Friday, June 3, 2011

Weekly Recap, 2011 06 03

Weekly Recap

I was talking to some friends today about what goes on and my take is very simple and straight forward:
- Inflation in EM has picked up markably
- Central Banks around the world have been raising rates steadily to keep the cheap-global-credit from causing an overheat in their economies
- With austerity in many countries, with US QE2 coming to an end, the ECB hiking rates and the Japanese new-QEs being offset by the quake+tsunami issues the markets have stalled because of expectations of a reduction in global liquidity
- Therefore causing economic agents to think twice before further capital expenditures/hires
- And repeat: more volatility and negative performance in risky-assets, less confidence within the corporate community for investments and worse economic numbers

Did the Japanese natural disasters cause all this? Yes and no in my opinion.

How? It seems to me that it certainly helped trigger the slowdown or at least antecipate it.
People were not too confident about the recovery in DM and with the japanese-related hit and outright slowdown in industrial activity they got more cautious therefore agravating the slow down.

With inflation running loose in EM and Central Bankers still behind the curve (and kinda comfortable with that) it seems to me that we're all in a "wait and see" mood.
Everyone is watching global economic numbers closely and hoping that risk-markets won't go bad.

Again, my reading of the recent market moves is that the market is pricing in more easing from the Fed, more liquidity ahead.

Bonds have been performing very well.
The US-dollar has taken a hit and commodities and equity markets dropped, but not thaaaat much.

So... as Grantham, Howard Marks, Hussman, Stephen Jen and others say, it looks like a bad risk-reward choice right now to be positioned for a risk-on future.

If we embark in a slowdown, especially after QE2 ends, will QE3 come easily? Will more fiscal stimulus come easily? Not likely in the US, not likely in Europe. Will rates be cut more? How? They can't really drop below zero, can they?

This dismal growth in the US is on the back of a never-seen-before fiscal and monetary stimulus and private-sector bail out.

When all this stimulus, or part of it, fades... where will growth come from? The function Growth(Debt growth) has come to its limit and from here on it seems that no matter what happens to credit growth will simply not improve linearly and its marginal usefulness will drop to zero. Or negative: another credit collapse.

Below some charts of things no one cares about:

*Disclaimer: charts and data are presented as I receive/see them. Sources are usually not checked for validation and my own calculations are of 'back of the envelope'-type. I am aware that some math that I do myself might be wrong and/or misleading to some extent. In financial markets the rate of change of economic data is often more important than the actual level and the perception of 'what is priced in' is more important than 'what is actually going to happen'. This is actually the way people pick entry and exit points. So... yes, sometimes you might say 'This guy is an idiot, this is way wrong!' with a high conviction, being right. Not to worry. Markets are made of expectations and the clash of conviction between its participants. Portfolio managers know that being an idiot is sometimes profitable and being smart is often a bad choice. It is all reality, sometimes good, sometimes bad. By the way: corrections to my analysis and intelligent debate is welcome. theintriguedtrader AT gmail do com

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