Action Over; Reaction About To Commence

Via Mark J. Grant, author of Out of the Box,

“Knowledge is a weapon. If you wish to participate in the Great Game; be formidably armed!”
                       -The Wizard
The one thing that all of us know, surely all of us must know at least this, is that markets do not go forever in one direction. I am not speaking here of the pecularities of a day or of trying to eke out some trade but of shifts in circumstances and sentiments that sets the direction upon a new course. Sometimes the tide going out is stumbled upon as there is more sand than before on the beach and sometimes it is revealed by certain indicators such as when the 50 and 200 day moving averages break-out of their ranges. This occurred yesterday for the ten year Treasury which is the third time it has happened in the last three years. The first two times there was a break-out to the upside which helped to fuel a massive rally in Treasuries and other fixed income securities but now we have broken out in the other direction which may cause any number of unsavory occurrences. The first would be higher yields and lower prices for Treasuries and then for other bonds with the second being a reversal in equities as stocks generally lag bonds when a reversal is in process and then it may well be commodities that take the next hit and so the dominos proffer their usual effect. Now may be a very good time to take some profits, I suggest it, as I have suggested before, and to have a little extra cash in your sock drawer. Timing is always part of the larger question and the money that you have made may be the money that you have lost in the twinkling of the some Fate’s eye.
“We give advice, but we cannot give the wisdom to profit by it.”
               -Francois de la Rochefoucauld
We live in a world recently comprised of three basic tenets; postpone, make up facts to suit the goals of some nation or nations and throw money at anything that moves. This is an inherently unstable construct and yet that is what our brilliant leaders have embraced. I will tell you this; when chicanery is trotted out as truth, when liabilities are not counted, when losses are termed investments, when the only answer to anything is the printing of more small pieces of green and blue paper then trouble is approaching with a capital “T” and the future is a bleak cloud of foreboding. There are some that think my musings pessimistic; they are not. “Preservation of Capital,” Grant’s first ten rules written once and reiterated nine times thereafter are cast in stone because that is exactly where they should be cast. Almost four decades on Wall Street allows one to capture a little wisdom perhaps and whatever I have captured, judge me as you like, leads me to be the bearer of forecoming news which, without a lot of confusing statements, is the following: “We are going down.”
Money has flowed. It has propped up every asset class on the planet. Nothing was exempted or spared and if you were on the right side of this trade, in any security, you have benefited handsomely from the collusion of the central banks. A little analysis however indicates this is all about to change. Let me first differentiate the situation that separates America from Europe. The methodology for the Fed has been to buy the sovereign debt of the United States and so monetize what the Treasury has printed which has lowered yields and been a benefit to the government at the expense of investors except the ones that were already fully invested. Then the Fed started with mortgage backed securities which further benefited fixed income investors and also helped with the housing problem as Real Estate stabilized and then rebounded. Then, in Europe, we have a very different scenario.
The European Central Bank has bought not just the debt of the sovereign nations in their care but also massive amounts of loans, securitizations, bank debt and Real Estate loans. Then it is not just the ECB that has participated in this program but the central banks of every nation in Europe. Nothing is counted accurately, 80% of all assets are classified “risk free,” and virtually nothing is marked-to-market. All good, all fine except that these loans and securitizations are failing and the losses are going to be massive. The amount of debt resting upon the financial condition of Greece, Portugal, Cyprus, Spain and Ireland is going to come to the fore and the results will nothing like you have seen before and certainly nothing that is generally expected. Long experience in the Great Game has taught me that you may ignore what you like, not count what you do not wish to count, pull the wool over the eyes of the sheep for a time, sometimes a long time, but there does come a day, there does come a time when the Day of Reckoning arrives and it will be a bloody affair.
The world has engaged in a game of smoke and mirrors where the reflections in some Swarovski crystal have been thought of as reality. We play to win and not to be right and certainly not to be either judge or jury and so we have ridden the steed given to us but I am afraid the bend in the racetrack ahead is a U-turn and woe to those who do not recognize the distinctive features. Since the financial crisis of 2008/2009 it has been a “Mad, Mad World” but we all played the hand we were dealt. For every action, as Newton famously pointed out, there is a reaction and I predict “action over and reaction about to commence.”
“Excess generally causes reaction, and produces a change in the opposite direction, whether it be in the seasons, or in individuals, or in governments.”