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THREE THINGS I THINK I THINK

THREE THINGS I THINK I THINK

Courtesy of The Pragmatic Capitalist 

Investigating the

  • Just a few brief comments on the market at the current levels. I was relatively optimistic about the equity markets coming into the beginning of the year.  The themes that had dominated much of 2009 (better than expected earnings, accommodative Fed, continuing stimulus, etc) appeared to be largely intact.   To my surprise, the rally ran a bit farther than I expected, but Greece and the downturn in China were game changers in my opinion.  I was a few weeks early to lay my short positions, but the market ultimately came around to my thinking (better to be lucky than good).  Where are we now?  In my opinion, we have a global economy that ispre-Greece and a global economy that is post-Greece.  The dominoes appear to be lining up in an eerie fashion at this point in time – there are now dozens of negative catalysts in the coming 12 months (which I will detail in a soon to be released report).  Although the markets are once again oversold and at risk of a bounce the fundamentals are quickly deteriorating and my expectation of a weak second half appears to be right on cue.  I would continue to approach this market with a great deal of caution despite the current oversold conditions.
  • What do the Germans know? This short selling ban is very desperate looking.  I hate to speculate, but my gut tells me that they are beginning to realize how bad the situation is over there.  They now understand that the problems in the Euro cannot be solved through intra-country debt issuance and bailouts.  The short ban looks like one more act of desperation from a group of nations that have severely underestimated the problems they confront.  Unfortunately, I still don’t think they’ve realized that this is a currency crisis and not a solvency crisis.  That means they’ll continue to kick the can down the road and markets will battle with the turbulence.  This truly does have a very Bear Stearns feel to it.
  • Will we scare ourselves into a double dip or even a second great depression? Everyone and their mother appears to be in the same camp regarding all the very scary “money printing”.  I’ve never in my life heard the drumbeat so loud for fiscal austerity.  In fact, this might be the absolute scariest thing about the current predicament.  Investors are now convinced that government spending has done nothing to help the economy (despite talk of a v-shaped recovery just a few weeks ago).  Now everyone is convinced that we’re all bankrupt and doomed. Confusion over the EMU has everyone worried about defaults.   Even the nations who have no solvency risk (UK, USA for instance) are being scared by the deficit terrorists into thinking that they need to stop “printing money” because the country will go bankrupt.  And the most tragic thing here is that our leaders are so ignorant with regards to the monetary system that they are listening.  Oh no!  California is the next Greece (WRONG!).  Oh no!  UK is the next Greece (WRONG!).  Oh no!  Niall Ferguson says the US empire is over and we’re going bankrupt (WRONG!).  Nouriel Roubini says the big bad bond vigilantes are coming for the USA next (WRONG!).   Robert Shiller is correct (as usual) – we’re literally going to scare eachother into a second Great Depression.   Meanwhile, the very crowded short t-bond trade is where the supposed “smart money” is lined up.  Unfortunately, we have the playbook for this environment and it doesn’t involve hyperinflation, skyrocketing bond yields or sovereign bankruptcy (at least not in the case of the USA).  Treasury bonds will continue to be the ultimate safe haven play despite the fact that every hedge fund manager in America thinks the USA is bankrupt (WRONG!):

JGB2 THREE THINGS I THINK I THINK

 


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