In my view the main catalyst behind these confusing gyrations is the Euro crisis. In April the markets were reacting to the confusion surrounding the dire situation in Spain. By June as soon as the crisis appeared to have been solved the markets reacted accordingly. Thus I think it is fair to say that until the Euro crisis is finally resolved, either way, the markets can be expected to give very mixed signals. Markets do not like uncertainty and it is probably only once every 50 years or so that a "doomsday" event like the potential breakup of the Euro Zone appears on mister market's radar.
Major crises spawn major confusion.
The political classes on both sides of the Atlantic should take this fact on board. The last thing the markets want is the current status quo to persist. We do not want 20 years of a stagnating Europe, al la Japan. Germany must decide if it wants to remain benefiting from a 100 billion a year trading surplus with its Euro partners and cough up to Euro bonds accordingly or it should revert back to the Deutschmark. Yes there will be fallout but as with Mexico in the 1989, Argentina in 1990 and Russia post 1991 there is life after default and devaluation.
Such devaluation is exactly what Greece, Ireland, Portugal, Spain and Italy require to recalibrate its sovereign debt balance sheet and make their exports more competitive. History shows that the pain will be hard but it will short and sweet.
America on the cusp of a boom; if only?
The metrics of the American indicate to me that she is on the cusp of a boom once the Euro Zone issue is finally resolved. American companies are the most profitable, competitive and resourceful in the world. In valuation terms they and the stock market had gone nowhere since 2000, particularly when you allow for inflation. In a field of instability the American dollar is by far the most favored currency on the globe and its democratic/political system the envy of the world.
So what's holding America back? What is the catalyst that will trigger this long awaited boom? In my humble opinion the fuse will be lit when, following a Euro Zone resolution (either way), the over 30 year bond bull market finally gasps its last breath. Then and only then will the stage be set for a boom in equities. We are nearly there but not quite. Yes this scenario will involve the raising of interest rates but rates cannot remain at zero forever. When FED policy changes it will be timed perfectly be under no mistake about it. All its ducks will be in a row and when it moves the effect of the American stock market will be substantial.
This demise in the bond bull market will have the potential to create a wealth effect to match the Millenium tech boom. This in turn will influence the American real estate market, making a new secondary wealth strata. This real estate recovery will in turn recalibrate the value of American banks. This recalibration will place these financial corporations in pole position to take advantage of their less favorably placed European and Asian cousins.
In other words I can see American banking institutions "buying up" bankrupt European banks, corporations and state assets. How long will this scenario take to play out? I am not sure but I do perceive the American establishment putting the pieces in place. I believe the City of London has been forced into a political cul-de-sac as a result of the horrendous LIBOR scandal. This will leave Wall Street the pre-eminent financial power house in the world and the dollar the undisputed reserve currency. All this augers well for Uncle Sam. I reckon for America the best has yet to come.
Keep your powder dry and await the technical buy signals which will be breakout high on Industrials, Transports, Real Estate and American Financials. I repeat we are not there yet. I reckon following the September 2012 earnings season the imminent balloting in the American presidential elections will be an interesting time followed by what I reckon will be a watershed year - 2013.
(C) 3rd. August 2012 Christopher
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