The following is an abridged version. For full details see: The Coming Crash: Four Reasons Pro and Con
To paraphrase Charles Dickens, it is the best of times (low rates, improving earnings and data), it is the worst of times (multiple crash threats). Here’s a quick review of the balance of bullish and bearish forces to watch for 2010-11.
In the course of preparing for an interview with allthingsforex.com, I was musing over the array of bullish and bearish forces that will shape the coming years, and the below thoughts will be useful to readers in clarifying their own strategies and plans.Crash Or No Crash In 2010-11? That Is The Question-Here’s How To Approach It
Prices for equities, commodities, and high yielding or commodity based currencies remain close to 52 week highs, yet:
- The EU teeters on the brink of a wave of sovereign defaults and ensuing banking crisis that threatens the global economy like nothing since the Lehman Brothers crash in the Autumn of 2008
- The US faces a potential second wave of mortgage defaults of a magnitude not seen since the subprime crisis that ultimately sank the global economy-which was stronger back then.
- China and India are trying to slow their growth rates to more sustainable levels
- Interest rates are generally very low and will need to rise over the coming years, creating potentially severe headwinds for most developed economies because they are so dependent on long term low rates.
- The key question for analyzing trading/investing opportunities for the rest of 2010 is: are we facing a major pullback or crash back to Autumn 2008 or March 2009 lows, or can markets continue to their “risk on / risk off” pattern of the first quarter?
- Low interest rates:
- Slowly but steadily improving economic data and earnings
- Growth in emerging markets
- State Economic Creativity
If the above forces prevail, given the bearish clouds hanging over markets discussed below, the best case scenario appears to be perhaps a bit more upside at most, with markets stagnating but not collapsing through 2011.Four Horsemen Of The Coming Crash
When it comes, one or more of these will bring it. (see The Coming Crash: Four Reasons Pro and Con ) for details on these
- EU Debt Crisis: A likely wave of sovereign defaults and resulting bank failure contagion that has likely become a question of when, not if.
- US Subprime Crisis II: As first pointed out to me by Graham Summers in U.S. Housing: The Big Picture , the US begins to see another wave of mortgages resetting at higher rates in July. The last time a wave of this magnitude hit it caused the subprime crisis which ultimately crashed the global markets and economies.
- China- Slowdown or Crash? James Chanos, Marc Faber, and the Chinese government all seem to see a bubble in Chinese housing construction and real estate. The Chinese are actively trying to let the air out slowly, but governments do not have a great track record at controlling the pace of economic expansion and contraction, especially once a bubble is in place – and all indications are that it is (see Edward Chancellor’s Ten ways to spot a bubble in China and Edward Harrison’s Andy Wie Will Tell You When Chinese Bubble Is About to Burst ).
…and if the markets are still standing…
- Rising Interest Rates: Either via central banks promised tightening short term rates or bond markets raising long term rates on fears of rising default risk from rising deficits.
That’s how the bullish and bearish forces are arrayed: four bullish, four bearish. Regular readers know we believe that while the global economy is improving, the evidence suggests another serious pullback at least. A complete crash of Great Depression magnitude is also a real possibility.
Disclosure: No Positions