If we remember the disgrace suffered by Temasek when Merril Lynch had to liquidate itself by being absorbed by Bank of America, perhaps it is not a big surprise that they are selling a sizable part of their stake in Citigroup just as the markets show no sign of any intimidation in the face of a clearly overextended rally, and many frightful, although improving economic statistics. Still the Singaporean giant has made no announcement to the effect that it will bail out of the U.S. finance sector any time soon, and given the close ties that exist between Singapore and the U.S. it is highly unlikely that they will cast a bearish vote on the American banking sector any time soon.
More and more people, among them some worthy names and investment firms, are convinced that the black days of the economy are over, and that from now on the journey will be a climb. On the other hand, there are still a large number of analysts claiming that the breath of relief that we are taking is premature. It will take a long time for the structural adjustments to impose their full power on the economy, and before that takes place in the form of much tighter regulations, a much more conservative consumer, and an economy that has a smaller potential for growth, any expectation that the economy is on the way to newer heights cannot be supported by the facts.
For now, however, it seems that the best course is to ride this rally for as long as it lasts, while remaining fully aware of the massive amount of speculative money causing the financial markets to become unduly optimistic and ebullient about the future. Fighting the markets of course makes little sense, but neither is it a good idea to jump in the bandwagon of euphoria when there are so money indications that only a stage has finished, while the play itself has many acts to play out.
The battered financial firms have a powerful friend in the Fed, which was successful to prevent their bankruptcy, but seems to be in the dark when it comes to the question of how we can replace the rotten aspects of the system with something healthier and more robust. A large amount of temporary liquidity support has allowed the financial world to take a deep sigh of relief, but if we keep in mind the slow pace at which economic events progress, it is only prudent to await a while before reaching conclusions about how deep this recovery is.
In short, we’re going through a phase. It will take time before it has fully played out, but we don’t expect any new records to be broken in this rally, nor do we expect it to prove to be anything more than a footnote in a long-term picture of pessimism that will pervade the minds of financial actors as facts are absorbed in due time.
Disclosure: No position