A Fart in the Wind
Like Ron Wolf's famous statement (at least in Wisconsin) about the mid 1990s Green Bay Packers only winning one Superbowl, this market rally, which appears to be losing breath, is about to become a fart in the wind. More importantly, the United States as a whole, is facing the same problem.
While I know that predictions of doom are common, heck, Alstry makes them daily, the overriding sentiment has been overall bullish, both in the markets until very recently going neutral, and most recently more positive at the retail investor and household level (excluding die hard Republicans and CITMOs- oh, that's my new acronym for Conservatives In Their Minds Only, which is for all those people who claim to be fiscally conservative, but really don't know what that means, as they are pessimistic because the guys they think are their guys- but really aren't- are not in power at the moment).
It was the observation that retail investors were feeling bullish, AFTER a 60%+ run up, that I wrote Amateurs Buy From Pros = Correction Imminent about a week ago. What I am seeing and hearing makes me believe it more each day that we are in for a doozy of a correction sometime soon.
Now, like Hussman, I realize that irrational markets- markets usually are irrational in any short time period, generally only passing through rationality for a short visit- can push higher for a number of reasons, however, risks, both seen and unseen, always play out one way or the other. Right now, the risks in the economy and markets are not that different than what the risks were three years ago, though less extreme in the immediate sense in many cases, but as extreme over time. I believe we have only stretched out the pain, rather than getting over it. As I've mentioned before, in my mind, the only way out of another decade of malaise and kicks to the gut, is for the developed nations to rebuild their energy, water and transportation infrastructures with a close to a pay as you go way, beginning yesterday; and for debt loads to get one off adjustments which are in some way balanced for pain relief and fairness to those who did things right.
Here's a list of risks from some cats way smarter than I at the World Economic Forum. If you don't read this each year, I frankly don't know why you would bother to invest your own money. I read this stuff and still have a hard time making money (averaged 6%/year during the 2000s).
Under economic risks I would focus on #4 (Chinese growth under 6%), #5 fiscal crisis, #6 falling asset prices.
We all know there are plenty of potential financial crisis around the sovereigns right now. I'll leave that Greek salad to the FT (another must read publication or stop investing on your own).
Let's talk Chinese. Right now, the Chinese are facing a problem. They have huge inventories and a lack of foreign buyers. Cheaply produced goods and plenty of credit rich buyers had been the Chinese path to growth for decades. Well now, the credit is gone, and not coming back quickly. The Chinese have only one response as far as I can see. They must inflate their currency at some point soon. Probably very soon now. If I were the Chinese leadership, I would re-peg to the dollar and Euro at about 20-30% higher this spring. Apparently, some are already thinking that. GaveKal Research has been talking about this, and I have been seeing CYB (WisdomTree Chinese Currency ETF) commercials in the last couple weeks.
Why does this make sense? Very simply for two reasons. The Chinese must clear their inventory in order to be able to keep producing. By reflating their currency they create a new market for their goods. China itself. This not only fixes their inventory problem to a large degree, maybe completely, it placates an increasingly demanding populace. With lowered inventories, they buy themselves time during which they can keep producing without much interruption, in the hope that international demand returns in a few years (sometime between 2013-2018 if the infrastructure builds occur is my estimate). Also, with a stronger currency, China can buy commodity inputs and food cheaper. Without knowing what is about to happen, it is my suspicion that if the Chinese allow their currency to appreciate one time (a true re-peg, not floating) that their currency will be added to some basket of currencies regularly accepted for international trade. The Chinese have to want that.
The impact of the Chinese re-pegging upward their currency v the dollar and Euro would immediately help our exporters to some small extent, but also keep our assets from again free falling as we would necessarily be getting inflation from new currency values. In the short run this looks attractive to the United States, especially those controlling a handful of multi-nationals. In the long run, it is a coin flip whether the new values help or destroy us. Again, if we engage in rebuilding our infrastructure and develop a more skilled labor force- let's face it, way too many of our people have become paper pushers, burger flippers and general slackers the past thirty years (largely due to the outsourcing and credit manipulation, so let's not just blame half the population for being under skilled without giving the appropriate blame to those we trusted to make decisions for the nation), then the coming Chinese currency move will benefit us by helping jump start our exports a bit and stabilizing asset prices.
The flip side is this. If we choose to take the short term benefit of a currency change, allow the multi-national execs to bonus themselves most of the money due to upticks in profitability which had little to do with them and not reinvest most of the one off windfall into developing our economy, well, then the party is over for a very long time.
The decision is ours to make. Does the United States become a fart in the historical wind and suffer for multiple generations or do our children inherit the nation we did?