Markets pricing in new recession
Disappointment with last week's eurozone summit and a lack of new initiatives from the Federal Reserve unleash a torrent of selling pressure focused on commodities like gold.
Stocks and other risky assets have plunged this week as traders returned -- after a weekend of studying last week's disappointing eurozone summit -- in the mood to sell. After researching the finer points of European Union governance, Wall Street realized that the incrementalism and obsession with fiscal austerity demonstrated last week were, in retrospect, no palliative.
The European debt crisis hasn't ended; it's entering a dangerous new stage after leaders flubbed a critical opportunity. And Tuesday's Federal Reserve announcement, which featured no teasing of any new stimulus measures, reminded everyone that central banks cannot solve the structural problems plaguing the global economy.
As a result, markets around the world are starting to price in a new, deflationary future. And they're using the U.S. dollar to do it.
The sell-off picked up steam during the European session Monday after analysts at all three major credit rating agencies pooh-poohed the results from the EU's summit last week. Moody's warned of negative credit rating action against European Union countries in the months to come and said last week's summit offered few new measures as crisis remains in critical and volatile stage.
Not to be outdone, S&P's top economist was out in force, noting that the eurozone governments may need "another shock" to shake them out of their complacency and take decisive action.
And finally, analysts at Fitch commented that the euro summit did little to reduce pressure on European debt. According to them, it seems that a "comprehensive solution" -- one that doesn't just rely on stricter enforcement of recession causing budget austerity -- is not on offer. The gradualist approach being followed, they continued, imposes additional economic and financial costs which mean the crisis will continue at varying levels of intensity through 2012 and probably beyond. Ouch.
All of this increases the chance of negative rating actions against the eurozone in the weeks to come -- an event that will precipitate the crisis and risk pulling the U.S. economy down into the recession that Europe seems to already fallen into.
If these were the fundamental reasons risky assets sold off, there were a number of technical reasons as well. Mainly, the selling focused on dollar-sensitive assets including gold, crude oil, and foreign stocks as the greenback strengthened vs. the euro -- setting off panic selling among leveraged hedge fund types betting on gold denominated in euros.
Although currency fluctuations were the acute cause of this weakness in dollar-sensitive assets, all are also very sensitive to the deteriorating economic growth outlook as well. Gold is an inflation hedge as well as a safe haven asset. Lower global growth is deflationary, damaging the yellow metal's desirability.
Really, the euro is in trouble either way. If the ECB prints, it will be seen as a euro negative since the bank would be embarking on overt currency devaluation. If they don't, and the crisis intensifies, it will also be a euro negative since funds will flow out of the banks within the currency union to be parked in Asia and the United States on fears of a eurozone breakup.
Overall, after the ridiculous counter-trend rebound rally seen during the Thanksgiving holiday, and the consolidation trading that has marked the beginning of December, it looks like the medium-term bear market that started back in May is about to embark on its next big downswing.
As I've been doing since early November, I recommend investors maintain a defensive positioning.
For conservative long-term investors, the best advice is to hold off on new stock purchases and increase your allocation to cash.
For short-term traders and my newsletter subscribers, there remains plenty of opportunity on the short side focused on materials, financial, and foreign stocks. The Direxion 3x Emerging Market Bear (EDZ), which is up nearly 12% since I recommended it on November 9, remains one of my top picks. Less leveraged alternatives include the ProShares UltraShort Emerging Markets (EEV) and the ProShares Short Emerging Markets (EUM).
"Markets pricing in new recession"? I thought we are in one - no wait that was declared to be over in '09. I'm confused (and broke too). So is this a new recession, or a new depression, or a depressioned recession, or a recessioned depression - button, button who's got the button? Santa's got it easy this year, looks like everyone's gettin' that lump of coal. 'least we'll be able to stay warm - wanta buy some matches?
The second my portfolio gets back to cost basis i will dump stocks and look at Wall Street in the rear view mirror. If they cant return any money in two decades the time to get out is now!!! Cd'S have out preformed stocks for years. Right now we have lost all or any gain back to 2008 and then we have to go back to 1999.
At some point this insanity has to stop. These guys just continue to change their story at the drop of a hat. The real issue here is there are too many people (companies) with extremely high powered fast computers involved in minute by minute trading. This is basically screwing the average person with a standard 401K package. I'm not much on government intervention but at some point this type of trading has to be stopped. There should be a term of owernship on every stock purchase. This would eliminate these firms from day trading and the stock market would stabilize. I don't know about the rest of you but I am sick of these guys spewing their garbage input about the stock market. They are completey clueless and everything they say at this point is speculation.
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