A Bearish John Taylor Asks If Too Much Fear Is Priced In

Tyler Durden's picture

One More Try for Risk
June 3, 2010
By John R. Taylor, Jr.
Chief Investment Officer

Troubles are everywhere, in the Gulf of Mexico, in Greece, and in Korea, to name just a few, but we already know about these problems. Other than the tragicomic opera being played out along the 38th parallel and in the waters around the western sea border, which is still lighting up our brain cells, the other news has been rehashed ad nauseam. The airwaves have been so full of Greece and the gigantic US oil slick that the rest of the world has been forgotten. In fact, the Greek problem has been ‘solved’ at least for a while. The ECB is on the bid for the dicey sovereign debt and all is getting quieter in the markets – even though we can’t quite yet believe it. And, no one will really be able to judge the effectiveness of the tax increases and spending cuts until September at the earliest. A mainstream bank just sent out a report arguing “Fiscal adjustment in the Euro area: so far so good.” Who are we –or anyone else – to argue with that opinion? Anyway it is almost summer, so most Europeans will be taking their extended vacation. All those speculators who are short the euro could start to get nervous as it climbs a bit. The BP oil leak is another issue, as the situation has gotten completely out of control. Some pundits are even clamoring for the US government to step in, throw BP out, and fix it - now. With what expertise? There is no IMF for this problem. Although this is a wild card impacting the psychological health of American investors and the electability of anyone associated with Obama in November, the imagined impact has become so negative that a solution could bring a spectacular feelgood rally. The probability of an outcome better than the bleak expectations is probably higher than 50%. Add that onto the Greek solution and this looks like the right time to bet on a risk rally. If only the North Koreans took summer vacations like the Europeans, it would be a sure thing.

Although our analysis argues that the global economy should be slowing down and starting a long
decline, the tremors that went through the markets in May have halted the Central Banks’ tightening drift, which should allow financial markets to rally again. The American fiscal stimulus might be losing its steam, but it is still positive through this quarter. Although this boost will disappear in the third quarter and will turn into a retrenchment by the end of the year, the US business community, as expressed in the ISM numbers and the local Fed reports, is positive enough to keep the economic naysayers (like us) on our back foot. China, the other global locomotive, is still gently applying the brakes and could prove the Achilles heel of our positive multi-month outlook. Too dramatic a slowdown in Chinese growth could prematurely chill investors’ enthusiasm, but we consider this risk a minor one.

The non G-10 economies, having suffered very little financial distress during the banking crisis of 2008, and benefitting from the current exceptionally low dollar, euro, and yen interest rates, are doing just fine. Adding this all together, it is possible to paint a very happy picture – as long as the looming solvency issues remain in the background. However, with banks cutting their asset sizes because they are short of capital and being hemmed in by new regulations, there is no way that multiple national debt restructurings can be avoided, but that is a story for the fall, or next year.

Our analysis of the long-term cycles points to a peak in the second half of July or August which would be followed by a long and increasingly dramatic decline that would continue into the middle of 2011 at the minimum. It is very likely that the global Central Banks will lower rates further, where they can, and will resort to increased amounts of quantitative easing. As much of the economic distress will be centered in Europe, the dollar will gain against the euro, but when the Fed eventually shifts into high gear – as it always does – the Asian currencies and maybe even the euro will outperform the dollar.

h/t Teddy KGB

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Leo Kolivakis's picture

He's been reading my comments, but central banks will be raising rates, not lowering them.

Deep's picture

Hey cut and paste specialist


can you cut and paste your replys too.


you liar.

Leo Kolivakis's picture

Deeply disturbed, crawl back under your rock.

Astute Investor's picture

I would wager significant amounts of fiat currency that John Taylor is NOT reading your comments....

Astute Investor's picture

Nope.  If I was in fact Mr. Taylor, I could have simply written that I never read your comments (nor know who you are for the matter).

Crab Cake's picture

Oh yeah Leo, this is exactly what you've been saying....

"Our analysis of the long-term cycles points to a peak in the second half of July or August which would be followed by a long and increasingly dramatic decline that would continue into the middle of 2011 at the minimum."


taraxias's picture

Leo only read the first part of that sentence.

bob resurrected's picture

Couldn't the US let the dollar rise instead?

Carl Spackler's picture

Too much fear is not priced in when you're faced with the strong possibility of war breaking out in the Koreas or Israel, the destruction of the Euro and European economies, and the economic paralysis caused by the oil drilling accident in the Gulf of Mexico.

And, an "empty suit" living on Pennsylvania Avenue only exacerbates the problems...which reminds me, someone should fark or photoshop that Obama campaigh sticker so it reads "Hopeless".

dpr10's picture

agreed.. how can you say too much is priced in when we are expecting debt defaults & restructuring and more pain to come for a long while..the stock market should be buying the prospects for the second half of the year right now..which are pretty bleak as stated here..

carbonmutant's picture

Bilderberg Boys are gonna fix everything by this weekend.

The keynote address is being given by José Luis Rodríguez Zapatero, the Spanish Prime Minister.



cymro33's picture

Maybe he can help his fellow Bilderberg friend - Tony Hayward of BP!

mephisto's picture

Last year was in Greece, this year is in Spain. That's a really bad way of hiding from conspiracy theorists.

