The Weak That Was - W/E 25 Nov 2011

Weak, week say what.  Down on the week, down on the year, down from the peak, languishing well below all key moving averages.  Indian Rs at a lifetime low, EZ on the verge of falling apart; the world as we know it looks like its about to end.

The Storm, The Butterfly & The Rupee As a Measure of Risk Aversion

The Rs did prove a good measure of risk aversion during the US led 2008-2009 crisis.  This time around, the main risk stems from the EZ.  And the Rs may prove to be a good measure of risk aversion once again; sometimes it is better to look for the Butterfly and away from the Eye of the Storm to watch a crisis unfold or resolve.

The Glitter of Gold

Gold Prices a Bubble?

This chart shows the nominal annual average price of gold and the nominal annual return from gold.  Gold is more expensive than ever before.  But this says nothing about whether it is a bubble; almost everything is more expensive.  The nominal annual return on gold are high, but certainly not at a level where a bubble at the point of implosion is evident.

Super-Committee Failure - Big Deal?

What does Super-Committee Failure Mean?

Well, looks like the super-committee is set to fail.  Is it bad, and if yes, why?  Its bad, because starting 2012, there are some small cuts in discretionary spending; payroll tax cuts will expire; extended unemployment benefits will go.  These cuts could hit GDP by 0.5% to 1% next year, thus ensuring that the US is at stall speed or in recession during 2012.  But what is really bad is that the nation is not able to rally around a common purpose; in the US, the magnitude of the problem is still not acknowledged by our political masters.

Bottom line; super-committee failure is nothing more than a disappointment.  Markets will ultimately move past this event. The political jostling for position will be interesting to watch; Obama will need some money to stimulate 2012 to protect recession downside and I suspect the might of the market is strong enough to ensure he gets it.

Presidential Cycle - Election Year

This is a brilliant chart from Ned Davis Research which shows the Dow has performance during the election year.  The data looks at the previous sixteen cycles.  Put it this way, the prognosis is not good for Obama unless the market has already bottomed, or will bottom no later than late November.  A decline through mid December would be bad news for Obama & indeed for markets during 2012.

I am hoping that we have seen the bottom for this bear; but the time wise correction required to mark typical bottoms does point towards a July 2012 bottom.  Throw Europe into the mix and the uncertainty rises further.

Blast From the Past

This video is all about happy memories - a memoir of the happy times 50 years ago when my uncle passed out of school.  I passed out some 24 years later.  We have long memories and despite a 26 year gap, the memories are amazingly similar.  Hear the words of the school prayer; very simple, but in some ways it covers everything that matters.  And it ends with Auld Lang Syne; we sung it to a completely different tune! More martial, perhaps more emotional; mostly a toast for those golden years now past.  The present is but an instant which flashes into the past; the future is cloudy, perhaps more now than ever before; but the past - that belongs to us it cannot change and we must learn and build upon that foundation.

The Austerity Trap W/E 11/11/11

Where are we in the business cycle? I would say near the bottom of the vicious phase on a secular basis.  And near the start of a vicious phase on a cyclical basis.  Good policy matters if the vicious secular phase is to be turned up into the virtuous secular phase.  Good policy to address the vicious secular phase would also shorten the vicious cyclical phase we are presently in.  Bad policy now would extend the duration of the vicious secular phase as well as the vicious cyclical phase.  Neutral policy would permit continuance of the vicious secular phase, while helping with the vicious cyclical phase.  At present, I believe policy is heading from bad to neutral.

Since steps are being made in the right direction, an optimist would hope for policy to progress to good; but the hurdles are monumental.  To make policy good, we would need to see far better global co-operation.  We would need to see solvent Europe embrace spending.  We would need to see a more substantial EFSF.  We would need to see a changed ECB; one willing to consider balancing growth and inflation risk and one expanding balance sheets and money supply to support illiquid but solvent markets.  We would need to see a good plan out of the US super-committee.  We would need to see the House & Senate vote yes to the plan.

All in all, the cyclical position is encouraging, while the reversal of the adverse secular trend needs more support.