Submitted by Mark J. Grant, author of Out of the Box,
Steer the Course
I have said, for the past two years, that the euphoria would end. I said it would either come from some "Event" or from the Fed changing course. I also said that until one of these two occurrences took place to play the game as long as possible. That was my consistent advise.
Honestly, I thought the "Event" would take place before the Fed changed their direction and while there were certainly events during this time period none were serious enough to derail the train. You will also note that the moment, the instant, that Bernanke changed direction that I said to take money off the table. I said it that day and I have said it every day since then.
Now the bond market has led the way; yields back, back and back some more. Equities have also declined and I think they have further to fall. Bonds, on the other hand, will reach a point fairly close to here and rally as yields entice buyers back into the market.
We will have days of course when both markets rally as bounces from the fall-off but the overall trend in equities is down. The actions by the world's central banks have affected everything. The markets in a very positive way but the underlying economies; not so much. You would have thought that the Fed's actions would have caused a growth rate in America of more than 1.5%-2.0% which is a dismal showing given the amount of money that has been sloshing around.
With the spigot about to be turned down there will be a marked effect on earnings and profits in American corporations as borrowing costs rise and as all of the gains that could be taken were utilized from our very low interest rate environment. Much of the corporate earnings gains during the last two years did not result from growth but from financial management which was to be anticipated and expected. Those schemes, however, have been brought to an end by the rise in interest rates.
In the meantime the Fed, in every manner possible, will try to downplay what Mr. Bernanke has done. The Governors will make speeches. Tidbit swill be handed to the Press. Calming remarks will come from every corner of the great machine and every stock guru on the planet will focus on the Bernanke's remark that the overall economy is improving. Fortunately I have seen this game before exorcised by every Fed during the last forty years. The correct response is, "Bah Humbug" and the correct viewpoint is to watch what they do and not what they say. They will say what suits them. What they do will be a different story.
Europe will continue to be a major drag on the world. They play "extend and pretend." The don't count various liabilities, assets are marked "risk free" which is a ridiculous claim and they assure us that loans and securitizations are paying with the flip of some accountant's wink. Their bank stress tests for the Continent and for Spain have had all of the accuracy the old gods still being in residence on Mt. Olympus while the IMF trots out financial projections for Europe which are akin to the value of a three dollar bill and about as useful.
The problem here, however, is that what is not counted does not erase what must be paid. The liabilities mount up. The cash is never enough to make the payments. The finances of most of the sovereigns and banks in Europe are a hoax. America is not good, Europe is far worse and China is a box that lacks any clarity at all.
The problem with the governments in Europe is that they make up numbers to suit themselves. Then they loudly proclaim them from each capital on the Continent as if the multiple proclamations will prove their accuracy. Now they are claiming that "The crisis is over" when the real data suggests that it is worsening. If you make up stuff it is one thing but to believe it and act upon it is a far worse sin. There is also a negative side.
We breathed the opiates. We went on about our drug induced way. I predict that we will have Christmas again this December but that the word "Merry" will not be appended.