Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Monday, 15 October 2012

I feel beary bullish

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us…” In short, Dickens could have been writing about the current market.

We seem to be caught in a Hegelian bind where every positive is counterbalanced with a negative. Take the US first. Economic data has been broadly positive recently including the critical employment numbers. However, the fiscal cliff is looming which has the potential to deliver a nasty negative shock. Bernanke’s QE is providing a psychological uplift but with the monetary transmission mechanism broken it has little real impact (apart from distributional consequences). Stocks are holding on but earnings estimates are being revised down. So is there going to be a recovery or a double-dip?

In Europe the optimism of ESM’s safe passage through the Constitutional Court and Draghi’s bluster still remains. Everyone’s making the right noises, visiting the right countries and awarding the right prizes. But behind the scenes the schisms are not healing. Eurozone is undertaking austerity and has adopted the fiscal pact but now the doctor (IMF) says that austerity is counterproductive. The ESM is in place. But no agreement has been reached on it recapitalising banks. To the shock of recipients northern Europeans want sovereign guarantees on bank recaps and no retroactive bank recaps. There is going to be a banking supervisor. But no agreement has been reached on banking supervision. Draghi’s OMT is the ultimate weapon. But it is so controversial that neither the bailer-in-chief (Germany) nor the bailoutee (Spain) want it activated. So rumours about imminent requests for rescue have to keep hopes and markets up. Meanwhile, Greece is unable to meet bailout conditionality potentially leading to the next aid payment being withheld. But a fudge will allow disbursement of the next tranche. However, the ECB will not take losses on its bond holding (but it will have pari passu status in future). There is a funding gap but there will be no OSI or additional bailout funds. There is nothing to worry about though as the German finance minister has assured that Greece will remain in the Eurozone. On the other hand the Swedish finance minister thinks that it may leave in the next six months. 

It is enough to make a grown investor cry.

The rest of the world is in the same state. One day Chinese data beats expectations signalling a soft landing; another day it disappoints. But disappointment raises hopes of a massive stimulus. However, pundits opine that another massive stimulus isn’t going to happen and the government’s actions thus far have not contradicted this opinion. At least the emerging world has scope to cut rates to boost growth. But the developed world’s monetary easing has tied their hands with inflation. 

No wonder this is the period for fence sitting and flip-flopping. The essence of capitalism, the market, has become egalitarian. It supports both bulls and bears and it supports neither. Turning the old saying on its head, currently the pigs are making money (at least looking at hog price inflation in China).

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