Guest Post by MacroStory. Last week he was on vacations, and maybe he will give us an “objective” view.
Having been on vacation through possibly the most volatile week (yet) of 2011 this week’s macro view may be better served as a recap of various asset classes to get a sense of where the equity market stands right now. From credit to commodities to forex a lot of technical damage was done.
First though it appears an important change in perceived risk has occurred. In the past bad news was good news as it would bring further accommodative monetary policy such as QE1 and QE2. Market participants always believed the Bernanke put was alive and well and equity values would be defended. In other words the perception of risk was less severe.
The Fed is not done with “free market intervention” though and like a child in the toy aisle will go down kicking and screaming trying to get what they want. The recent emergency action such as globally coordinated swap lines are such proof as are the eventual TALF programs where US and EU banks can access Fed capital in exchange for any “collateral” they can find.
Like the famous line from Rocky IV “You see? You see? He’s not a machine, he’s a man, he’s a man” the Fed showed its ability to print at will is constrained though, it too is not a machine. Whether it is political pressure, rising inflation, dissention among members or the simple reality that QE1 and QE2 actually harmed the economy market participants are realizing perhaps the Bernanke Put has a massive theta burn, an expiration date. The next Fed meeting is not until November 1 and beyond any emergency programs equities are now on their own. The training wheels are off.
The market’s reaction to this shift in risk perception was made clear this week as demonstrated by the multiple charts below.
With majority of markets crushed last week, many indices now trade deep in bear markets. Last week we saw some rather extreme moves, like the Hang Seng down almost 10%. Several indices are down around 50% from the start of this millennium. Long term investing, with poor risk management, is a dangerous game….Below charts, courtesy DShort;
A look back at how we got here. Sunday evening viewing.
While the Troika argues of how to fix Greece, the Economy is in free fall, and it is as usual the people the suffer. Latest from Gallup.
Gallup classifies respondents’ wellbeing as “thriving,” “struggling,” or “suffering,” according to how they rate their current and future lives on a ladder scale with steps numbered from 0 to 10 based on theCantril Self-Anchoring Striving Scale. Greeks’ current level of wellbeing is low compared with levels in other developed countries, where thriving is typically much higher than suffering. The results from Greece are based on surveys conducted in the country in April and May immediately preceding the start of major riots and protests against the government’s austerity measures.
Greeks’ current life evaluation — with 14% thriving, 62% struggling, and 24% suffering — is also low compared with ratings in other European countries surveyed so far in 2011. More Greeks are now classified as suffering than those living in several other European nations, including those in other countries hard hit by the financial and economic crisis such as Ireland and Italy. Suffering is higher only in Hungary (29%), Romania (30%), and Bulgaria (42%), and thriving is significantly lower only in Bulgaria.
Some short quotes from at least a few intelligent people that attended Bloomberg Markets 50 Summit in NY. Full article by Andrew Horowitz here..
Nassim Taleb; The system has consumer between $2-3 trillion of compensation over the past 5 years. The great bank robbery. There are rules that we had for centuries, the problem is that the modern version of capitalism that we have (of which Adam Smith did not like) does not have consequences.
We are not made for information, we are not made for randomness, we are not cut for this world. 2 options, heuristics and try to play with them or 2) change the world. Either the world will self-correct or destroy itself. All we need is common law (heuristic). If we want to simplify the system, look at what Swede did in 1991, they cleaned house in 90 days. Then reset the system.
Thinking requires effort and a high expenditure of energy. Heuristics – we don’t know that we are using heuristics and have the illusion that we are thinking when we are not thinking.
Dalio; Credit can be created in countries and the same cycle as above will persist. How much of the money that is being spent by ECB to do a restructuring and other measures to fix things. One of the most important things now is to understand what is going on and make some important plans, rather than waking up every day to a new surprise.
On printing money: It is quite a handy thing to have. If you are a creditor with a linked policy then you have problems in that there are extremes that are created. For example Greece is a creditor and they cannot adjust and they are their economy is going to crash, if on the other hand you have those that are linked and needs to print then you have a bubble like China.
What is working for Bridgewater? Dalio says the he writes the daily so that he knows that he knows what he is doing wrong. If you diversify and don’t rely on only one things to make your year, but many ideas go into the Ray Dalio code and his template for the economy is available to download HERE. (pdf).