To: Hawkmoon who wrote (77567 ) 8/11/2011 11:43:13 PM From: TobagoJack Read Replies (1) | Respond to always loved that song· The primary cause of the continuing dramatic sell off in equities remains growth concerns in the developed world, and the lack of any expectations of an immediate fiscal or monetary policy response. The S&P downgrade of America has not served as yet to undermine the Treasury bond market. The Treasury bond rally this week has further confirmed that the US government bond market continues to trade on trends in nominal GDP growth and not on supply factors.· It remains likely that the late 2008 low of 2.05% on 10-year Treasury bonds, if not a lower low, will be reached this time though a short-term back up in yields should probably be expected now. America and the rest of the Western world continue to display Japanese-style deflationary market action where stocks, and in particularly bank stocks, are correlated to government bond yields.· If the market action remains massively deflationary, the US is not yet experiencing deflation. This presents a tactical problem for the Fed chairman since there is no doubt in GREED & fear · This week’s FOMC statement clearly sets the conditions for future more aggressive action with the comments on slow economic growth and the risk of inflation being too low. GREED & fear · GREED & fear · Investors have to remain alert to the tactical implications for markets of more quanto easing. One reason stock markets have been selling off so violently is precisely because they see little scope for immediate help from monetary policy. It is going to take a further sell off to create the conditions that will allow Bernanke to act more decisively since such a sell off would trigger growing expectations of a renewed recession.· The main driver of renewed bouts of risk aversion in coming weeks and months will continue to come from the ongoing crisis in Euroland, not the US, given the continuing incendiary fault line represented by monetary union without fiscal union. GREED & fear · Investors should keep a close eye on the European equivalent of the so-called “TED spread” which essentially measures the premium required to lend to banks over governments. A further spike in this spread will be a sign of credit stress starting to hit markets and not just growth concerns, creating the potential for more violent downward moves.· As the Euroland crisis spreads from the periphery to the core, the growing risk is the complete repudiation of the ECB’s original mandate with the resort to Fed-style unadulterated quanto easing to address the sovereign debt issue. Such a change in policy would clearly be very bearish for the euro. · Eurobonds remain the likely end game with the soon-to-be expanded role of the EFSF representing a halfway house to that final outcome. Still, Frau Merkel will only go in this direction if pushed there by more flagellation by the markets.· GREED & fear · GREED & fear · This week’s Chinese inflation data has again confirmed that inflation appears to be in the process of peaking. The odds of tightening ending sooner rather than later must also have increased as a consequence of the deteriorating external environment. Still, an imminent end to tightening does not mean that investors should be anticipating, at least as yet, a 2009-style Chinese stimulus programme.· The Asean stock markets continue to outperform. The inflation scares which pre-occupied so many earlier in the year are now evaporating amidst current market action. There is surely no reason why the central banks in Asean should be thinking of raising rates again. Asean markets, save for Singapore, are also not facing government policies actively seeking to suppress property price appreciation.· The continuing explosive rally in the Swiss franc now constitutes what can be legitimately described as a bubble. The Swiss authorities do not seem to have woken up to the fact that the only way to control this, short of an end to risk aversion, is to introduce negative clsa.com or sent to you upon request.
