It never ceases to amaze me what people are prepared to believe. Sometimes, the stubbornness of beliefs leads to disaster. Below is a list of some presently well publicized beliefs that seem to me to be just ludicrous. Some on the list are globally important and some are not.
1. JPMorgan's trades were a hedge gone wrong.
Really? A loss, that The Independent says may have now reached $7 billion, is a hedge that seems to have produced no gains elsewhere, to offset the loss. If that was a hedge, then it is the worst one in history. Perhaps it was not a hedge after all.
2. The LTRO fixed Europe.
The last LTRO was on the 28th of February, 2012. On the 22nd of May, 2012, the following 10-year yields apply (all from Bloomberg):
Doesn't look fixed to me.
3. The US won't do anything about the fiscal cliff.
The politicians in the U.S. are as bad as anywhere else, but they are not mad. Something will be done about the fiscal cliff that will turn it into a fiscal slope. You can bet on it.
4. The U.S. economy is in better shape than Europe.
I hear this daily as a reason that you should be buying U.S. stocks at the moment. The U.S. is in no better shape than large parts of Europe. When the U.S. faces its fiscal problems, the results will be the same - recession. It is only the timing that is different. The U.S. will do a better job than Europe of clearing up its fiscal mess - when it is forced into it. That, however, is a different point. Here are some comparisons from 2011:
|total debt at y/e*||161%||120%||68.5%||107%||99%|
* Both as a % of GDP
Notes: 1. Portugal's budget deficit was reduced due to a one-off pension contribution; 2. Debt levels are taken from IMF estimates.
When you look at the table, it only stands out how bad Greece is. It is possible to group the U.S. in with Italy, Spain and Portugal! What would you estimate the U.S. growth rate for 2011 to be if the U.S. budget deficit were reduced to the rates given for Italy or Portugal? It seems to me that buying U.S. stocks is a matter of timing, not of fundamentals.
5. In the long term, the U.S. will reflate its way out of this crisis.
For this to happen, income growth needs to at least match or exceed inflation. At present, income growth is below inflation, resulting in contracting real wages. Over the long term, contracting real wages end up in reduced sales and a contracting economy. This is Econ. 101.
6. In the long term, the U.S. will grow its way out of this crisis.
U.S. growth was 1.7%, with a $1.3 trillion budget deficit (8.3% of GDP) In 2011. Growth for the first quarter of 2012 was originally set at 2.2%. Goldman Sachs estimates the next revision will take it to 1.9%. The U.S budget deficit for 2011-12 is estimated by the Congressional budget office to be around $1.2 trillion (estimated 7.7% of GDP). So large deficits are only creating weak growth. At the rate of progress above (although progress it is), the wait will be a long one. We will hit the next recession for sure, before the budget gets remotely under control.
7. QE will save the day.
This is my favorite and every bull out there believes it. QE is weak monetary policy in the zero bound rate environment. Eventually, the markets will catch on to this. It may take time, but they will catch on. When they do, the U.S. Congress will be forced into the actions that they should be taking now. Better late than never! One of the unintended consequences of QE, is that it enables Congress to carry on bickering and take no action. In my opinion, this is a more important consequence than the inflation that QE is bringing.
8. Europe is going for pro-growth strategies. The crisis is over!
The problem is best summarized by this quote taken from the Wall Street Journal from an article by Chris Ciovacco on Seeking Alpha.
The temporary hope for softer pro-growth reforms has created a kind of lull in the European drama, while everybody waits to see what magical plan might emerge from Bonn or Paris or Brussels. But no convincing new plan is likely to materialize, for one basic reason: Growth costs money, and nobody is willing to pay.
9. Nothing is going to happen in Iran.
I can guarantee you this, Iran is not enriching Uranium for its nuclear reactors. Uranium enrichment for reactors is generally around 4%. Uranium enrichment for nuclear devices is generally over 20%. The latest report from the IAEA says that there is evidence of enrichment of uranium to 27%. It must be close to a nuclear bomb by now, as this has been going on for quite a while.
It may be that Iran does back off from further enrichment, but the status quo is not neutral here. The next year will see some action, as either Iran stops enrichment or Israel/ the U.S. take some military action. Will it be before the presidential election in November 2012? Margaret Thatcher used the Falklands conflict to stir patriotic emotions and win an election victory in the U.K. in 1983. If the U.S. economy starts to turn sour, will Obama try the same trick?
So the question is how many of these do you believe?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long RWM, RIMM, USD/JPY, various U.K. corporate bonds.
Disclaimer: This article is not intended as investment advice. Before taking any action, please do your own research. Do not rely on any opinions or facts included in this article for decision making.