Fixed incomes get screwed, but what else is new?
I’ll pass on Flecks Rap on the subject … give me your opinion.
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Euro’s Future: Not for the Feint of Heart Now, regarding the euro, I will be quoting liberally from the LODM’s weekend write-up, because I don’t want to mischaracterize his thinking by paraphrasing too much. To wit:
“I wonder if people realise how bad things now are for EMU? Here is what I think has happened over the past week, and why the guardians of EMU are in a flap. For six months, or more, France has repeatedly called for a larger EFSF, but suddenly, they are not.”
He thinks the reason for that is because the French have finally figured out that an increase in the EFSF would put pressure on their credit rating, which would not be a good thing given all the derivative exposure of the French banks. (And, by extension, all banks in Europe, which collectively need to roll something on the order of $5 trillion in short-term debt in the next two years, according to John Mauldin.) Thus, he notes:
“It is slowly dawning upon the guardians of EMU that they are trapped; forget the upcoming votes on the expanded EFSF in national parliaments, starting next month. For EMU it is now fiscal union, or die, and barring a miracle the odds are now on the latter.”
A pretty potent comment. As for as those supposedly in charge of the EMU, he says:
“When the guardians of EMU tell us they will do whatever it takes, I believe them, but I do not think any of them realise the scale of what is now required to keep EMU going, and one wonders how keen German voters will be to embark on permanent fiscal transfers — for that is what is required — at a time when their own economy is slowing.”
From IOUs to the ICU (As an aside, I might add that an extremely knowledgeable friend of mine, who sits in a very high place on Wall Street, shared his view that the scope of the problem there is probably $1 trillion, which he thinks is just too much for the Germans to afford, or for the other PIIGS to endure through austerity. Thus, he believes that the flawed experiment of the euro is going to come to an end in the not-too-distant future.)
The LODM summed up by saying:
“So here we are, coming up on two years since the guardians of EMU thought it would be a good idea to teach Greece a lesson, and look at what they have wrought upon the financial system: not just upon their own experiment, but upon the entire financial system. Once again, policy error in Europe has brought the financial system to its knees.”
And here is where the rubber meets the road:
“The guardians of EMU won’t give up easily though: if it becomes obvious it is a choice between cutting rates hard, and embarking on unsterilized buying of peripheral debt or risking the failure of EMU, they will opt for the former; if it becomes obvious it is a choice between getting the euro down, or risking the failure of EMU, they will get the euro down.
“If it becomes obvious it is a choice between allowing the markets to function, or risking the failure of EMU, they will shut the markets down & my oft-repeated warnings of capital controls, considered ridiculous even today, will become reality.”
“So Long, Farewell, Auf Wiedersehen, Good Night” He concludes:
“What does it mean for your portfolio? I am no longer convinced that EMU in its current form makes it beyond the end of 2011.”
Part of the problem, he thinks, is that, “They are also meddling with people’s hedges, a sure fire way of forcing people to reduce gross exposure.” In other words, the banning of short selling will make the problems worse, because it is much trickier to adjust your positions via various different hedges, as you basically have to sell first and ask questions later.
And finally: “Overall, my sense is the situation in EMU is, from a mechanical and plumbing perspective, more complicated and much more difficult to resolve than anything United States policy makers were faced with in 2008. Therefore my advice when it comes to EMU would continue to be trade as you like, but run like hell and I think there is a growing risk the guardians of EMU do something to our financial system that could be worse than anything we experienced in 2008.”
I’ve had time to think about this, and I’m not sure exactly what the ramifications are. We know that the response to disruptions will be more easy money: here, in Europe, and worldwide. Ultimately (and maybe even soon), that will benefit gold and gold-related ideas over time. The near-term risks are unanticipated dislocations and people’s reactions to other people who are responding to the dislocations. In other words, the billiard balls will be careening around the table, and it is not possible to anticipate all of the interim moves.
World Markets: Home of the Bottomless Cup. . . Thus, if the powers that be in Europe continue to be a day late and a euro short, as they have been, we could easily see disruptions there spill over here. I think that means that most people at the margin ought to have a bit more liquidity, even if that means green paper risk, to be able to take advantage of any opportunities that result.
I hope not to receive a thousand emails asking exactly what one should do, because I don’t have the answer. I have not changed anything that I have done thus far, I am just alert to the fact that I may need to react. Possible outcomes, for me, might be to short the euro or the S&P. The only reason I would consider doing that would be if I start to anticipate that we are entering a nasty period where stock markets crash to the downside and cause people to panic everywhere. I am not saying that will happen, but it is a possibility.
. . . of WTF I believe the U.S. banking system is far sounder than it was in 2008; thus, to the extent financial problems occur here, it will be as a consequence of what is happening in Europe. Still, we can never forget that the real estate market is weakening again and we have no idea how related assets are marked inside the U.S. financial system. In short, the next couple of months are liable to be rather turbulent, and I think folks need to be alert as to possible catalysts that could lead to new financial problems.