Brinkmanship is defined as the technique or practice of maneuvering a dangerous situation to the limits of tolerance or safety in order to secure the greatest advantage, especially by creating diplomatic crises. International politicians are famous for escalating military tensions primarily for political advantage and strategic concessions. The practice of international 'economic' brinkmanship is just as lethal but a considerably more dangerous practice. At minimum, it definitely creates an annoying and toxic investment atmosphere. It is not a wise or healthy 'game' for world economies and the business environment.
Widespread uncertainty, fear, and doubt is currently being generated throughout the world by dysfunctional Central Banking types who threaten contagion risks with looming financial Armageddon. Unfortunately many of the dudes who are trying to solve these complex debt issues are the sames culprits who created this mess.
Greece who entered the European Union (1981) based on a 'fudged' financial resume threatens the world with a return back to bankrupt independence. It is now clear that the EU 'merger of equals' was anything but! Greece with almost US$ one half trillion in debt obviously borrowed considerably more than they could afford. For the past 2 years they have demonstrated zero fiscal discipline or budgetary restraint. The thought of austerity, and the necessary 30% drop in living standard, has brought the masses back into the streets in aggressive protest. It has become clear they have little or no interest in repaying a single Drachma if they can help it. Credit ratings agencies have had no alternative but to lower ratings to default levels in the dismal Caa1 category.
And as the various sovereign sabres rattle, Central Euro Bankers are frantically attempting to engineer further irresponsible 'short term' lending which Greece will also never repay. Ultimately various banks will be on a very tenuous Greek hook for a combined US$100 billion - if not more! In for a penny ... in for a pound I guess?
It may be unfair to blame the problem on a small singular defenceless country which represents less than 1% of the world's GDP (#45 per capita). Iceland has recently disavowed any financial responsibility. Portugal is closely monitoring Greece's reaction to the latest blackmail package. Spain and Italy wait anxiously in the wings for similar largess. One wonders how much bailing Germany and France can or wants to do? Trying to hold 'unaccountable' jurisdictions accountable looks to be the ultimate challenge in this bizarre international financial Ponzi scheme.
In the US - the same dangerous game of brinkmanship is on daily display in Congress and the Fed in mindless debt ceiling rhetoric and irrational deficit financing masterminding. Public service unions use any opportunity to dip into an already massively over extended public trough. Learned & fearless leadership are fully convinced that it would be 'totally irresponsible' for the taxpayer NOT to get deeper 'into the glue!' Talk of perpetual bailouts, zero interest rate policies, and multi trillion dollar deficits roll of their lips far too easily.
The US Federal Government has spent US$5+ trillion of borrowed dough over the past four years to generate less than US$800 billion in GDP - and they think that's a good thing! They want to do more!
Minor currencies have become one of the few harbors of capital safety. Decades of shameless and reckless fiscal and monetary mismanagement has obviously come to a difficult and painful crossroad. It is time to pay the piper and for this nonsense to end! It is definitely time to regulate the regulators!
Finding leadership with the character to realistically address responsibilities will be another matter altogether. Knowing who to trust and/or believe may be more difficult.
Combining fresh negative US employment, housing, and manufacturing data this week it is hardly a wonder that equity markets have stumbled out of the gate this month. This past 2 year S&P/DJIA bull market has been difficult, unloved, and under owned. Outstanding export and earnings growth data gets little or no respect. It appears that market participants are searching for reasons not to own equities as opposed to searching for opportunities. Past negative news gets repetitively recycled and has effectively kept the major North American equity markets within 5% of the opening Jan 1st level - but also within 5% of their three-year high levels recorded at the end of April. Markets are keenly more sensitive and reactive to negative than positive reports.
Negative housing hysteria has hit a fevered pitch in spite of being 3 years old! Double dipping Case-Shiller stats indicate that home ownership and prices have returned to early 2000 levels - the beginning of the 'accelerated madness.' A veritable tsunami of foreclosed homes are about to hit a weak marketplace. More importantly - on an inflation and a gold adjusted basis (number of ounces of gold to buy an average home) US housing prices have returned to 1980 levels - a period of mid teen interest rates and very difficult economic circumstances. US homes have never been more affordable as compared to income - or cheaper on a square footage basis. Needless to say - it's a little late to get too negative on housing prices now even considering pending foreclosures and a major FNMA reorganization. With over US$1.5 trillion sitting in idle bank reserves my bet is that the worst is over.
