We have told this nugget before but feel its very appropriate at this time to rerun: During the hey day of the Michael Jordan Chicago Bulls era and the dreadful pop song “I Believe I can Fly,” reporters would often ask Jordan if he thought he could. Michael always responded the same way, “For a little while.”
So it goes with the euphoric atmosphere that has captivated the financial media and a plethora of tourist-macro pundits who got last year wrong. The optimism is widespread despite the heavily marketed idea that the election, the debt, the tax policy, the weather were all going to collapse the economy in the 6 months just lived. The critics now hold to a “moral high ground” argument that their ideas, though rejected and punted, are still better. They say the Fed is fixing/distorting/manipulating market prices because they (the Fed) do not trust markets enough to let them price themselves. In reality, the term structures we have been harping about have been adjusting in an orderly and constructive manner of late.
This is not the Goldilocks you’ve been looking for, however. Risks are now elevated even if the porridge is temperate. EU governments are rolling over their debt loads at considerable improvement but the citizens are severely constrained. (Neutron Bomb Qe) The Euro – obviously – is rising, aided heavily by the $/Renminbi relationship. The Eu now holds the Monetary Old Maid late in a debt depression cycle, not a good situation. Cyprus and or Greece may have to take a “time out.”
MENA remains a complete unknown to us.
Even here at home in Zoloft Country, the positive outlook feels over hyped. The market’s rise since the tax hike news has already triggered bold calls for more “revenue.” Although hourly earnings ticked up in Friday’s report, taxes and gasoline have already more than offset the increase. Ascending equity and real estate values, sometimes called the wealth effect, are limited to the top of the economic system and demographics will contribute to continued savings. The FT had a high-gloss pull out on luxury goods and the national news proclaimed those that “stayed in the market” the winners. Getting your money back 5 years later is the new killing it.
As expected, the euphoria also had its End of the World warn-ers. This week alone I heard prognostications that Stocks- over valued, Bonds-in a bubble or Gold- no longer needed were all about to “crash.” We cautioned that markets rarely if ever crash from the top, thus we doubt the probability of the event(s). Not too hot, not too cold but certainly not “just right.” Like Jordan’s air time, we think this only lasts for a little while.