Market Commentary for the week of January 30, 2012

Just as before….
In recent discussions with clients, I have answered questions about “good new versus bad news” and “short-term versus long-term” probabilities.  As my readers are aware, I have become increasingly bearish in my asset allocations, a factor which derives from a combination of very short-term information along with macro, secular data.

In short, my analysis quantifies policies, valuations, and fundamentals which have dragged down the prospects for global earnings acceleration (in the near-term).  Notice that I refer to these statistics as “decelerators,” not necessarily absolute impediments.

If anything, earnings growth is stagnant for many sectors.

Since consumerism is the engine of corporate demand, it is most important that confidence be restored in the “fairness” of the playing field upon which a global capital landscape can manifest.  It requires, though, overcoming obstacles, such as negative political discourse and retro-fiscal policies, that have led, slowly, to a desperate outlook for many households.

The derailment of global credit institutions was forewarned by the excessive amount of leverage that went into the creation of valuation bubbles in real estate, Wall Street, and tangible commodities.

Forecasts for growth hinge upon a redirection of monetary policy, fiscal policies, and individual’s fears.

….but not quite.

Almost from its inception, the current bear market has been viewed as an aberration, instead of a logical remediation of historical excesses.  Now, almost 5 years hence, the consequences, and causes, are being viewed more discriminately.  Savings patterns are, or should be, increasing.  Global austerity is the new catch-phrase.  Jobs growth is decelerating as a result of technology productivity enhancements.  Think of how much greater economic expansion might rise if only we could get the “human factor” back into the game.

I’m not suggesting markets are at the precipice of collapse.  But they are extremely fragile.

In the 1990’s we used to write about globalization.  A generation later, we can see the effect of linkage when nations like Greece and Italy have the capacity to neutralize global commerce in other continents.  The world is increasingly connected, culturally and economically, which wreaks benefits and consequences of immeasurable force.  The power of the internet, for example, brings nations, peoples and businesses within reach instantaneously.  A mild recession “over there” brings scrutiny and contagion “over here.”

It seems that globalization also has the power to stalemate economies, as well as to provide benefit for them.

Mea culpa.

While on the subject of debt, I’ll admit that I made a wrong call in the middle of this past decade.  In 2005, well before the credit collapse, I forecast that rising commodity prices, commodity valuations and economic activity had the potential to unleash secular inflation bulge like none seen since the late 1980’s.  Indeed, some commodities, like gold, have run inordinately, showing secular appreciation of over 600%!!

But the fundamentals necessary to sustain that inflation surge (jobs expansion e.g.) were simply not there.  Instead we uncovered, with chagrin, that an interest rate surge, portfolio valuation surge, and an enthusiasm surge were all fueled by leveraged excess in the financial markets.  The bubble burst and now we are paying the price with deleveraging and disinflation.

As evidenced by the U.S. Federal Reserve’s announcement last week, they plan on keeping the cash spigot open for at least 3 more years.