Everything running surprisingly smoothly at present.. long may it last. We know the consensus was very negative on the recent lows. We also know fund redemptions have been severe and that companies are sitting on cash heavy balance sheets. These positive factors seem to be holding up and the market and the momentum is to the upside for the moment.
The fundamental picture, earnings aside, continue to look ominous with rates persistently rising for Italy in spite of the lowering of rates by the ECB and ongoing 40bn euro monetization by the ECB of euro bonds. The EFSF bond issue of 3bn was suspended. No third party backers have emerged for the EFSF. The back stop of the IMF SDR monetization was knocked back by the g20 last weekend. The ECB is refusing to back the EFSF. And Germany is refusing to asset back the EFSF. We are at a euro impasse once again. I get a strong sense we are in the process of walking to the edge of a cliff in terms of equity markets.. The issue is how long that walk might last? but also whether that ‘cliff’ will evaporate entirely once nuclear monetization occurs via ECB or IMF etc.
My personal feeling is that, for financial repression to have any chance of working, the system needs much more forward stimulus that we currently have. We need a ‘final solution’ to the euro problems. Until we get this solution capital markets will be held hostage to the issues in Europe and beyond. The US has plenty of problems to come inc the $1trn student loan issue and many others beside. If financial repression is what policy makers truely desire they had better step on the monetary gas soon to ensure it occurs. They cannot be timid in implementing this strategy. If they are timid we will experience a Japanese scenario rather than a Zimbabwe scenario. Neither are particularly appealing, i confess, but assuming they can partially contain the African model, for asset holders rather than cash and fixed income holders, its not an entirely bad option.
Where as the US and UK are at the forefront of implementing the financial repression model the Europeans seem very keen on the Japanese approach. The difference, that the Europeans don’t seem to get, is the weakness of the European public balance sheets. Japan’s post 80s balance sheet was strong as was their people’s. Their banks were weak and so they gradually nationalized the bank’s problems to the state’s problem. Minimal growth for two decades has been the Japanese experience. Europe seeks to follow this model but without the strong public balance sheet of the 1989 Japanese state. The consequence is an impossible situation for Europe caught between the desire for partially sound money from the Bundesbank and the necessity of debt monetization by the dire situation in the euro area. The IMF is a possible/probable way out but its my view that we would need a world wide crash for the IMF to really come into effect in a meaningful way.. ie with a multi trillion dollar SDR program.
So.. where we are and what do we do as capital holders here? For my mind we have the traditional q4 rally as per UBS technical comments and many others inc Faber and John H at Amalgamator etc, etc.. Of course all technical views can be over come by events. No technical model can predict the future, ever. They simply provide the probable direction. Events can and do change this so in spite of the positive q4 technical picture. I would therefore tread carefully and will short on particularly worrying news flow. Option puts are also an excellent choice at this point in events.
Post q4 i’m very concerned that we have more of the Japanese model of drip feeding stimulus than any ‘bazooka’ stimulus. We will continue not to have any ‘final solution’ to the Euro problems. Only the taste of blood and the whiff of chaos will provoke the monetary reaction required is my view. This sets up for a messy q1 imo. It will be a V but it may be a V very similar to the 2008/09 V that we remember all too well. All in my opinion..
All these events continue to be hugely positive for precious metals and their miners. The HUI is close to breaking out again having dramatically failed a month or so ago. This looks significant but lets see. It has all the feelings of 1997/1998 Nasdaq to me.
Below are two charts.. The first shows the clear run up from 96 to early 99. The 18 months period from mid 2007 to the end of 1999 saw the index return zero whilst the wider market added weight confounding almost all commentators. (I remember these events all too well as i was involved as an investor and in the industry at the time). Importantly to remember, participants saw a horrid 40% correction, pre the real bull run in these assets. Post the 40% correction.. Boom. A nearly 400% upside in the following 16 months. But again.. all in my opinion. We have worked hard to accumulate our capital we must all, ultimately, make our own decisions as to how we distribute it across asset classes.
Rich
(6 votes, average: 4.83 out of 5)
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