Crab Cake's picture

I sincerely hope and wish for a Bilderberger expose here on ZeroHedge, by Tyler or a contributor.  The Bilderberger meeting is HUGE news, and is not fringe in anyway.  It is an ongoing conspiracy, and it is fact. These folks are political and economic king makers, and they don't like people noticing or talking about them.... that's right up ZeroHedge's alley IMO.

carbonmutant's picture

Looks like Daniel Estulin has made an obsession out of trying to do just that.

jkruffin's picture

Every major news media outlet using the term "HOPE".  I hope I win the lotto, but I am not counting on it.  LOL   Gamblers on Wall St. betting on hope.  Completely insane and they deserve to lose everything when it all collapses.  No one should cry one tear for these people, not even themselves.

DaveyJones's picture

I was voting for hope, now I hoping to vote 

RichardENixon's picture

That's change you can believe in mister.

primefool's picture

Hard to assign any credibility to a strategy that calls for a rip roaring rally for 30-45 days followed by a devastating decline. C'mon. We all know its not possible to predict these things with that kind of precision - even oif you could predict anything at all. So should one trade on the long side with a 30 day window to get out of dodge? Sounds like a dodgy strategy.

dehdhed's picture

here's and article by larry edelson that discusses kind of the same thing about the cycles

i think it was written in mid february



SWRichmond's picture

It is very likely that the global Central Banks will lower rates further, where they can, and will resort to increased amounts of quantitative easing.

QE is in fact a means of achieving below-zero interest rates, when the zero bound has been hit. 

mephisto's picture

All fair points, things have been quiet for a week now. So why aren't we higher? The charts look very different to the sharp collapse & recovery in Feb/March. That makes me think something is wrong with the analysis here.


This idea that everyone in Europe closes positions and takes 2 months off is kind of racist, and certainly wrong. We haven't had a quiet summer in a while, and as HFT computers don't need a holiday but I'm sure central bankers do, I vote for more volatility not less.  

I don't like the idea of buying the market now because Spain isnt quite bust yet, even though everyone knows it will be soon. Doesn't make sense to me. If I believed in efficient markets then I'd say they should keep pricing in the fear. What am I going to do, sell my long position when debt is restructured? Crazy, wrong way round.

Gubbmint Cheese's picture

I have a hard time believing the North Korean threats are anything greater than that - threats. I seem to recall lots of news reports in the past where war between the North and South was "imminent", and then everything cools down and a few days later we forget about it. I could be wrong (wouldn't be the first time, or the last) but I get the sense it might just play out the same way again.. and it would certainly provide a rgreat excuse for yet another bullshit "relief rally".

Meanwhile the economic recovery fairytale story keeps on rolling.. Recovery believers (*ahem* Leo) are having to come up with increasingly creative explanations to explain away nagging issues like increased unemployment (its your typical V shaped jobless recovery!!).

Bullish delusion will continue until it can't.. it happens all the time.

Whitenoise's picture

Some commentators dislike personal anecdotes.  I can understand that however what I see is fewer cars in the parking lots, fewer big purchases, fewer vacations.  As best I can tell no new mowers on the block and prices at WalMart are falling like leaves in October!

"...it is possible to paint a very happy picture – as long as the looming solvency issues remain in the background."

A story for the Fall ... how about right now, right here, paraphrasing Hugh Hendry,  we start panicking.  Clearly not enough fear is priced in.

Gubbmint Cheese's picture

funny - while I don't provide personal anecdotes here at ZH.. I do feel they are very relevant. "Boots on the ground" observations usually provide some of the first signs of a trend. In my city.. the 'for lease' signs are everywhere... and I'm finally starting to see the "new price" signs for residential home sales (I live in Canada and our housing bubble bust is long overdue..).

those are very worthwhile observations!

stickyfingers's picture

Sorry, but Hugh Hendry said to favor panic.

jory's picture

ZH Boneheads always see the dark side to life.  That's why most of you Idiots have missed the 70% run-up in stocks since March 2009.  LMFAO!!!



SWRichmond's picture

This particular ZH bonehead saw the darkside approaching and sold all stocks in October/November 2007, DOW 14,000.    LMFAO!!!!!  You moron.


I'll buy stocks when the darkside turns to real light!!!!!!   LMFAO!!!!!

JohnG's picture

That's a bold statement jory when you certainly could not have audited our trading accounts.

That said, please refrain from commenting until you have a construcive thought to add to the conversation.

dumpster's picture

jory .. dollars to donuts ... you have nothing in the market ... are using zit cream  are on food stamps or eating at mom table

know absolutly nothing about markets , are prone to fits of myopia , and have an alarm clock to wake you up for the late shift for pizza delivery /

because your resume to become asst asst mgr at the local starbucks was discarded due to spit on the pages


Bruce Krasting's picture

It sounds like J Taylor is trying to be a macro trader. Read tea leaves, foretell the future. But that is not what he does. It is trend analysis. What Taylor is voicing is the signals his machines are seeing.

Most markets have stabilized and improved a bit in the last 10 days. The 200 MA is now going to break to the upside. When that sort of thing happens computers signal "risk on". Just what JT is saying.

So JT is telling us to both go long and go short. And his time frame is 60 days. Ignore this. You you will just lose money following the advice of computer.



anony's picture

Sarcasm "on", right?

Temporalist's picture
U.S. Inflation to Approach Zimbabwe Level, Faber Says (Update2)

“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”