Low Expectations Could Yield Positive Surprises

Includes: DIA, QQQ, SPY
by: Bill Ehrman

Both the G-20 and the major energy producers are meeting this weekend, and expectations are low that anything substantive that will be sustainable will result from either meeting. That's good news as there is significant upside to the financial markets if anything worthwhile is announced over the weekend. If history is any guide, the members will talk the talk but whether they will walk the walk by implementing policies with sustainable positive change will remain to be seen.

Both meetings need to focus on the demand issue in addition to supply as weakness in global consumption for a whole host of reasons enumerated in prior pieces is holding down global growth. Policies need to be adopted across all regions to work in unison to benefit all nations rather than regional competition. One example of this was the quasi agreement at the last G-20 meeting by all members not to enter into competitive currency devaluation. Just yesterday the heads of finance for both Japan and the United States reaffirmed that stance. Interesting!

The world is hemorrhaging from a lack of demand. Excessive monetary ease has done all it can at this point in time and its time for regulatory, tax and financial reforms across all markets acknowledging that the pendulum from excessive regulatory and financial ease prior to 2008 has led to excessive tightening that now exists. Just look to the change in capital ratios at all financial institutions and its impact on lending since 2008. You can flood the system with cash and lower rates to below 0 but if demand is not there, it won't work. Did you read that people in Denmark are being paid to take out mortgages? Isn't that nuts? Only Christine Lagarde of the ICF and the Chinese seem to really understand this. By the way, did you see that growth in China in the first quarter came in at 6.7%? Not too bad. I think every other nation would love to see that.

The policy makers need to acknowledge the mindset shift to a more conservative bias at all levels since 2008 and adjust policies accordingly.

I will discuss more after the weekend but felt that I should set the tone for the financial markets today. So remember to review all the facts, step back, pause and reflect, consider the proper asset allocation with risk controls, do in-depth research on each investment and invest accordingly.