In the commodity sector the negative effect of stressful currency and sovereignty issues have been much more muted. Gold persistently holds the US$1.535/oz level and is only $20/oz away from all time high closing levels. Silver continues to consolidate in the mid US$30/oz level and looks to be more of a range bound trading vehicle in the US$32-39/oz level. A break over US$40/oz would imply a retest of all time high levels of US$50/oz.
The grain complex looks very positive with Soy Beans and Corn on the verge of a major break to the upside and into new recovery high territory. Wheat prices are lagging based on recent fundamentals but will more than likely rally with the group.
My favorite Natural Gas is breaking out of a multi-week & multi-month long term consolidation pattern at US$4.75/mcf. Nat Gas crossed through the positive 'golden cross' of the 50 dman passing through the 200 dma on the upside. NG looks to possibly rally quickly to the long term cost of production of US$6+ /mcf. The long term Natural Gas chart looks very interesting with a positive risk to reward ratio. Most negative 'over supply' NG news appears to have been built into current consolidated price levels. With the prospect of a long hot summer air conditioners will be pressed to the limit and excess NG supplies will be reduced.
Crude Oil continues to hold the $100/bbl level and also looks to be more of a range bound trading vehicle in the US$95/bbl to 105/bbl range.
Copper looks a little more dicey - but continues to hold the US$4/lb level in spite of a well publicized 'potential' world wide economic slow down threat. A break of the US$4.25/lb level would imply a retest of the recent all time high levels.
It appears that the overall commodity complex is discounting the possibility of a modified QE III stimulus package looking past the current QEII program.
In Canada the TSX continues to consolidate in the frustrating 13,400 to 14,200 level. Canadian Banks have reported generally improved but lower than anticipated earnings. A few expected dividend increases were announced but it appears than much of the good news has been factored into current prices. The heavily weighted TSX Financial index rests on critical support levels and at it's 200 dma. It may be a tad early to suggest that the full effect of the North American 'low to neglibile' interest rate policy has been fully baked into Cdn bank equity prices - but any meaningful intermediate upside does appear to be limited.
RIM has broken into new multi year low territory breaking the $40 level after almost 6 months of selling. Negative Nokia research reports of pending low inventory turn over and tightening margins have contributed to the RIM malaise. It seems that no competing tech company has avoided the destructive 'Apple Effect!'
Many senior resource stocks and sectors appear to be very attractively priced based on their relatively strong commodity prices. Higher underlying prices would be the catalyst for resource sector leadership this summer.
Bottom Line: Hardly a day goes by without the major North American equity markets having to deal with a nasty economic or ugly political event.
Central Banking types have clearly demonstrated that they do not possess the determination or will to deal with key fiscal or difficult monetary issues. They seem to be a collective group of 'can kickers' who are happy to kick their problems 'down the road.' It appears their current low interest rate & easy monetary policies will continue to be the status quo for the foreseeable future. Let's just hope that all of their collective posturing and self serving idle Brinkmanship threats remain idle.
I do believe that the world wide economy is a lot stronger than is being advertised. I think that earnings will continue to grow and that employment conditions will improve faster than expected. Recent impressive IPO and M&A activity looks to accelerate considerably.
Most key stock prices are fairly to attractively priced on most key metrics. They appear to be considerably under owned and unwanted relative to liquidity and capital levels. It would be unusual to see a meaningful topping process with a majority braced and expecting significant downside liquidation.
Considerable external geo-economic risk does indeed exist - but I will not be surprised if markets are consolidating for a more positive summer investment season than has been announced & expected. I maintain long held stop levels of DJIA 12,000, S&P 1,300, and TSX 13,250 just in case push comes to shove! Or if the can doesn't kicked!
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