Tuesday, September 22, 2009

New Zealand steps out from the Recession

New Zealand became the latest country to statistically step out of the shadow of the recession, sparking an increased appetite for the carry trade, and thereby bringing the USD under pressure again overnight. Ironically, the country's growth was partially a result of dairy sales, which have caused such grief in Europe.

What's the Fed to do?

Tomorrow will be a significant day for the markets. It may mark the first day we hear the Fed's plans to exit the quantitative easing program initiated during the midst of the crisis. This could cause significant pain to the market short-term, but may provide a catalyst for the markets to move higher. As the Fed moves out of the mortgage business (effectively ending its purchases of 10 and 30-year treasuries), the market will need to soak up all the Treasury's liquidity without the U.S. government's assistance. I'm not sure where the heavy lifting will come from, and this may prompt higher yields in longer term treasuries. While this will reduce confidence in the U.S. dollar, it will do wonders for the competitiveness for U.S. exports, and bringing some inflation into the market. Depending on the velocity of the Fed's tightening of the money supply (through reduced treasury purchases), we will see this inflation bring higher commodity and equity prices, as future earnings prospects will accelerate.

On another note, it will be some time before we see the Fed increase the fed funds increase, as the Fed will need to first remove the layers of support that have been thrown over the faltering economy, including the quantitative easing, TARP and TALF programs. Thus, I see a steeper yield curve, a lower U.S. currency (vs. commodities at the very least), and better future prospects for the equities market. Only time will tell - the initial reaction is not necessarily the right one in the market.

Monday, September 21, 2009

Permabears turning bullish...Many bulls remain frozen in the headlights...

James Grant, a famous bear who had been harping about the housing and credit bubble for years, has turned remarkably bullish, in spite of his fears about the long-term implications of shoveling money into the economy. Grant evidences that in each major recession in the past, the economy has rebounded very quickly, and the harder we fall, the faster we rise.

With the economic meltdown as severe as it was in 2007-2009, it is clear that the next bull market will be much steeper than many predict, and it's great to have a permabear trade in his claws for some horns and hooves.

While Grant has become bullish, many economists and institutional managers alike remain bearish. This in itself is a bullish sign, and I am in the camp that we have entered a secular bull market, that many will only conclude is such a market when we make new highs on the S&P and Dow, which may still be years away. While we may have corrections (even at the current levels), my personal opinion (to be taken with a grain of salt) is that any correction will be fast and furious, to flush out the weakest of hands and the gambling speculators.