Still 50% bullish, 50% bearish.
portefeuille has recently asked if I'm abandoning my middle-of-the-road position. I am not. I remain (moderately) bullish on America and bearish on all international markets except Britain. There will be a change in this position at some point in the future when the Euro drops to 90 cents. I will then green-thumb foreign markets and become neutral or bearish on America, depending on the S&P market cap. But meanwhile here is the situation that we have now.
The second wave of the crisis is developing exactly as I expected. After the bailout of homeowners worldwide, many governments' balance sheets started to look like that of Enron. The US has printed more and borrowed less as compared to Europe, but it too has accumulated too much debt. By the end of last year, each country's bond market felt like an overcrowded theater that is prone to a fatal stampede for the exit if someone raises the cry of "fire". The only question was which theater would experience that stampede for the exit and which one would stay calm in spite of being overcrowded. In this case, the theaters marked for the accident were European PIGS, the clever competitor was the US government, and the special men hired to cry "fire" in the competing theaters were the ratings agencies.
This winter I spent one hour to drink a cup of coffee and think about the economic prospects of international markets, and came to the conclusion that US market was the only game in town for 2010. Both US and EU were technically insolvent. But it was clear that European bondholders would blink first, because America had the intelligence to create as many as 3 ratings agencies and Europe had the stupidity to create none. It was an easy corollary that these 3 rating agencies would soon start telling bondholders about the danger of European bonds and the safety of US treasures, and Europe would have no tool in its arsenal to fight the negative PR campaign.
Needless to mention, manipulations can only succeed in those cases when good preconditions are already in place. If the euro were undervalued vs. the dollar and the debt did not go out of control, Europe would have little to lose in this ratings game. The fundamentals of PPP (purchasing power parity) would create a good line of defense against the onslaught of negative news (negative stories, actually, for that's what they are - stories. These "news" are anything but new). But as it happened, the euro at that time was also overvalued vs. the dollar. It was a bubble waiting to be pricked, and the US had no incentive to keep it growing. So it was an easy bet that all things European would soon come under heavy pressure from panicked sellers.
It was also clear that China, already on its last legs because of its government's failed mercantilist policies, would receive an additional hit from the crisis in Europe, and then Europe, already on its last legs because of its bond crisis, would receive an additional hit from the crash in China, and the ever-present 3 ratings agencies would suddenly "notice" the crisis in China and tell investors to steer clear. And there was nothing to like about Brazil, Russia and the Middle East either because they were in a commodity bubble mode, and that bubble could not survive the implosion of China. And there was nothing to like about Japan either because it was yet another failed merchantilist model, facing its own debt crisis.
So what would the second wave look like? It was clear that the movie-goers who were lucky enough to escape the overcrowded international theaters would readily flock into the equally overcrowded American theater where the hired man does not raise the cry of "fire". In the global battle of bubbles, the bigger bubble would absorb the air from the smaller bubbles. The conclusion: a horrible global crisis overseas and a booming economy at home. To be more on the accurate side, I don't think flipping houses, stocks, and bonds should be called "economy", but let the linguistic purists fight over such issues. The thing is, we have that misnamed thing known as "US economy" that we invest in, and that thing will be growing in 2010 and beyond while the rest of the world is collapsing.
Insatiable demand for dollars and deflationary impact of cheaper oil and cheaper imports mean that Bernanke will have all the opportunity to reinflate all three domestic bubbles - the housing bubble, the stock bubble, and the bond bubble. S&P 500 will be fairly valued around 1000, and will offer a good buying opportunity if it drops lower. The only issue is that the ride does not have to be smooth. Big players have the habit to shake out weak hands every once in a while (just ask investors who sold at the bottom 15 months ago). So I expect something similar this time as well. They will use this crisis that is objectively good for the US to spin horror stories and justify a sharp selloff. And then money will appear very silently out of nowhere, and buy the dip, and then the media will change its tone and start talking about how this crisis is good for America, and we'll start climbing up along the 4th and the last line of the "W". And the higher we climb, the lower the international markets will drop.
And then year 2011 will come and go, and the first fantastic bargains will start showing up among the rubble of formerly high-flying foreign markets. Think Russia in 1998 after the default or Indonesia at roughly the same time. Or the oversold oil companies at the time when $8 a barrel was dismissed as yet another temporary bottom. Most of these entities eventually came back with vengeance. This time, some of them go down for good. Many foreign governments will default, and many countries that seemed stable will plunge into a political crisis. But so much more exciting will be the opportunities for the investors who can single out future survivors amid the rubble and will have the patience to miss all the great bargains waiting for the truly incredible ones! The Fool's Global Gains newsletter will be streaming with red ink for the next year, then will spot some future 20-baggers just when subscribers will be throwing the towel.
So, dear Fools, fasten your seatbelts. The new bear market at home will end soon, but the bear market abroad is only beginning.